索尼 (SONY) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the Sony Corporation second quarter fiscal year 2007 earnings conference call. My name is Bill and I'll be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be conducting a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded for replay purposes. I would now like to transfer the conference over to your host for today's presentation, Mr. Sam Levenson, Senior Vice President of Investor Relations. Please proceed, sir.

Thank you very much for that introduction, Bill. Thank you all for joining us today, October 25, 2007, for the discussion of Sony's results for the quarter ended September 30, 2007. I'm Sam Levenson, Senior VP of Investor Relations at Sony Corporation of America. We are joined this evening in Tokyo by Nobuyuki Oneda, Corporate Executive Officer, EVP and CFO of Sony Corporation, and by Robert Wiesenthal, Group Executive in Charge of Corporate Development and M&A for Sony Corporation and EVP and CFO of Sony Corporation of America. Thank you both very much for joining us.

In just a few moments I'm going to give a brief summary of today's announcement. Then Mr. Oneda 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'll begin with a discussion of our consolidated results and segment results for the quarter ended September 30, 2007 and then review our revised forecast for the year ended March 31, 2008.

Consolidated sales and net income set a new record for the second quarter, as did equity and net income of affiliated companies. Consolidated sales rose 12% year over year. All segments except Financial Services recorded sales gains.

Consolidated operating income of JPY90.5b was reported compared to a loss of JPY20.8b in the same quarter of the previous year. Electronics had a large increase in operating income. However, the Game segment recorded increased losses. Restructuring charges, which are recorded as operating expenses, amounted to JPY18.5b for the quarter compared to JPY5.3b for the same quarter of the previous year. A JPY60.7b gain on the sale of the site of our former headquarters is included in operating income for this quarter.

Non-operating income improved JPY2.7b to a JPY2.5b loss. This was due to the recording of foreign exchange gain during the current quarter compared to a foreign exchange loss in the same quarter the prior year, despite an increase in loss on devaluation of securities investments.

Equity and net income of affiliated companies increased 7% year on year to JPY21.1b. The contributions of the major affiliates are as follows. Sony Ericsson contributed equity and net income to Sony of JPY21.1b, a decrease of JPY700m compared with the prior-year period. SLCD, our joint venture with Samsung, contributed a loss of JPY500m or JPY3.4b lower than last year, due to its investment in eighth generation equipment. Sony BMG, our joint venture with Bertelsmann, also contributed a loss of JPY500m, which is an improvement of JPY1.8b year over year.

As a result of these factors, net income increased JPY72b year over year to JPY73.7b.

Now I'll take a few moments to discuss the quarterly results on a segment-by-segment basis. First, Electronics. Sales in the Electronics segment increased 21% or 17% on a local currency basis. Sales to outside customers increased 12%. By product, LCD TVs, VAIO PCs and Cybershot digital cameras contributed to the sales increase. On the other hand, there was a decrease in the sales of LCD rear projection televisions, the market for which is shrinking. Intersegment sales increased significantly, mainly due to sales of PS3 semiconductors.

Operating income in Electronics was approximately 13 times that for the comparable period last year. If you exclude the JPY51.2b provision in the prior year for the battery pack recall, operating income rose 80% year on year. The largest profit-generating products were, in order of magnitude, digital cameras, video cameras, system LSIs, PCs, and broadcast and professional equipment.

Now, looking more specifically at the TV and semiconductor categories, overall sales of the television category for the quarter were approximately JPY307b, an increase of 20% year over year. Operating loss was approximately JPY21b, about JPY11b lower than last year. Impairment losses against certain assets contributed to losses in the quarter.

During the second quarter, LCD TVs continued to be impacted by price (technical difficulty). However, as we approach the holiday selling season, we will introduce new large screen and full HD models in Europe, Japan and Asia, as we have in the U.S. in August. Through expanding sales of these new models and improving our panel cost competitiveness by utilization of the eighth generation plant, we will work to increase sales and improve our profitability in the second half of the fiscal year. LCD rear projection TVs were impacted by continued market shrinkage and price declines.

In semiconductors, overall sales of the semiconductor category for the quarter were approximately JPY225b, an increase of 59% year on year. Operating income was approximately JPY24b, an improvement of approximately JPY31b year over year. Sales and profit increased due to the sale of chips for the PS3. We aim to make the semiconductor business profitable before the full fiscal year.

Now, Sony Ericsson. Sony Ericsson's sales increased 7% to EUR3.108b. Unit sales were approximately 25.9m, an increase of 31%. Income before income taxes decreased 11% to EUR384m, reflecting the exceptionally high level of profit recorded in the comparable quarter of last year. Walkman and Cybershot phones contributed to the results of the quarter. Sony Ericsson gained approximately 1 percentage point of market share over the past year and finished the quarter at over 9% share. The equity net income Sony recorded from Sony Ericsson decreased year on year by JPY700m to JPY21.1b.

In the Game segment, sales increased 43% or 38% on a local currency basis. Approximately 70% of sales came from hardware and accessories, while the rest came from software. Looking at each of our Playstation platforms, first PS2.

We began the year thinking PS2 unit sales would be less than the previous year, but the strength in the first quarter continued in the second quarter and we reached the same sales level as last year's first half. The entire business, including software, is solidly performing above expectations. As a result of the strong performance, we have increased our PS2 unit sales forecast for this fiscal year from 10m units to 12m units.

Next, PSP. Hardware sales increased due to a significant increase in unit sales year on year. We launched a new lighter, slimmer PSP model in Japan, the U.S. and Europe in September. Penetration of PSP is gaining speed in every region, with September unit sales in Japan reaching a record high. Through the introduction of new colors and other region-specific product rollouts, we're appealing to a wider user base. As a result, we're also increasing our full year unit sales forecast for PSP from 9m units to 10m units.

Although PS3 contributed to increased sales, actual results for this quarter were below our original expectation. As we approach the year-end holiday selling season, we will accelerate the expansion of the PS3 platform through enhancement of the software line-up and proactive measures aimed at expanding sales, such as the recent introduction of new models in Japan, the U.S. and Europe, as well as the recent adjustments to the price of the models currently in the market.

I'm pleased to report that in Europe, where we first introduced the new models and pricing, sales in the first week were two to four times higher than the previous week, depending on the country. In Japan and North America, where the new models will be introduced in November, sales have already doubled due to price adjustments on current models. We continue to make every effort to achieve our first year unit sales goal of 11m units.

Next, turning to software. During the second quarter we recorded significant PS3 software sales, whereas there were no such sales in the comparable quarter of the previous year. However, overall software sales decreased in the second quarter as unit sales of PS2 and PSP software were lower than last year.

Operating loss in the Game segment increased JPY53.2b year over year to JPY96.7b. Segment losses increased primarily due to the loss recorded from selling the PS3 at strategic price points lower than its production cost, and an increase in write-downs of PS3-related inventory related to the new pricing structure. Write-downs of holiday selling season PS3 inventory and major components came to JPY71.1b.

Turning to the Pictures segment, sales increased 6% year on year or 5% on a U.S. dollar basis, primarily due to higher sales of theatrically released and made-for-TV movies in the television market, as well as higher advertising and subscription revenues from several of Sony Picture Entertainment's international channels. The film that contributed the most to revenue during the quarter was Superbad.

Operating income was JPY2.7b compared to a loss of JPY15.3b in the same quarter of the prior year. Lower marketing expenses, resulting from the fewer number of theatrical releases in the current quarter compared to the same quarter of the prior year, as well as other factors, contributed to the improvement in profitability.

Next, looking at Financial Services. Revenue decreased 6% due to a decrease in revenue at Sony Life. Revenue at Sony Life decreased 14% to JPY124.5b. Although insurance premium revenue increased due to an increase in policy amounts in force, net gains from investments in a separate account and net valuation gains from convertible bonds in the general account decreased.

Operating income decreased 6% to JPY23.1b as a result of the decrease in operating income at Sony Life. Operating income at Sony Life decreased 31% to JPY17.7b. Although insurance revenue increased, net valuation gains from convertible bonds in the general account decreased. Results at Sony Assurance trended well, primarily due to car insurance. And Sony Bank had a steady increase in its business as total assets held increased.

On October 11 we successfully completed an IPO of a minority stake in Sony Financial Holdings. The offering raised JPY290b for Sony Corporation and JPY30b for SFH. As of last night's closing price, Sony's retained 63% stake in SFH is worth JPY564b for our shareholders.

All Other. Due primarily to a year-on-year increase in album sales at Sony Music Entertainment of Japan, as well as the consolidation of the U.S. music publishing company Famous Music, sales in All Other increased 17% compared to the same quarter of the previous fiscal year. Famous Music was acquired from Viacom by Sony's U.S. based music publishing subsidiary, Sony/ATV Music Publishing.

Operating income increased 66%. This increase is primarily a result of the increased sales recorded at Sony Music Japan, an increase in trademark royalty income from Sony Ericsson and higher fee revenue from the new broadband subscribers at So-net Entertainment Corporation.

Sales at Sony BMG decreased 10% to $851m. This decrease was due to the continuing decline in the worldwide physical music market, as well as fewer major artist releases compared with the same quarter of the prior year.

Sony BMG recorded income before income taxes of $8m, as compared to a loss before income taxes of $31m in the same quarter of the previous year. This improvement was primarily due to lower marketing, overhead and restructuring costs. As a result of a number of one-time items recorded in the quarter, including a reduction to the deferred tax assets in Germany stemming from a recent tax rate change and a number of return to provision adjustments, a net loss of $8m was recorded by Sony BMG. Consequently, Sony recorded $4m in equity in that loss.

On October 3, 2007 the European Commission completed its reexamination of the merger between Sony and Bertelsmann's recorded music businesses, and announced that it was reaffirming its 2004 decision that the merger of the two companies does not pose a threat to competition in the market.

Next I'd like to review our forecast for the fiscal year ended March 2008. We have revised upward our forecast for the fiscal year from the forecast we announced on July 26. The foreign exchange rate assumptions used in the forecast for the second half are approximately JPY115 to $1 and approximately JPY160 to EUR1. In July we had JPY117 to $1 and JPY158 to EUR1 for the nine-month period.

There are five factors that led to the changes in our forecast. First, second quarter results as a whole exceeded our previous forecast.

Second, while second half sales are expected to slightly exceed the previous forecast, we expect lower income in the Game segment as compared to our July forecast. In addition, certain one-time gains which are expected to be recognized in the second half had been incorporated into the revised forecast.

Third, we've increased our forecast for restructuring charges by JPY10b, mainly as a result of additional impairment charges from manufacturing facilities relating to rear projection televisions.

Fourth, in connection with the IPO of SFH and its concurrent listing on the Tokyo Stock Exchange, we expect to record a gain in income before income taxes of approximately JPY75b and net income of approximately JPY11b in the third quarter. However, we also expect consolidated net income to be offset by the expected increase in minority interest arising from the IPO of SFH.

And finally, we've increased by JPY10b our forecast for equity net income of affiliated companies due to better than anticipated results during the start-up period of production for the eighth generation LCD panels at S-LCD.

As a result of these factors, our new forecast is for JPY8,980b in consolidated sales, JPY450b in operating income, JPY500b in income before income taxes and JPY330b in net income.

Before Mr. Oneda and Mr. Wiesenthal take your questions, I'd like to summarize the key points discussed today.

The Electronics segment continues to achieve significant growth in sales and profitability. The results for the quarter reflect 21% top line growth and operating profit margin of over 6%. In the Game segment, PS2 and PSP sales continue to be strong, resulting in an increased unit sales forecast. While PS3 results were a bit behind our July forecast, the overwhelming majority of the losses associated with PS3 for the year have already been reflected and we will approach the holiday selling season with an expanded software offering, new models and more attractive pricing. The Pictures and Financial Services segments continue on their path to significant profit contribution for the fiscal year.

So, our full year earnings forecast has been revised slightly higher and we're on track to achieve a six-fold increase in operating income and our operating margin is forecast to be 5%.

At this time, we would be pleased to take your questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). And ladies and gentlemen, your first question comes from the line of Jason Mauricio of Arete. Please proceed.

Hi. Thanks a lot. Just a few questions. One is I was wondering if you could talk about gross margins overall and what contributed to the decrease in gross margins, given sales volume was roughly in line with the previous quarter.

Second, could you detail how much of the Playstation -- or the Game loss was inventory write-down versus the console loss, and what were the reasons for the inventory write-down?

And finally, can you discuss the factors contributing to the upgrade of the digital camera forecast? I believe it wasn't so long ago that you were looking at that with a cautious eye. Thanks.

Okay. The gross margin overall is basically decreased from 5% to -- the operating margin was from 5% to 4.3%. But if you exclude the one-shot restructuring type expenses, the quarter-to-quarter basis margin is 5.2%, which is almost equivalent to first quarter and second quarter. So it's primarily because of the restructuring type expenses is the main reason.

And how much of the Game loss was inventory related with write-down?

Yes.

This is, of course, only PS3 hardware product only. And about 711 (inaudible) is included in the second quarter.

And what were the reasons for the write-down of inventory?

As of this moment, the cost is still higher than the selling price and the formula of the write-down is as follows. The denominator is the production cost of the latest, current month. Okay? The numerator is the average selling price for the coming three months minus the last month -- the production cost of the current month. So that the denominator and the numerator comes up with the negative gross ratio, that is the percentage that we write down against the current on-hand inventory.

Okay. So you're writing down (multiple speakers).

Yes. Basically, the cost is higher than the selling price and all the on-hand inventory is devaluated, so that we will not lose the future losses. In other words, the losses are recorded in advance.

So this is a write-down of finished goods inventory to basically a mark to market of finished components rather than raw materials?

Right. Not only finished goods but also the raw materials like the cell chip inventories are also devaluated.

Great. And thanks for that. And digital cameras, what were the factors contributing to the upgrade?

This is Rob Wiesenthal speaking. I think the product mix that we've had has definitely added to the increase in sales in terms of just Sony generally and obviously the choice of colors and such. But overall, what we're seeing in the market is the growth is continuing, given we've conditioned the customers to really think about these products as an upgrade cycle. The prices have been maintaining very well, have not been subject to the kind of commoditization as a number of other products. So you'll see additions such as image stabilization, Wi-Fi base detection, and yet these cameras maintain their price over time. If you look at some of the analysts' reports, analysts are now talking in terms of cameras per person, where they used to talk about cameras per household. So the growth continues and Sony's playing a very big part in that growth, and we have a very full line-up from very small Cybershots to full SLRs.

Okay. Thanks a lot, guys.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Evan Wilson of Pacific Crest. Please proceed.

Good morning. I have three questions for you, the first on the Television business. You indicated this morning that the TV business operating income forecast could be lower than previously expected for the year. Should we be thinking about the second half the same, or just remove the underperformance from Q2 from our previous fiscal year expectations?

A second question would be on whether or not you're seeing any impact from the subprime market here in the U.S. on your sales, and whether or not you've factored in any weakness into your forecast for the rest of the year.

And the third question would be on the Game business. You increased your sales forecast on a unit basis for both the PS2 and the PSP, with no corresponding increase in software. Could you square up the change in the forecast, up for hardware but not for software? Thanks.

Your first question is the operating profit of the TV could be lower than the previous forecast? You're talking about the future?

Yes. I'm wondering if the forecast is lower for the second half or if (multiple speakers) forecast for Q2.

Yes. The first half, the product is actually the model that's producing [swing back]. Those products were not so competitive compared to our competitors. The reason of this is the competitors prepare the full high definition type product, compared to our regular full high definition TV. So therefore, basically our product was not competitive. But the second half our product is fully competitive, more large size and [therefore] HD products. So therefore, we are expecting that the second half of the TV profitability could be better than the first half. So therefore we have the loss operation for the LCD television in the first half, but we're expecting the profitable operation for the second half.

Is your profit forecast for the second half lower now than it was in your July forecast?

Compared to the July forecast, the second half is slightly lower because of the introduction of the new product is different from country to country. And compared to the original plan, it's slightly slower.

Thank you.

Okay. And the second question is the impact from the subprime issues. At this moment, we don't see any drastic deterioration of the U.S. economy, even though that we are cautious of the consumer economic situation. But at this moment we don't see any drastic downside adjustment.

I think your third question was about the increased PS2, PSP hardware forecast without the software forecast being increased. I think with respect to PSP, clearly I think there was a little bit of a lapse before the PSP hardware really took off, where some game manufacturers migrated. I think those who didn't stay on sorely missed a unique window, because the new thin PSP is doing extremely well. In fact, there are a lot of places that have been out of stock on it and we're working hard to keep up with production. And it's been a very exciting time in the hardware side with this new device, because clearly it is a lower price point, thinner, a great form, faster, and is now being packaged in different colors with unique game combinations. So I think you'll be seeing a big pick-up in PSP software sales, both from first party and in third party.

And adding to that factor, the PSP, we have some accessories like the GPS type functions and one certain type function that you can enjoy the TV programs through the PSP, and also the light and slim pack, the hardware shape. That could increase the quantity without increasing the software drastically.

Would it be safe to say that your forecast now versus the July forecast for PSP and PS2 software is higher, but it was offset by a lower forecast for PS3 software?

The PSP, PS3 software, the expected software numbers will not be changed. So still we are shooting about 200 titles compared to the current about 100.

Thank you.

Next question, please, Bill.

Thank you very much, sir. Next question comes from the line of Jessica Reif Cohen of Merrill Lynch. Please proceed.

Hi. I have a couple of Entertainment-related questions, the first on the studio side. What preparations are you making for a strike on the film and television businesses, and what are your expectations?

In terms of the impending strike, or so it seems to be, clearly we have an inventory of films and we are also -- it is something that in the short term we really don't see any kind of real economic impact. In the short term, depending on the length of the strike if there is one, there could be some blips. I think our role here is to take some of our inventory and fill out our pipeline and take advantage of open dates. And we'll see how it goes.

Really, no one really knows what is going to happen yet. Everybody is bracing for this. We're hoping for the best but we really don't have any great information yet about how this is all going to pan out. But again, in terms from a financial perspective, no real short-term economic impact for us, and long term we'll wait and see and we'll use our inventory both on film and TV to take advantage of dates and program holes.

Okay. I have three more questions. The second question is can you discuss what you're seeing on Blu-ray versus HD-DVD in the market, both the U.S. and outside the U.S.? And how do you expect things to shake out with some of the payments that have gone to a couple of the studios?

And I'm sorry but, as part of that, could you also talk about the calendar fourth quarter expectations, since there are so many titles coming into the market?

Sure. In terms of Blu-ray, obviously we were disappointed with some of these other studio decisions. I think that, Jessica, you're 100% right. These payments have obviously had a lot to do with it. Our format is succeeding on merit. If you listened to what Rupert Murdoch said at the Goldman conference, he was quoted as saying the public is going to want Blu-ray because the public can tell the difference. We agree with Rupert. There's a greater capacity. There's a greater potential for interactivity. And I think that we have a good, strong suite of partners.

And right now Blu-ray is still selling two to one. And I think the power of the Playstation 3 is clearly going to have a big impact on the balance in the market. We'll probably have 15m Blu-ray players out there by the end of the year. And in the new PS3 bundles you'll see Spiderman 3, which I think is going to really start picking up the take-up rate for PS3 users to really enjoy a full high definition experience. And we have more hit titles. If you take a look at the top 20 high definition titles this year, 19 are available on Blu-ray and 13 of those are available on Blu-ray only. And we also have a lot of key retailers. Blockbuster announced that it was going to exclusively carry Blu-ray in 1,450 out of its 1,700 stores. Target and BJs are only selling Blu-ray players.

So, listen, it's a war out there and I think we're in a very good position, based on the hardware and the software. But we're taking it extremely seriously and we're hoping, again, that both the customers, the studios and the retailers pick the format on its merits. And if that's what happens, then we'll be okay.

And one last question on film and then I have a question on music. You mentioned that part of the profit growth in the second fiscal quarter was due to the international channels, I think you said advertising. Where are you seeing the most growth in your international channels, what geographic areas, and what are your plans for new channels, if any?

Well, I think it's really all over, Jess. I think India, where we have Sony Entertainment Television, is growing extremely well. And also our local film production which we're picking up in India and also Russia is a huge market for us. China, as you know, we've been involved in local Chinese production for many, many years. So it's across the board. Sony Pictures has been a leader in local production in all of the European countries and also in Asia. I can't pin it on one specific territory. Again, our business is divided into local language production, local channels and also distribution. And they're all firing on all eight cylinders, so we're very excited about it.

Okay. And then just finally from me on music. Do you have any sense of when the market will stabilize, meaning when do you consider the decline of physical will be offset by the increase in digital? And for Sony/BMG specifically, should we expect further restructuring charges this year?

Well, this fiscal year, I mean calendar year, the package media could be reduced by 11% and download probably will be increased very, very drastically. But overall the industry may be declined by 5%, 6%. That trend may be continued, but hopefully in the future the download type operation will be increased and then hopefully that will offset the package media.

I think, for the first time, it's interesting, Jessica, we're seeing certain artists that actually are selling -- the majority of their income is coming from digital. It's something we haven't seen, especially in the urban arena, both in terms of ring tones and master tones. And I think that what the music company is doing a good job of is really trying to pursue more of what they call a 360-licensing opportunity, where at least with young, emerging artists they're participating in the entire revenue stream from branding, merchandising, touring, video. Obviously they work closely with Sony Pictures on the television side and the film. You're not going to be able to do that for Celine Dion, but you are going to be able to do that for some younger, emerging artists.

But it's going to take a while. I think the next couple of years are going to be tricky but it -- I think the benefits of the restructuring have finally happened. We've cut over $400m of costs and enjoy those savings annually. And I think over the next couple of years you're going to start seeing the new business emerge, but it's going to be difficult for a while.

Should we expect further restructuring charges?

Probably a bit for the year ending 3, '08. You could probably see in the $75m range for this year.

In total?

The cumulative basis is over $600m, but annual savings is over $400m. So theoretically, less than two years we could get the return on the investment. That we are predicting.

Thank you.

Thanks, Jessica. Bill, can we go to the next question, please?

Certainly. Next question comes from the line of Daniel Ernst of Hudson Square Research. Please proceed.

Yes. Thanks for taking my call. Three questions, if I might, first two hopefully pretty straightforward, the first on Sony Financial Holdings. The net gain, just to clarify, will be offset 100% by the minority interest offset?

And then secondly, on the call this morning in Tokyo, just to clarify, I believe you said that the Game division second half operating income would be above breakeven, just wanted to clarify that.

And then third, on the LCD business, could you walk me through the kind of trajectories there on your gross margins or operating margins, now that the 8G fab is up? I assume that also in this quarter was a pass through on the full G&A on the 8G fab and the fact that it's not operating at full capacity or probably at full yield yet, but you didn't raise your forecast for LCD. So could you walk me through the flow through of that into your expectations for the LCD operating margin going forward? Thank you.

Your first question, SFH net gains, the net gain for this transaction, for the bottom -- I mean the net/net after-tax basis, is yes, approximately a little over 100 [of yen], so that will be offset in the second half because the minority of the profit would be eliminated from our bottom number. Yes, it will be offset.

The second question is the Game second half operating profit would be breakeven. As I explained before, within the first half we took the very high inventory write-down. That would be offset in the second half. So therefore we didn't see any big loss associated with this inventory write-down, but rather there could be the income from this inventory write-down. So that is the main reason that we could be breakeven in the second half.

The third question involves walking me through the trajectory of LCD operating profits now, with the 8G fab?

The eight generation LCD operation in Korea is good for the -- is very economically good product for the large screen size, like 46-inch and 52-inches. For example, we could get the eight panels from the generation eight production line, compared to the six of generation seven. That would really help the cost efficiency. And because of the very smooth start-up, we could enjoy the quantity much faster than we expected. That will help to improve our profitability for the LCD operation from now on. But this eight generation line would become full capacity very quickly.

Could the LCD business then be operating margin profitable in the second half, or the tail end of the second half?

Yes. The second half, we are expecting the profitable operation for LCD, yes.

Great. Okay. Thank you, sir.

Thanks, Dan. Bill, our next question, please.

Next question comes from the line of Ben Williams of GAM. Please proceed.

Hi. It's Ben Williams from GAM in London. Sorry, it's just following up on this JPY71b write-down in the Game business. Because I'm just looking here, you're forecasting 11m units for the fiscal year and as far as I can see you've sold just over 2m so far. So we've got about another 9m to go for the second half. I'm kind of guessing that the third quarter is bigger than the fourth quarter because it's a holiday season. So that's a breakdown of 5m in the third quarter, 4m in the fourth quarter. Could you give us an idea of what your monthly production capacity is, because it seems that with such a high unit figure for the next two quarters to come you must have been building many millions of units of inventory? So if you could perhaps walk us through a bit more clearly in terms of that JPY71b, in terms of how many units you've got in inventory and how much you've actually written down on this number, that would be great.

Capacity wise, I think that we could go as high as the 2m per month. But our -- we are using the outside manufacturing companies and they are flexible to adjust the production capacity. So we could go 1m sets or even to 2m sets. And the inventory pile up mainly comes from the devices area, because of the relatively long lead time for the cell chips, [Sony] RSX chips. So therefore, we have to pile up some of the inventories for the keypads a little bit earlier than the production of the final assembly operation.

It just seems that the JPY71b figure, I guess that's, what, $650m. When we're talking figures, let's say you might have, I don't know, 2m to 3m units in inventory, all PlayStation units, that's -- we're talking about [250] (multiple speakers) unit, roughly.

Okay. Yes. The reserve for the inventory write-down is monthly -- every month we increase the reserves and we decrease the previous year's -- previous month's reserves, depending upon the inventory level and depending upon the gross margin, the improvement. The inventory write-down amount is always changing. So 711m is the number that we charge to the first half. And the second half, the balance of the inventory write-down which is on the balance sheet side, the charge is much, much higher than the 11 -- 711.

Okay. Could I just ask you a follow-up question? I've read a couple of analysts' notes which suggest that the shift to 65 nanometer production for the cell chip could potentially, and I think with the graphics chip as well, could cut costs by close to $200 per unit for the PlayStation 3. Is that an accurate -- is that a sort of ballpark figure?

Well, we don't disclose those kinds of details. I'm sorry, I cannot tell you exactly.

Okay. (Multiple speakers).

Roughly speaking, from 95 nano -- 90 nano to 65 nano, theoretically the cost would be reduced about 30%.

Okay.

Great. Thanks, Ben. Bill, can we have the next question, please?

Next question comes from the line of Luc Mouzon of BNP Paribas. Please proceed.

Yes, hi. Good afternoon. Just to follow up on the previous question is that basically when do you expect the positive cost of the PS3 to move closer to the selling price now that you have adjusted those selling prices, especially in Europe, quite sharply down? Should we expect like six months ahead, 12 months ahead? And if you could give maybe some specific measures that you have been taking to match with the price decline on your cost base. Thanks.

Yes. As of this moment, we are expecting sometime in fiscal '08 we could achieve the breakeven for the PlayStation 3. But I cannot tell exactly when at this moment.

Okay. And with regard to the cost reduction, is there -- you mentioned that you will not give the details on the cell chip cost, but is there any other specific measures that you have been implementing or (multiple speakers)?

Okay. Not only cell chip, but also another RSX chip, which is the graphic-related chip, also would get the similar benefit by shrinking the size of the chip. But also we are planning to change the optical pickup by changing the designs. But also we are improving the cost of PCs. So not only the cell chip, but also we can reduce the cost of those three components.

Okay. And just a follow-up with regards to Electronics and your pricing margin that you could expect for the second half. As far as I understand from your answers in the very first question, you expect the EBIT margin to come slightly down compared to where you stand at midyear, which is 6.2%, as far as your terms of concern. But why are you keeping then such a low 4% EBIT margin? What are the rationales behind that 4% margin, knowing that you are now running at 6% plus?

We are taking a little bit of the conservative numbers, a conservative view for the other -- the Electronics products. Even though the TV may be improved, but we are taking some conservative view for the DIs and the audios and the Vaios.

Okay.

Hopefully, our forecast is long and it could be better than the first half. But at this moment, because of the market and the competition situations, we are going to take a little bit of a conservative view in a way.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of C.J. Muse of Lehman Brothers. Please proceed.

Yes. Good morning, good evening. Thank you for taking my call. A couple of questions, I guess first on CapEx. That JPY8b, does that include S-LCD?

C.J., where did you get the JPY8b figure from? You've got us a little confused.

I'm sorry, the LCD CapEx number.

Are you referring to expanding the production lines at S-LCD?

Yes, the numbers in the presentation on the CapEx side.

Bear with us a second.

We are envisaging close to the $1b to LCD generation eight lines.

Okay. And that's in fiscal 2007?

While we get the answer to that one, do you have a second question for us?

Yes, sure. I guess that initial gen-8 ramp, what kind of CapEx are you planning for 2008 as you fill out that line?

Again, the question is specific to S-LCD?

Exactly.

S-LCD related investment is for the generation eight only this year. This year and next year -- last year and this year was already the $1b.

Okay. And what do you expect to spend next year as you build out that line?

There is no specific plan to invest for the generation 8 or 10 at this moment.

Okay, great. And then, on the semi side, the CapEx of 130, what are your thoughts in terms of your needs there for 2008?

The capital investment for this fiscal year mainly comes from the CMOS related and also the investment in the Slovakia for our LCD manufacturing operations. And this and LCD are the main investment for this fiscal year.

And on the semiconductor side?

Excuse me?

And on the semiconductor side?

Semiconductor side, the main investment is for the CMOS sensor.

Okay. And then your outlook for 2008?

2008, we don't have any specific data yet.

Okay. If I could move over to your TV business, can you talk about your ability to source panels and what percentage of your Bravia TV line you're outsourcing to ODMs this year?

Our Bravia panel is basically coming from our outside suppliers but 50% is coming from the S-LCD, which is the joint venture company. And 50% is primarily coming from Taiwan.

Okay. And in terms of your outsourcing the module manufacturing to ODMs, how has that progressed this year?

What do you mean by module?

Where you outsourced the manufacturing, the actual manufacturing of the TVs, for instance TPV, guys like that in Taiwan.

In terms of the finished LCD, completed, the LCD TV?

Yes.

We don't think that we will outsource to the Taiwanese makers. The only panel we will buy from the Taiwanese manufacturers.

So you're saying you're not outsourcing to ODMs certain production of TVs that you've sold to China and Taiwan?

Only the components only.

Okay. A final question. Can you talk about your outlook for mix, I guess in the second half of this year, of 1080P and 120 hertz panels, and then how you see that progressing in 2008?

Primarily, the strength of the -- I mean the focus of the Bravia TV would be the large size and full HD with 120 hertz. So this percentage will be continuing.

I mean this year, is that 10%, 20% of your mix?

As of this moment, there are 30%.

And where could you see that going next year?

We don't have specific numbers yet.

Okay. Thank you very much.

Bill, we'll take our next question, please.

Next question comes from the line of Sue Xu of Investec Asset Management. Please proceed.

Thank you. I have a few questions about your PS3 business. The first one is about the inventory write-down. Given that -- it just seems that you have already brought down your cost base of PS3 to the life of the average selling price over the last three months. So is it fair to say that, assuming you are not going to cut price further, you will certainly be able to achieve at least breakeven in the second half? And also, if the cost reduction continues, you will be able to even reverse some of the inventory write-down that you had this quarter?

The PS3 inventory write-down has already partially did it within the second quarter. That will cover the two, three-month inventory level. But if we have to cut the price further more, yes, the additional write-down may be required. But at this moment we don't have any plans to reduce the price of the PS3 further more.

Okay. The other question is about your software titles for the PS3. Just wondering if you can give updates about the launches of the key titles over the Christmas shopping season, if you see any further delay of any title. Thank you.

We have about six, seven big titles, like the Ratchet and Clank Future, Heavenly Sword, World Soccer Winning Eleven, Grand [Theft Auto] 5, Time Crisis 4, (inaudible) 3, those are clearly the big hits within this calendar year.

Okay. Yes, okay. Thank you.

Unfortunately we've run out of time, so if there is anyone left in the queue we would like to ask you to call our investor relations team directly. In Tokyo the number is 813-6748-2180, in New York it's 212-833-6722 and in London it's 44-207-444-9713. So, again, thank you very much for joining us today and that concludes today's call.

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation for today and you may now disconnect. Have a good day.