Sony Corp. Business Update Call Transcript

Oct.17.08 | About: Sony Corporation (SNE)

Sony Corp. (NYSE:SNE)

Business Update Call

October 17, 2008 9:30 am ET

Executives

Aldo Liguori - Vice President of Global Corporate Communications

Hideki (Dick) Komiyama - President of Sony Ericsson

Anders Runevad - Executive Vice President

Ulf Lilja - Chief Financial Officer

Analysts

Tim Boddy - Goldman Sachs

Rod Hall - JP Morgan

Mark McKechnie - AM Tech

James Faucette - Pacific Crest

Rod Hall - JP Morgan

Alexander Peterc - Exane BNP Paribas

Jan Dworsky - Handelsbanken

Richard Kramer - Arete Research

Mats Nystrom - SEB Enskilda

[Jeff Kewal] - Barclays Capital

Edward Snyder - Charter Equity Research

[Sheriff Walker] - Citi

Matthew Hoffman - Cowen

Operator

Welcome to Sony Ericsson’s media and analyst conference call. To view visual aids for this call, please log on to www.sonyericsson.com/press or www.ericsson.com/investor or www.sony.net/ir. (Operator Instructions) Aldo Liguori, Vice President of Global Corporate Communications for Sony Ericsson, will now open the call.

Aldo Liguori

Thank you for joining our Q3 financial results call. With me here today are Dick Komiyama, President of Sony Ericsson, Anders Runevad, Executive Vice President, and Ulf Lilja, Chief Financial Officer. We will be making forward-looking statements during today’s call. These statements are based on our current expectations and certain planning assumptions which are subject to risk and uncertainties. The actual results may differ due to factors mentioned in today’s press release and discussed in this conference call. We therefore encourage you to read about these risks and uncertainties in our earnings reports.

I would now like to hand the call over to Dick Komiyama.

Dick Komiyama

First, let me outline the highlights of the quarter. As expected, the third quarter has continued to be challenging for Sony Ericsson. We reported a break-even income before tax of 12 million euro before restructuring on sales of 25.7 million handsets. Illustrating what we said at the time of the Q2 financial results that Sony Ericsson needed to align its business organization and cost structure to better compete under the current market conditions, the alignment activities are proceeding in line with our expectations and internal meetings have been taking place with employees outlining management plans for the future business structure and negotiations are now taking place at the local level on which position will close in the future.

We feel confident that we have acted quickly to stabilize the business and the restructuring activities are progressing well. The quarter is giving us some reason for optimism and I will return to this area in the presentation.

We continue to forecast global handset market growth to be along 10% for the year, but believe the recent economic turmoil in the market will have an impact on the market going forward. We believe that the mobile phone market is undergoing a period of rapid change and we must align our organization to those new business conditions in order to remain competitive. For this reason, the company announced a major internal program to review its operation and transform the company into a more streamlined, efficient, and dynamic organization in order to enhance our long-term competitiveness. We have reviewed our strategies and are now aligning our capabilities, portfolio, and platforms in line with the new direction.

As we stated last quarter, this will result in a headcount reduction of around 2000 employees. We must create a right-sized and structured organization to have the agility and speed to compete effectively in the new market condition. This new organization will have cost efficiency at score and reduced duplication across the site and functions. The alignment activities are key to Sony Ericsson being able to return to a profitable growth in the future.

Our aim in the future is to focus on what we do best - creating a compelling product proposition that appealed to the consumers and offer our network operator partners opportunity to grow their business. We must return to the core of Sony Ericsson’s promise to the consumer, great products, innovative service and applications, great design, and being one step in front of the consumer knowing what the consumer wants even before they do. Increasing innovation is also key. The alignment of our R&D facilities into the new organizational structure is based on the need for greater innovation to compete in this market. We recognize this and are taking steps to address it internally.

Our immediate focus will be our returning to profitable goals as soon as possible while at the same time putting a structure and process in place to ensure the company can survive in the new market conditions.

Let me just detail the timeframe we have set internally to complete these activities. Our aim is to align operations and resources by the end of the first half of the year 2009 with the aim of reducing extra costs by 300 million euro by the end of the second quarter with those cost benefits being seen during the second half of 2009. Over the first few weeks, we have re-aligned our R&D organization, reducing the number of divisions from 3 to 1 to reduce the duplication across the portfolio. We have consolidated our hardware and software operations and improved product development and design processes. We have taken immediate steps to reduce the number of models in the portfolio as well as announced internally which site will be affected by the headcount reductions.

Although obviously the company is focusing on a transformation program, it is still very much business as usual and we are continuing to strengthen our portfolio as well as our content and service opening to ensure the deliverance of the brand to the consumers.

We announced the expectation of our PlayNow Arena content service and launched PlayNow Plus and music subscription service that will launch in Telenor in Sweden in Q4 with a customized W902 Walkman phone and then roll out to additional markets at the start of 2009. We recently announced C902 Cyber-Shot phone, which has sold extremely well during the quarter and we have started shipping our new multimedia Xperia X1 phone in selected European markets.

During the quarter we have also announced our involvement in the 2010 FIFA World Cup as the official handset vender of the tournament which will give us a greater global marketing opportunity in the run-up to the tournament. We also announced the new global take-back initiative to ensure our handsets are recycled and disposed off responsibly in every market where we do business. Although we have reduced number of products in the portfolio, we still announced 6 new models during the quarter which will start shipping in Q4. We also launched 11 new phones to the market in Q3.

We expect the current level of economic uncertainty to continue to the fourth quarter and at the current time it is difficult to predict what the full impact of this will be in our industry. It is probably safe to predict that lack of consumer confidence will impact sales in the coming months. At the same time, with so many new entrants, the high-end market will remain extremely competitive. Challening market conditions are expected to continue for Sony Ericsson.

Ulf Lilja

As usual we have provided additional financial information as addendum to our press release. Let me walk you through some of the financial key data.

Unit sales in the quarter at 25.7 million units, is up 5% versus previous quarter and flat versus last year. Net sales of 2808 million euro, is down 10% versus last year or 3% adjusted for currency effect. Gross margin in the quarter of 22%, was down one percentage point compared to the previous quarter mainly due to continued price pressure at the time of adverse cost trends in the supplier base.

Income before taxes and excluding restructuring charges was positive 12 million euro compared to 19 million euro in the second quarter and 384 million euro last year. Including restructuring charges in the quarter of 35 million euro, income before taxes became a loss of 23 million euro. Cash flow from operating activities was positive 102 million euro.

A second dividend totaling 300 million euro was paid to the parent in the quarter leaving Sony Ericsson with a net cash position of some 1.4 billion euro at the end of September 2008.

This concludes my presentation and I hand it back to Aldo.

Aldo Liguori

We are now ready to open our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) We will now take our first question from Tim Boddy from Goldman Sachs.

Tim Boddy - Goldman Sachs

I wanted to ask more about the X1 products, how many did you ship, did it contribute meaningfully to the third quarter results, and what outlook should we have for that product in the fourth quarter and obviously the price point it could make a very material difference on the gross margins and average selling prices.

Anders Runevad

We shipped in Q3 a very very small amount of X1. We actually started a shipment in the very end of Q3. So, from a Q3 point of view it was significant. We don’t give numbers on individual products in the quarter, but we have good expectations on X1 for Q4. We are now rolling out gradually, ramping up in Q4 the volumes to key markets and we will start with that primarily in the European markets during Q4, and we had a very good response on the product.

Tim Boddy - Goldman Sachs

Is your expectation that this will be a hit product in the fourth quarter?

Anders Runevad

Our expectation is that this is a very important product as any other product for Sony Ericsson, but it is definitely our really high-end multimedia product, and it is also from a brand point of view an important product because it’s also the Xperia branded product.

Operator

We will now take our next question from Mark McKechnie from AM Tech.

Mark McKechnie - AM Tech

I wanted to ask about the subsidy behavior on your new Xperia phone, have you seen any kind of impact for carriers desirous of subsidies either based on the kind of the credit issues that we’re seeing in the global world or relative to their focus on the Apple and RIM products?

Anders Runevad

I can’t go into detail on our agreement between different customers on subsidy levels or in detail for the customer and product, but the general trend that we have talked about before them prevails and what we see is longer contract periods to some extent. We also see a bit less subsidy levels overall in important markets. So, the trends that we talked about when it comes to subsidy levels and when it comes to lengths of contracts are very much the same as we discussed during Q2, and that is also coming into Q3, and we expect that to continue into Q4.

Mark McKechnie - AM Tech

And for Q4, are you thinking kind of breakevenish again or do you think you can actually, given seasonality, show a bigger profit?

Anders Runevad

Sorry, can you repeat?

Mark McKechnie - AM Tech

I’m just trying to get a sense for what type of profitability level you’re looking at in the fourth quarter here in the December quarter overall for your handset business, you are kind of break even this quarter, do you see some of your cost reductions or seasonality translating into kind of a positive operating margin, mid single digits here in the fourth quarter?

Anders Runevad

If you mean the complete business, and as you know from previous calls, we don’t give earning guidance for the coming quarter.

Operator

We now take our next question from James Faucette from Pacific Crest.

James Faucette - Pacific Crest

I just wanted to ask, you mentioned that you thought that the overall demand given the consumer could continue to be challenging going through into the fourth quarter, you obviously were able to show reasonably good sequential growth in the third quarter of around 5% in terms of units, what is your feeling in terms of how we should be thinking about the seasonality, typically the fourth quarter is up about 20% sequentially for the industry, can you help us gauge or bracket your expectations for the industry’s sequential growth in units and your own?

Anders Runevad

When it comes to the industry overall, of course we will have seasonality also this year, but we don’t think that it will be 20% up sequentially. It will be probably less than that, but we see that the seasonality effect is definite there, so we will have a sequential increase in the overall volume from Q3 to Q4, but overall then since also this year overall is less overall growth, around 10%, and probably if we said around 10%, the current thinking is probably that it’s rather likely to be below than above, and that of course means that the overall growth for this year is less than the year before. So, as a consequence of that and of course the seasonal growth, it will be less compared to a year ago.

James Faucette - Pacific Crest

Great that’s helpful, and then just as a followup, it’s interesting your commentary on your moves to try to narrow your overall product portfolio, can you give us a sense to how we should think about that impacting your P&L, should that result in lower R&D and lower marketing costs, it’s an interesting move, but I’m struggling a little bit to think about how it flows through to the P&L.

Dick Komiyama

This is a very important part of the strategy as we saw for the past few years that we have a cluster of products crowded in certain price range which actually gave in to some cannibalization in each other, and the efficiency of product designing, product development, and the manpower to make this product is rather too much. So, the idea is that we’re going to make a product which makes sense in the price range and the features and benefits so that it will stand up and it will also give volume unit base, and by doing so, we could make it a more meaningful portfolio alignment overall, which actually has already started taking place and this you’ll see more of next year’s first half to the second half, and by doing so, we are really shaping up our portfolio which I’m sure you will like it in the future.

Operator

We now take our next question from Rod Hall from JP Morgan.

Rod Hall - JP Morgan

I just have two question, one you were talking about cost trends in Q3 impacting the margins and I wondered if you could talk a little bit about component supplier cost expectations for Q4 and how you think that may impact margins, and then I have one followup to that.

Ulf Lilja

On a general note when it comes to our operating expenses, they do follow a little bit also the sales seasonality, so although we saw a drop sequentially in the provided material in OpEx versus the second quarter, in light of that, typically the fourth quarter is the highest activity quarter and that will of course also impact the fourth quarter development. When it comes to component cost, over time, we have on a general note seen the traditional cost down that is typical for the industry, but for specific components as we have talked about subject to phenomena in the raw material markets, etc., we have seen opposite trends, and that prevails and it is not necessarily then following the seasonality patterns as the OpEx does. So, with that it’s a little mixed bag there how we will be impacted by these trends going forward.

Rod Hall - JP Morgan

Okay, so just to be clear, as of now, the component cost rises that you saw affecting Q3 probably continue into Q4, you haven’t seen any change in the trend?

Ulf Lilja

No, we have not.

Rod Hall - JP Morgan

Okay, and then the second question that I have is on ASPs, we’ve seen rapid decline both for your ASPs as well as yesterday we think Nokia’s in Europe, can you talk about where you see ASPs going generally for the industry in Europe in Q4.

Anders Runevad

I think I can talk to you about where we see ASP generally in the industry, not specifically by region, and it’s very much as we have said before that is the general trend when ASP is declining, and we see that now very consistent for many quarters and we think that overall the general trend in the markets with declining ASPs will continue, and for us then, we see of course in retrospect we have to follow the general markets.

Rod Hall - JP Morgan

Okay, if I could just follow that up, normally in Q4 because of new product introductions we see some stability in ASPs, do you expect that in this particular Q4 or do you think ASPs continue to decline at roughly the same rate they did in Q3?

Anders Runevad

No, as I said we don’t give specific guidance on the quarter on ASP, but of course, you are right. I mean ASP is a consequence of product lifecycle, product mix, and then of course the general erosion, and so it can vary between quarter and quarter depending on the product lifecycle and the product mix, but we don’t give specific guidance on our ASP for the next quarter. I was more talking about the longer trends of ASPs in the markets.

Operator

We will now take our next question from Alexander Peterc from Exane BNP Paribas.

Alexander Peterc - Exane BNP Paribas

I’d just like to have a little bit more precision on when you say that there’s increased price competition in the market for mid to high-end phones, could you tell us whether that’s old competition or new competition, by old I mean Nokia, LG, Samsung, and by new rather the Apple, Research In Motion, and HTC?

Anders Runevad

No, I think that is a very broad statement. I think when we say increased competition, we mean from all the players active in the markets.

Alexander Peterc - Exane BNP Paribas

And geographically is that valid in all regions or is it more concentrated in Europe?

Anders Runevad

No, I think that we see increased competition in the higher segments in all parts of the markets, not just Europe.

Operator

We will now take our next question from Jan Dworsky from Handelsbanken.

Jan Dworsky - Handelsbanken

Could you in any way describe if you have seen any trends over the last few weeks in the market place given the increased turbulence in banking systems and consumer confidence plunging or is that too early to judge?

Anders Runevad

I would say it’s too early to judge. I don’t know what you would say, but I also follow this market very closely, but I think with the recent turmoil and ups and downs it’s very very hard to judge the impact of that on consumer spending at this point in time. It’s simply too early.

Dick Komiyama

Just let me add one more thing, yes, that’s true, it’s too early to predict at this moment, but we see this situation as a very important development in global economy and also in our industry, and generally speaking, in those situations we see the decline of the consumer confidence and also level of the inventory in distribution, in manufacturing, and also the credit that is available in distribution over this area. We are watching very carefully what is happening, but to a degree we have to anticipate something may arise and we should be ready to whenever the situation arises.

Jan Dworsky - Handelsbanken

An additional question relating to that, in terms of the restructuring program that you announced in the Q2 stage given what’s happening in the global economy, if we see a bigger impact on the consumer and a weaker market, do you believe that the program that you have announced is sufficient to cope with that or do you think that you will need to cut costs further to accommodate a more challenging market?

Dick Komiyama

Well, you know this plan of reorganization and restructuring process is already initiated in the middle of spring of this year and I think this is a plan that we streamline our organization make it competitive from the industry’s benchmarking, and from that viewpoint I think we are doing well. However, you are right, and certainly, this chronic situation and financial crisis, how it will impact the consumer behavior we are not sure about at this moment. However, at this moment, I do feel that the level of our engagement in this execution of plan will be good enough, but if some case which is beyond our expectation may arise, certainly we will be flexible enough to adapt to that situation, but today, what we’re doing is quite well planned and cover our ability to restore the competitiveness which we’re right now proceeding.

Operator

We will now take our next question from Richard Kramer from Arete Research.

Richard Kramer - Arete Research

A question for Ulf, given your comments on component costs and also the need to constantly add larger displays, more memory, etc., to products, can you talk us through the specific steps we might expect Sony Ericsson to take to recover the gross margin which has now fallen nearly 10 full percentage points in a year’s time. And also, a question for Komiyama, can you tell us what might be preventing Sony Ericsson from making far greater use of Sony’s various media assets. We can understand the early start of PlayNow, but are there any plans to bring first-party games, content from Sony Music or Pictures beyond the few tie-ins that you have got right now.

Ulf Lilja

If I start with the first part of the question, I think we should remember first of all the background to the considerably lower gross margins that we are operating with today compared to a year ago, that’s not only linked to cost development. We have pointed out that a significant impact also comes from the portfolio mix, and to what extent, the portfolio is mainly based on products that were launched sometime ago or newly launched products where the gross margin tends to be higher. So, that’s my first comment, it’s a mix of that and cost reduction efforts. A little bit more specifics then on the cost reduction efforts. In the framework of aligning the company to become more efficient we have also set up a number of programs to tackle the cost of sales. Specifically then, we have one team working with the dealer material part of the cost which might be classified as more traditional work, working with the supplier base, doing that more efficiently, but also actions that might be of a more time consuming nature, trying to reduce the number of components and the redundancy of certain component activities which also I expect will drive down our cost for the product. Lastly, we should also remember, as I talked about, a significant part of the component sourcing is US database. So we do also need to remember that FX development could also at least short-term by quarter have an impact on the margin here. But in summary we have a focused effort and you will see some quick gains, but other will be a more medium-term nature.

Dick Komiyama

The question about working with the components side, as you know one of the important marketing agenda currently we are seeing is the so-called communication entertainment. Based on the web and based on the younger generation and as you know past successful Walkman, a music-enabled phone, which has been an extraordinary success to Sony Ericsson, we will continue to expand the scope of this entertainment based on music. But of course we are adding additional features and benefit on also the Cyber-Shot on the imaging side too. And from this viewpoint and naturally end-to-end solution including this service and contents are the very vital and integrated part of Sony Ericsson’s future marketing drive. And we are very happy that developing the Sony PlayNow Plus Arena we have a very good support from our sister companies. So we continue to expand the scope of this usage and we hope we can create something new that other competitors may not be able to do. That’s what we’re working on at this moment.

Richard Kramer - Arete Research

Is there any plan to bring, for example, a PSP enabled type device or something that brings the user interface on the various Sony CE products more closely aligned with the UI of the Sony Ericsson phones?

Dick Komiyama

I can’t tell at this moment exactly what it’s going to be, but those are the areas where certainly it makes sense and we’re looking at this and working on this as an agenda.

Operator

We will now take our next question from Mats Nystrom from SEB Enskilda.

Mats Nystrom - SEB Enskilda

Could I ask you about your strategy low-end, perhaps M3, is there any change there? Is the agreement with Sagem going on according to what you have previously talked about or is there any change in the low-end strategy?

Anders Runevad

No major change in our M3 strategy, M3 is of course a very wide definition, and as we have said before, we’re not really a player in the low-low or sometimes called ultralow end, and we don’t expect to go in that part of the segment of the market either. We are definitely leveraging our partnership with Sagem and as far as the three products out of that partnership will be launched to the market now in Q4. And we will continue of course the M3 strategy where we have several ODM partners that we’re working with. We view it of course as an important part of the portfolio, but again we wanted to do the higher part of M3 as a segment and we want to focus on one unique product that continued to be a very aspirational product which is in the segment, primarily the replacement part of the market where we are very relevant.

Mats Nystrom - SEB Enskilda

Could I get some followup here on the delayed products, if I understand the C902 was one of the delayed products that you had previously been talking about in one of the previous profit warnings this year? What is the status for the other delayed products, do you expect the delayed products to ship in Q4 and will that in case have a positive impact on financial numbers in Q4?

Anders Runevad

As we have discussed before, we’ve had some delays of products in the middle of this year. When it comes to Q4 - no, as we said in the beginning of the call as well, we are ready to ship the products that we have announced will be shipped in Q4. I talked about X1, we talked about this Sagem product, and also our new flagship Walkman C905 will be shipped as planned in Q4. So the products that we have announced to be shipped in Q4 will be shipped in Q4.

Operator

We now take our next question from Kulbinder Garcha from Credit Suisse.

Kulbinder Garcha - Credit Suisse

Just back to comment from the economic turmoil affecting your sales, I’d be curious as to what you think about handset demand beyond the fourth quarter. I know you don’t give guidance, but do you see a scenario where actually volume growth could be negative in the entire industry? Is that something that you could rule out at this stage, or do you think it’s actually possible given how bad the end-consumer environment is deteriorating?

Anders Runevad

I think this area is of course one of the important areas of our concern, and in general, the feeling we have today is that this impact of what is happening today on the financial crisis front will lead to longer residual effect until it stabilizes. When this situation happens, I think recovery overall and also particularly recovery of consumer confidence may take longer time, so this mean we have to make a very conservative look at the industry as well as our budgetary process, and we are looking at this more closely, the elements affected by the credit issues, pricing issues, and inventory issues. All these operational issues we are looking at more conservatively and constructing the budget, and we are right now in the middle of building this budget and forecasting based on the new consensus we are going to see throughout our industry, and hopefully in another two to three weeks, we will be reaching a point where we’ll finalize our plan.

Kulbinder Garcha - Credit Suisse

In terms of recent months, have you actually seen specifically in Western Europe total subsidies spent by the carriers being brought down? Are you actually seeing that in terms of across-the-board cuts given the weakening top-line or the consensus they may have in Western Europe?

Anders Runevad

No, we have not seen that if you mean that in the recent two to three weeks. It may be a shift or a complete new strategy. We have not seen that. What we’ve seen is very much what I talked about, the trends that we’re actually seeing for sometime. There are some reduced level of subsidies, some longer contract terms, but I would say, still, you cannot say either that it’s one strategy across Western Europe. It depends very much on the different markets and the different operators in those local markets in Western Europe, so it’s more of a trend of longer contracts and a bit less subsidies.

Operator

We now take our next question from [Jeff Kewal] from Barclays Capital.

[Jeff Kewal] - Barclays Capital

I was wondering if you could help us understand a little bit the $300 million in restructuring. Is that entirely from OpEx, and where should we measure that from, like an annualized run rate from the June ’08 quarter?

Ulf Lilja

Of the charge we took in Q3, $35 million, you will find the majority of that in the OpEx part, some $29 million of the $35. You should also be aware of that on a year-to-date basis there is a reclassification in the second quarter of some $11 million expenses that are restructuring expenses. Of that, some $8 million of the $11 million are in cost of sales and the balance is in OpEx. When it comes to run rate then, as we talked about in the last call, when it comes to the cost aspect of our improvement program, we will take the expenses as we go along and the decisions are implemented, so that will continue. Savings will also be phased over time, and we do still expect that the savings will have full effect latest at the end of first half of 2009 and that we will see the expenses also then being taken over that time period, up to the level of the savings.

[Jeff Kewal] - Barclays Capital

Could I ask how should we gauge where that $300 million is coming from? Is that $300 million less than you might have spent on run rate or $300 million less than you otherwise would have spent in that quarter?

Ulf Lilja

The savings will definitely flow through to the bottom line to the level of $300 million, but during the implementation of the program, the savings will be offset then by the $300 million, with the timing met then being a little bit different over the quarters up to the next half year, but at that time point, you should expect to see $300 million following through to the bottom line then going forward.

Operator

We now take our next question from Edward Snyder from Charter Equity Research.

Edward Snyder - Charter Equity Research

Sales from America seem particularly weak here. Who do you see as your primary comepetition in that market? Would it be something like the iPhone or Nokia’s Music Express products, especially given about half of your volume in the last several quarters has been made up of this Walkman phone which has probably been your most successful product line to date? Are you seeing an impact more from something like the Express phone or the new products coming out from Apple and some of the others starting to cut into it, or do you have that kind of granularity?

Anders Runevad

Could you repeat…in which market did you say?

Edward Snyder - Charter Equity Research

Mostly in North America. You were particularly weak this last quarter in that market, and we know the iPhone has been out for sometime and that Nokia has done particularly well with their Express Music phones at T-Mobile. In fact, if you look at that product, it almost goes head to head with the Walkman phone which has probably been your best-selling to date. I’m just curious in your competitive analysis when you look at the different markets, are you being hurt more by some of these newer phones, the touch-type products, or some of the more classic products that look a lot like a Walkman?

Anders Runevad

In North America, we have had a good development in the quarter, very much driven by the Walkman 580 where we have increased our volumes even if it’s a quarter from all our position with a fairly low market share in the US or the North American market, but as I said we have had good volume development very much driven by the Walkman 580, and we also have a product that we launched in Q3 that we have good expectations from, and we have a very relevant portfolio for the US market also going forward.

Edward Snyder - Charter Equity Research

So you’re not seeing any adverse effects from the Express Music phones that Nokia has put out last year? It kind of coincides with some of your problems at hand with the launch of that last fourth quarter or from the iPhone at all in the Americas, which as a group the Americas were weaker this quarter than they have been in some time.

Anders Runevad

No. In general, of course, we have a lot of competitors in the music segment, and of course the Nokia Music Express is one of them, but all in all, we feel that in the music segment with the Walkman, we have a good leadership. We have a full range of Walkman devices. We have superior audio quality, and we have that combined now with the PlayNow Arena, so we have actually shipped 12 million Walkman phones in Q3, and year to date, close to 90 million Walkman phones, so when it comes to the music category, we feel that we maintain the leadership both with the width and the breadth of the Walkman portfolio, but also with the new technology, the best audio quality, the new services that we bring to the markets.

Edward Snyder - Charter Equity Research

As a follow up to that, your market share in 3G is about twice that of your total market, but it doesn’t appear to be helping your margins or ASPs much, and if you look at companies like Motorola who are striving very diligently to get into 3G because their ASPs have gotten pushed down, how are you looking at 3G from here on out. I mean it definitely increases the cost of a handset. Are you looking at doing less in 3G than you had before to try and improve your margins? Why isn’t 3G giving you more traction in the ASP, or is it more feature sets in the segments that you’re competing in and not the technology whether it’s a wideband CDMA or not?

Anders Runevad

3G is very important today and for the future even more so. I would say that the market is of course moving 3G in all parts of the world, and looking ahead, we feel strongly that 3G is a very good place to be, as more and more markets evolve and mature to 3G, so 3G is and will continue to be the core of our strategy, and we will see 3G technology of course both very dominant in the high end as it already is, but we will also see 3G coming down in price points and moving more to what we define as the entry type of products. So, over time we definitely believe that 3G will continue to spread.

Operator

We now take our next question from [Sheriff Walker] from Citi.

[Sheriff Walker] - Citi

A question on the Japanese market, we haven’t really heard you discuss that market recently. Could you maybe update us on what percentage of your shipments or sales come from Japan and what your strategy is over the longer term given what appears to be a very challenging market environment and maybe how you are adjusting your costs in light of that?

Anders Runevad

The Japanese market is one of the most competitive and also difficult market due to a shrinking of not only the volume but sometimes it’s a revenue aspect as an industry. In the meantime, it requires a very high degree of diversification in application technologies and working with all the operators who are in Japan. As a result of this competitive environment, we see that a few of the manufactures are dropping out, and right now a restructuring process is going on because it won’t survive that way, and as far as we are concerned, we do have excellent engineering people and also a lot of small sales force in Japan, and we have been dedicating this engineering power to that market, but we have done for a year now, just about going to be a year, is that we that we see that the engineering power we have in Japan can be definitely applied to the global market, and where we see that that features advantages, present technologies, and also software capability working with other parts of the global family in Sony Ericsson. We have already started seeing some very significant contribution in that area. So as a market, as we can find smaller role in the Japanese market, which actually in our case is reducing our loss position to much smaller degree at this moment, in the meantime we have this engineering power free for the global applications, and we are making out very well from a Japanese resource allocation standpoint in a global sense at Sony Ericsson.

[Sheriff Walker] - Citi

Is the Japanese market one which you would consider exiting if the market conditions continue to prevail?

Anders Runevad

No, I don’t think so. I think we are going to stay, and we have definitely many opportunities, and also technology of telecommunication for the future [inaudible] and also Japanese industry won’t be able to survive if they remain as they are. They have to also globalize, and we will have more different opportunities arise, and so therefore we are not going to exit that market. We certainly have very important customers like KDDI, which we do very well for, but generally speaking, the Japanese competitive environment is a very unusual situation from a global perspective.

Operator

We will take our last question comes from Matthew Hoffman from Cowen.

Matthew Hoffman - Cowen

Question on the inventory here, it ticked up a bit in the quarter. Should we view that inventory increase as a forward look at maybe what you expect? You might be able to shift in terms of the fourth quarter, i.e., could there be some Xperia in there, or is it more a result of clogged channels, and I have a follow-up too.

Ulf Lilja

Actually, the main driver for the quarter 3 increase in our inventory remembering that we basically only manufacture to order, we do not carry finished goods stock, was actually the Olympic activities. We have around a third of our production in China, and they had to make preassembly pre-production during the Olympics period because they were asked by authorities to close down then. So I expect this inventory level to go down during the fourth quarter. They will remain higher than they were in the beginning of the year for a number of reasons. We have a more geographic spread leaving some goods in the channel while we distribute them over the world, and secondly I think we talked about it that we have also changed our sourcing strategy where we operate more centralized way of sourcing components, so a slight decrease until the end of the year is my expectation.

Matthew Hoffman - Cowen

Do you think that will translate into any type of sell-in share gain in the fourth quarter?

Ulf Lilja

I think it’s not so much linked to the sales activity. It was more a phenomena of our backend in the supply chain during this quarter.

Operator

There are no further calls.

Aldo Liguori

Ladies and gentlemen, thank you for taking part in today’s call. This marks the closing of our call on the Q3 financial results. If you have any additional questions, please contact Sony Ericsson or the respective investor relations department of Sony and Ericsson.

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