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Sony Corporation (SNE)

F3Q06 Earnings Call

January 30, 2007 8:30 am ET

Executives

Sam Levenson - SVP of IR of Sony Corporation of America

Takao Yuhara - Corporate Executive and SVP of IR of Sony Corporation

Robert Wiesenthal - Group Executive in Charge of Corporate Development and M&A at Sony Corporation and EVP and CFO of Sony Corporation of America

Analysts

Evan Wilson - Pacific Crest Securities

William Drewry - Credit Suisse

Ben Atkinson - Gagnon Securities

Jason Mauricio - Arete Research

Daniel Ernst - Hudson Square Research

Ben Atkinson - Gagnon Securities

Luc Mouzon - BNP Paribas

Jessica Reif Cohen - Merrill Lynch

Michael Bertz - Kennedy Capital

Evan Wilson - Pacific Crest

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 Sony Corporation Earnings Call. My name is Cindy and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Sam Levenson, Senior Vice President, Investor Relations, Sony Corporation of America. Please proceed, sir.

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Sam Levenson

Thank you very much for that introduction Cindy, and thank you all for joining us today, January 30, 2007 for the discussion of Sony’s results for the third quarter of the fiscal year ended March 31, 2007.

As Cindy mentioned, I am Sam Levenson, Senior Vice President of Investor Relations with Sony Corporation of America. We are joined this evening in Tokyo by Mr. Yuhara, Corporate Executive and Senior Vice President of Investor Relations, Sony Corporation, and by Robert Wiesenthal, Group Executive in Charge of Corporate Development and M&A at Sony Corporation, as well as EVP and CFO of Sony Corporation of America. Thank you both very much for joining us.

In just a few minutes, I'll be giving 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 this evenings call and Q&A session with respect to Sony's current plans, estimates, strategies and 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 managements' 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 result to differ, please refer to today's press release which can be accessed by choosing Investor Relations at the bottom of the page at www.sony.com.

With that, I am now going to turn to our announcement. I would like to begin with a discussion of our consolidated results, highlights for the quarter and revised full year forecast before reviewing some of our operating segments in more detail.

Consolidated sales in the third quarter were of new record, 2,607.7 billion yen, an increase of 10% year-over-year. The successful recovery in the electronics business has continued. Sales were at 17%, while operating income doubled, both of which are historical highs on a quarterly basis. Bravia LCD TVs performed strongly during the holiday sales season and the TV business as a whole achieved profitability during the quarter.

Other significant contributors included Cyber-shot digital cameras and the semiconductor businesses, where shipments of semiconductors for use in PS3 increased. Together, these all contributed to the significant increase in operating income within the electronics business.

The game business, PS3 was launched in November in both Japan and the US, reaching a cumulative shipment of 2 million units within two months. This is the fastest ramp up of shipments of any of Sony Computer Entertainment's platforms. The Picture segment recorded strong results during the quarter as a result of hit DVDs being released such as Da Vinci Code and the theatrical release of Casino Royale, which has achieved new records for the Bond film franchise. The Pictures business continues on track to achieve higher profits than last year.

Sony Ericsson, an equity method affiliate, also achieved record results for quarterly sales, profit and unit shipments. More specifically, unit shipments rose 61% reflecting the strength of the Cyber-shot and Walkman brands. Net income of Sony Ericsson more than tripled to EUR447 million. As a result, the joint venture contributed nearly 34 billion yen of equity and net income to Sony for the quarter and was a major factor in our increased earnings forecast for the year. During the quarter, Sony Ericsson moved to number three in terms of sales volume and to 9% of unit volume in the worldwide mobile handset market.

I'll now discuss each P&L line item. As I previously mentioned, consolidated sales increased 10% year-on-year to 2,607.7 billion yen, due the strength of the electronics and picture segments. Operating income decreased by 15% year-on-year to 178.9 billion yen. Even though there was a significant increase in operating income in electronics segment and a considerable improvement in the pictures segment versus last year, overall operating income decreased due to the loss recorded in the game segment as well as decreased operating income in the financial services segment, which resulted from the smaller rise in the Japanese equity market compared to the previous year.

Consolidated restructuring expenses during the quarter, which are recorded in operating expenses, were income of 0.3 billion yen compared with expense of 14.7 billion yen in the previous year. This reflects the recording of a gain from sales of assets, for which loss reserves had previously been recorded. Almost all of this reversal was recorded in the electronics business.

Non-operating income decreased 14.7 billion yen to 0.9 billion yen as a result of increased foreign exchange losses, and decreased gain on change in interest. The decrease in the gain on change in interest reflects the gain of 9.4 billion yen in the current quarter, resulting from the sale of a portion of stock in Styling Life Holdings. As compared with the gain of 19 billion yen from the So-net IPO, in the previous year.

As a result of all these factors, income before income taxes decreased 20% year-on-year to 179.8 billion yen. Equity in net income of affiliated companies increased year-on-year by factor of 2.2 times to 43 billion yen. The significant year-over-year increase is primarily due to Sony Ericsson, which I discussed a moment ago.

Equity in net income from Sony BMG was 13.1 billion yen, an improvement of 2.8 billion yen, year-on-year due to lower overhead costs, as well as benefits from an industry-related legal settlement affecting the major record companies. Our joint venture with Samsung, S-LCD, yielded equity in net loss of 0.7 billion yen, which is 1.6 billion yen lower than last year.

Finally, Sony recorded equity in net loss of 5.4 billion yen from MGM, a 3 billion yen increase in loss over the previous year. As a result of these factors, net income decreased by 5% year-on-year to 159.9 billion yen.

Before moving to our revised forecast for the fiscal year, I would note that the initial launch of our structural reform plan announced last year continue either on-track or ahead of schedule. We have already achieved or exceeded our goals in terms of model count reduction, head count reduction and asset sales, and all of the remaining initiatives remain on track. Please see the Investor Relations section of our website, under today’s announcement for the full details if you are interested.

Next, I would like to explain the increase in our earnings forecast for the current fiscal year. The forecast for operating income excluding restructuring charges is unchanged. However, this is the result of both positive and negative developments since our previous forecast. As we have noted, the electronics segment is outperforming our October forecast. Conversely, the games segment is underperforming on our October forecast due to PSP sales being lower than our previous expectations and increased charges recorded related to the launch of PS3, partially offset by the stronger than anticipated performance of the PS2 business.

With respect to restructuring expenses, our forecast has been lowered; from 40 billion yen to 30 billion yen, as a result of the shift in timing of the consolidation of several businesses. This raised our operating income forecast from 50 billion yen to 60 billion yen and our income before income taxes forecast from 70 billion yen to 80 billion yen.

Our forecast for equity in net income affiliates has increased 50% from 40 billion yen to 60 billion yen, due to the strong performance of Sony Ericsson. As a result of all of these factors, our forecast for net income for the fiscal year was revised upward from 80 billion yen to 110 billion yen. Our forecasts for CapEx, depreciation and amortization, and R&D have not changed from our October forecast.

Now I would like to discuss each of our segments in a little more detail. First electronics; sales in electronics segment increased 17% or 14% on a local currency basis. Interest segment sales increased significantly, mainly due to sales of PS3 semiconductors recorded during the quarter. Sales to outside customers increased 10%. By product, LCD TVs, Cyber-shot digital cameras in particular, which had strong sales in all regions, contributed to the increase in sales. Vaio PCs also contributed significantly with strong sales of notebook PCs outside of Japan.

Operating income in electronics doubled to 177.4 billion yen and operating profit margins of 9.5%. Products which have the largest increase in profit were in order, digital cameras, LCD TVs and System LSI. Conversely, rear-projection TVs suffered a large decline in profit. This is because of price reductions caused by increased competition among large sized flat panel TVs, as well as the decrease in sales volume, both of which occurred in the US market which is the primary market for this product.

Overall sales for the TV category for the quarter were approximately 425 billion yen, an increase of 15%. Operating income was approximately 13 billion, an improvement of approximately 17 billion yen on year-on-year. Although, rear-projection TVs currently face a tough business environment, LCD TVs have performed quite well, and thus, there is no change in our forecast for the entire category to be profitable in the second half of the fiscal year.

Overall sales of the semiconductor category for the quarter were approximately 255 billion yen, an increase of 74% year-on-year. Operating income was about 13 billion yen, an improvement of approximately 13 billion yen year-on-year.

We expect to improve profitability this fiscal year and anticipate recording a smaller operating loss than last fiscal year's loss of 34 billion yen, due to the production facility utilization ratio for PS3 semiconductors being higher than the ratio assumed in our October forecast.

Next the Games segment; sales increased 6% year-on-year or 3% on local currency basis. Approximately 70% of sales came from hardware and accessories and the balance from software. In hardware, there was an increase in overall sales as a result of the launch of PS3. PS2 penetration continued to expand and achieved cumulative worldwide unit shipments of more than 110 million units. Although the PS2 business performed well during the year-end holiday sale season, PS2 sales declined as a result of strategic price reductions. As the PS2 business is seeing steady demand after New Year, we have upwardly revised our product shipment forecast from 11 million units to 13 million units.

PSP sales declined due to a decrease in unit sales compared with the same quarter of the previous fiscal year. As for PS3, we have shipped 2 million consoles within two months of US and Japan launches in November. And we continue to target a production shipment of 6 million units for the full fiscal year ended March 31. PSP software sales increased due to further PSP platform penetration. However, overall software sales decreased as a result of lower PS2 software sales.

An operating loss of 54.2 billion yen was recorded compared to 67.8 billion yen of operating income recorded in the same quarter of the previous fiscal year. This deterioration was primarily the result of the loss arising from the sale of PS3 as strategic price points. As well as recording of other charges in association with preparation for the launch of the PS3 platform.

In addition, while PS2 outperformed our expectations during the quarter, particularly in Europe and North America, operating income from the PS2 business declined year-on-year due to decreased software production shipments. Operating income from the PSP business also declined due to lower PSP hardware sales.

In the pictures segment, sales increased 46.8% compared to the same quarter of the previous fiscal year or 46% on the U.S. dollar basis. Sales increased primarily due to the significantly higher DVD revenues on films lead by the releases of The Da Vinci Code, Talladega Nights and Click that were released in the first-half of the fiscal year.

Theatrical revenues were also higher in the third quarter due to the box office performance of Casino Royale and The Pursuit of Happiness. Television revenues also increased primarily from additional syndication sales from the King of Queens.

Operating income of 26.2 billion yen or $220 million was recorded compared to an operating loss of 0.4 billion yen in the same quarter of the previous fiscal year.

Finally, Financial Services; Financial Service revenue decreased 9.2% compared with the same quarter of the previous fiscal year, mainly due to a decrease in revenue at Sony Life. Although revenue from insurance premiums increased at Sony Life, reflecting an increase in insurance-in-force, revenue at Sony Life decreased by 12% to 147.5 billion yen due to lower valuation gains in the general account and the separate account. This reflects the fact there was only modest increase in the Japanese Stock Market prices during the quarter compared to strong gains in the same quarter as of previous fiscal year.

Operating income decreased by 46% to 25.5 billion yen, due to a decrease in the operating income at Sony Life. This decline was due to the decrease in valuation gains from investments in the general account including valuation gains from convertible bonds.

Before Mr. Yuhara and Mr. Wiesenthal take your questions, I would like to summarize the key points discussed today. The strong recovery in our electronics business continues. We achieved record results in electronics this quarter, including doubling operating profit versus third quarter a year ago. Our TV business achieved profitability and we are on track to keep it profitable for the second half of the fiscal year.

In the games segment, Q3 marked for launch of PS3. Our start-up costs are substantial and trending higher than initial forecast. We remain very excited about the promise of PS3 over its life cycle. The Pictures division continues its very strong year setting box-office records, generating higher profits and exploring new delivery platforms.

The core financial services businesses continued to grow, however their results are somewhat muted by the lower growth in the Japanese equity market. And finally, our joint ventures continued to perform well with record result at Sony Ericsson and aggressive cost control and restructuring at Sony BMG to combat the shrinking market. We're very pleased with the results of the third quarter and we would now like to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question will come from the line of Evan Wilson from Pacific Crest Securities, please proceed.

Evan Wilson - Pacific Crest Securities

Hi, good morning. Thanks for taking the question. Couple of questions as it relates to inventory. First, on the electronics business, you said inventory was up 42.2% due fairly to LCD televisions and PS3 semiconductors. Can you give us any more detail on the break down between those two groups? How much is represented to the whole and whether or not each of those are trending well ahead of your forecast from October?

Takao Yuhara

Yes, Yuhara speaking. Yes, inventory was down by 42% and as you know, the semiconductor of PS3 was drastically down because the PS3 production just launched in third quarter and also LCD TVs, we could achieve to sell the planned quantity during third quarter. And therefore, this was also down to the reasonable levels. However, we have rear-projection TVs, which was expected to be lower production sales. So, therefore, we have a lot of inventory, but overall the inventory sale is within the controllable level.

Evan Wilson - Pacific Crest Securities

And then on the inventory levels for the Games business, you mentioned there is a significant inventory bump there as well. Wondering if you could breakdown, what percentage of finished goods was a piece of that inventory because you mentioned that 2 million units shipped within the first month -- two months, which indicated that you probably had some of the those shipments after the quarter had closed. So, trying to get a quantification of what percent of that game inventory has since sold to through -- or sold through the channel?

Takao Yuhara

Okay. I do not disclose the breakdown of inventory, but the most of Game segment inventory is finished products. Then, the PS3 itself is a very, very limited quantity number, and PSP, which the inventory was reduced towards the end of December, but we see the turnover of PSP is a little bit over than our expectation. And PS3 sales, as you can see, we have a very strong demand from the market then the inventory level is adequate. So, that's it all about situation of inventories of Game segment. Okay.

Evan Wilson - Pacific Crest Securities

Got you. Thanks very much.

Operator

And your next question will come from the line of William Drewry from Credit Suisse, please proceed.

William Drewry - Credit Suisse

Thank you. Question for Mr. Wiesenthal and one for Yuhara as well. First off for Mr. Wiesenthal, just wondering on the DVD pipeline, how that's looking for 2007, for calendar 2007 and milestones on which you look for. Also, any development you can share on Blu-ray, Blu-ray in terms of the DVD sell-through? And then, for Mr. Yuhara, I am just wondering how the Blu-ray diode has healed from that, if they have been improving and any comments you can give us on PSP evolution, any new product for PSP in 2007 as well? Thank you.

Robert Wiesenthal

Okay, okay Bill. In terms of DVDs, it's obviously part of the strength that we enjoyed this quarter at Sony Picture was a result of a very strong DVD sales, The Da Vinci Code, Talladega Nights to name two very important DVDs, and with respect to upcoming DVDs, Open Season, it is hitting the stores right now. And then this March, Casino Royale will also be hitting DVD along with The Holiday and Rocky Balboa. So, we are going to start really enjoying the wind towards our backs in terms of a very strong DVD market for our films, given the strong box office we enjoyed, being No.1 in box office for the year, and we had 13 films that opened to No.1, and we ended up the box office about a 1.7 billion with 18% market shares. That really bodes well for the coming year. With respect to Blu-ray, again a great way to look at Blu-ray in terms of the strength of the platforms to take a look at who is behind Blu-ray and what the new release schedule looks like for the past -- for the past year in terms of box-office performance. If you look at the top-15 films for this past year for 2006, 11 of those top-15 films were released by studios that have chosen only to release on Blu-ray, and those films represent about 80% of the box-office of the top-15. And in fact each of the top-5 films for the past year representing over 1.3 billion in box-office were released by studios that have chosen to release only in Blu-ray; those studios being Sony, Fox and Disney.

So, if you take a look at the strength of the platform, you have to not only look at libraries but also look at new releases. So, we are feeling very good about Blu-ray right now, but it is early days. In Japan, about 96% of the hardware being sold for high-definition format are coming from the Blu-ray family. It's a format with over a hundred different CE manufacturers being part of the association, and obviously we have the launch coming up in Europe for PlayStation3. So, we are feeling very good about that. I'll let Mr. Yuhara answer the question about diodes.

Takao Yuhara

Yes. On the [BD] diode, and we have big improvement of it, particularly during December period. Then, I will say, it is the good directions for this improvement. Then from January onward and we have more confidence to achieve the 6 million PS3 set during this fiscal year. So, it's the good news. Then, as PlayStation Portable concerned, you will see this year, we are going to plan to make 9 million unit. Then next year, it is to early to say but we are considering that, more to activate this PSP, such as developing that software and also it could be a new application with PSPs. But when the time will come and we would like to announce those to the marketplace. Okay.

William Drewry - Credit Suisse

Excellent, thank you.

Takao Yuhara

Thank you.

Operator

And your next question will come from the line of Jason Mauricio of Arete. Please proceed.

Jason Mauricio - Arete Research

Hi, there. Just a couple of questions; I am wondering if you could discuss whether you are comfortable enough with the laser diode production that you can now start thinking about moving the cell chip from 90-nanometer to 65, and what level of cost reductions you could expect from that? Finally, was there -- is there an appropriate channel inventory to think about for the PlayStation3 and TVs and LCD TVs? What's the appropriate level and how much that move is going into the next fiscal year? And may be finally, can you clarify the comments from this morning regarding the financial services, IPO and whether that could indeed come in FY07? Thank you.

Takao Yuhara

Okay. I just talked about the laser diode production and then in order to reduce the production cost of the PS3 in terms of the raw materials and we need to improve the yield of diode further. And also as we indicated today, we already started the various sized chipset with 65-nanometer production lines, and the die size itself is 40% reduction, compared to the 90-nanometers' production lines. So theoretically, you can reduce the cost reducing the die size. And also we are planning to reduce the number of part of PS3, together with the new chipset. Then we'll like to see the drastic cost reductions particularly for this PS3s throughout the next fiscal year. The inventory, some of the inventory for PS3s at this moment is too early to say, because currently we have very heavy bulk orders on this. And therefore it is too early to say at this stage. But on the LCD TVs and our -- some of the inventories, these is at most eight weeks. So, if some of the inventory is more than eight weeks then we are going to adjust the inventory together with dealers of this. So, that is our standard for this inventory factors. Yes, I feel it is unchanged which will be scheduled in fiscal year '07 onwards. Okay?

Jason Mauricio - Arete Research

Okay. Thank you very much. Thanks Yuhara.

Operator

And your next question will come from the line of Daniel Ernst from Hudson Square Research. Please proceed.

Daniel Ernst - Hudson Square Research

Yes, good morning. Couple of questions, if I might. First on the game divisions, I just want to clarify that the commentary from the call this morning in Tokyo, did you imply that the forecasted loss in game which in October was around 200 billion yen, loss for the game division, for the current fiscal year, that might be a bigger loss, than you had forecasted in October? And then, second and the related question. To what extent is your game loss in the fourth quarter still assuming recorded loss and components of things like SAL and Blu-ray that you have in production ahead of actual unit shipments. I know your launch in Europe is March 23rd, and you might have a sort of talent of production before you are actually receiving revenues, is their still sort of a catch-up to come of units in production versus actual revenues and shipments that you are accruing for in the fourth quarter? Thanks.

Takao Yuhara

Yeah. The operating loss in the game segment is just we indicated today in Tokyo. We have several hundred [openings] upward profit in electronic segment compared to the October forecast. Then this will be offset, by the loss in the game segment. So, therefore game segment loss will be increased from 200 billion to say 240 billion. So, that is what we are forecasted for the month.

Daniel Ernst - Hudson Square Research

Right. And to what extent does that 240 taking in you have components and units in production ahead of revenue. How you have been since the last couple of quarters, where you are sort of accruing your expenses ahead of shipment?

Takao Yuhara

Yes, that’s right. The end of March this year, we have the inventory of key devices such as, the semiconductor or Blu-ray and also finished products, which suppose to be the relative margin for this. Therefore, we are accrued those into the -- throughout the end of March. So, this amount is also included in this loss (inaudible) for this year.

Daniel Ernst - Hudson Square Research

Okay, that makes sense. And then, just last question, the forecast for -- the revised forecast for the fiscal year for the corporate-wide also includes an assumption that you have some appreciation in the yen, I think to 117 to the dollar, and I think it was at 156 to the 153 to the Euro. What is that impact and was if you don’t have that yen appreciation, what is that delta in your forecast?

Takao Yuhara

Yes, the first quarter, the yen exchange rate is 117 to dollar and 153 into Euro. Suddenly yen was rather depreciated to this level. So, theoretically there is a favorable -- the yen benefit such as something like a 100 to 17 again, for the first quarter only; this was theoretical benefit from this yen depreciation, which is not included in this forecast.

Daniel Ernst - Hudson Square Research

Good. And sir, could you repeat that number? The theoretical number?

Takao Yuhara

17 billion.

Daniel Ernst - Hudson Square Research

17 billion, okay.

Takao Yuhara

17 billion yen; that is the theoretical benefit from the yen depreciation.

Daniel Ernst - Hudson Square Research

Understood, okay. Thank you.

Operator

And your next question will come from the line of Ben Atkinson of Gagnon Securities. Please proceed.

Ben Atkinson - Gagnon Securities

Thank you. First, could you talk about returns to-date under the battery recall, and how that’s tracking versus your expectations? And also, what effect if any are you seeing on future orders for the battery business as a result of the recall? And second, could you talk about how you are combating the trend of game developers shifting some of their resources toward V or Xbox 60 and away from PlayStation 3; at least that is the impression I get form reading comments from some of your development partners. How you are going to go about trying to reverse that, thank you?

Takao Yuhara

Yes, when we had the provision and our voluntary -- the replacement program for this lithium-ion battery and we anticipated the return rate is above -- just over 50% and then the like Apple or Dell and there is Toshiba in Japan and their return rate is just the upfront at the beginning. So, then most of them would achieve this return rate by the end of January. So, that is a point, the other thing is, at this moment and those customers will not change the orders of batteries for the existing PCs, but in the future this is very hard to tell what's going on because most of the companies have the double resources of those batteries. But we hope they would continue to press orders of batteries to Sony. And, that's all.

Robert Wiesenthal

Okay. Yes, it's Rob Wiesenthal, with respect to the comments about Game developer shifting resources from PS3 to VN360; obviously the PlayStation3 is a very powerful platform. All these platforms are -- new platforms are like learning foreign language as it takes time, are really under first generation of games. We are constantly working on enhancing our tool sets and making these tool sets easier for developers to make powerful software and I think as the development community gets comfortable with these tool sets and sees the power of the platform and all the capabilities of the cell processor and the public really sees the capability. Really starting with the second generation of games, I really think that the pace is really going to continue in terms of the development. This is obviously a process that is still unfolding, it's going to take time, it's early days and I think you'll be really, pleasantly surprised when you see the second generation of games and I think that the response that we're getting from the developing community is that the tools sets are in fact improving and they are getting much easier for them to use and the development community is getting there in terms of learning how to take advantage of platform. So, given time and we'll see how it goes.

Ben Atkinson - Gagnon Securities

Rob, could you say when roughly we should start seeing some of the second generation games and that wow factor?

Robert Wiesenthal

I think you're starting to see more games that take advantage of [10 ADP], you're starting to see more games that take advantage of online capabilities, I don't know if you noticed but in our first month of PlayStation3 not only did we have 500,000 user signup for the PlayStation online but over 350,000 people downloaded Gran Turismo HD, an incredible game and a wonderful turnout from the PlayStation3 community. So I think its starting to happen already but its going to take time.

Ben Atkinson - Gagnon Securities

Thank you.

Operator

And your next question will come from the line of Luc Mouzon from BNP Paribas. Please proceed.

Luc Mouzon - BNP Paribas

Hi. Good afternoon. Just a question regarding the situation in Europe, it seems to me that your performance over the quarter has been pretty strong, especially on the Bravia LCD line and on digital camera. Could you comment about potential market share gains, right here, and regarding inventories and the long tail inventories, which I mean inventories in the channel? Do you think that there will be some clean-up going forward, especially for the European market or do you assume that the inventory level in the channels are normal at this stage?

Takao Yuhara

Okay. Thank you very much for the [tender]. We had a very good third quarter, as you said, particularly on LCD TV business and also the digital still cameras. So, if I just focus on the European market of the LCD TVs, first, we did have the record of sales of TV business in Europe and the markets share [derivative] was, it's around 16%; that is almost second place in the European market, next to Samsung. Digital still camera itself, we've good sales particularly in Europe. Europe, as you know is the biggest market. Then we have good sales over S and W series in the marketplace. Then, as you know as a result of this, particularly the contribution in Europe and we could increase our yearend forecast from 15.5 million to 17 million as the market increases. So, its an European market, particularly during holiday period is very good. Okay.

Operator

And your next question will come from the line of Jessica Reif Cohen of Merrill Lynch. Please proceed.

Jessica Reif Cohen - Merrill Lynch

Hi, thank you. I have a couple of questions on the music side of the business. The company is benefited from a legal settlement, could you give us a slice of that, was that KaZaA? And then just some other general question about music, the margins were up a lot, is there room for further improvement there? And what's the timeframe to get with the European regulatory issues?

Robert Wiesenthal

Hi Jessica, it's Rob. How are you?

Jessica Reif Cohen - Merrill Lynch

Good.

Robert Wiesenthal

Alright. I think it's really difficult to obviously to take a look at just one quarter. The music business is still a challenge for us. There has been a fair amount of restructuring as you know and we're going to continue with restructuring. We're not releasing the amount of the legal settlement, but KaZaA was definitely the majority of it. And with respect to the Sony BMG regulatory issues that we're going through right now, the legal processes is proceeding as we had hope. Obviously, we had hoped this thing would move further along in this time, but really I can say -- all I can really say right now is that we are going through the process and we are comfortable there is going to be a resolution where things will continue with the merger as originally formed. But we will keep you posted on it, but really not giving any sense of timing at this point.

Jessica Reif Cohen - Merrill Lynch

Thanks Rob. Can I just follow up with a couple of questions on the film side?

Robert Wiesenthal

Sure.

Jessica Reif Cohen - Merrill Lynch

Do you have any TV syndication? Do you have anything coming to syndication in the next year? And how many films, as you look at the calendar '07, what are the numbers of films for '07 versus '06?

Robert Wiesenthal

Let's talk about on the television side. We had five network series picked up this season, Kidnapped and Runaway, which were critically acclaimed (inaudible) the year present. We have two comedies that are doing well, Til Death, which received an order for additional episodes and Big Day. Additionally we have a couple cable shows that performed well and we have received additional orders for.

With respect to, lets us call a calendar '07, the films that we have coming up, we just had Catch and Release, Messengers in February with Dylan McDermott and obviously our big film in February is Ghost Rider with Nick Cage and Eva Mendez. We have Reign Over Me with Adam Sandler and Premonition with Sandra Bullock, and in the pipeline, obviously we have Spiderman 3 in the fiscal year. So, I would say next, this coming fiscal year is lighter in terms of box-office, but it is our Spiderman 3 year and we are very optimistic by the performance of the division as a whole.

Jessica Reif Cohen - Merrill Lynch

Thank you.

Robert Wiesenthal

And in terms of the syndication, we have additional seasons of King of Queens and obviously Seinfeld continues to be in syndication as well.

Operator

And your next question will come from the line of Michael Bertz of Kennedy Capital, please proceed.

Michael Bertz - Kennedy Capital

Good morning gentlemen or good evening. Just a couple of quick things, I wanted to ask that someone that is a little bit surprising, you mentioned in the rear-projection sales being little bit less than expectations. So, two things here, one, can you give us a sense of sales volume in terms of units or speak to excess inventory there? And then, I'll have the follow up?

Takao Yuhara

Okay. In this, the rear-projection TV is a main market in United States. Then as you can see, there was a big price reduction on this the rear-projection sales and also the Plasma TV in the same marketplace. Then, this was very much affected to our quantities and also the price on this. So, that’s the reason why rear-projection business was rather unexpected during holiday season and for this, in terms of quantity, we plan to make 1.8 million during the year, but now we changed to 1.1 million, so, which you can see that some reduction for this. Therefore, because of the adjusted results, the production itself, and that normal inadequate inventory results so far. Okay.

Michael Bertz - Kennedy Capital

Okay and a follow-up to that, on the profitability side. Presumably, I would think that the LCD production, the HTPS pricing got more competitive than the SXRD. Can you speak to, if there was any offset from SXRD, obviously being relatively better than the HTPS? And then as we think about the overall TV business, perhaps for modeling purposes you can talk a little bit about relative profit margins between rear-projection, especially SXRD and the LCD line?

Takao Yuhara

Yes. LCD TV performance was better than what we expected before the holiday season started. Then as you can see, if you'll see that the average sales price of LCD TV which is same as Q3 in the last fiscal year, which is SXRD and also LCD projectors, the (inaudible). The [cost] of LCD is not disclosed but obviously we have a reasonable cost percentage of LCD TVs for the Christmas season.

Robert Wiesenthal

Just one point of clarification, its Rob Wiesenthal Again, with respect to Jessica's question about Sony BMG. I think we believe that we would expect to hear a decision in the second half of 2007 just to provide you with a little bit more visibility and that's calendar 2007, I am talking about.

Sam Levenson

With that operator, we would like to take one last call, please.

Operator

Thank you. Your last question will come from the line of Evan Wilson of Pacific Crest Securities. Please proceed.

Evan Wilson - Pacific Crest

Hi. One more on the pricing of the PS3 and just your pricing decisions versus the consoles in general. With the PS2 launch, you didn’t cut the price for 18 months but traditionally we have seen a price reduction on your consoles about once a year. How are you thinking about the price point on the PS3 at this point and there has been lots of speculation, what’s the likelihood that we see -- price cut in the first year for PS3 launch?

Takao Yuhara

Yeah. It's very difficult to compare PS2 and PS3 now, but as you know when we launch PS2 in the United States, it had that killer content like Grand Auto Theft and then our customers just kept buying this PS3 without any play features. So, this PS3 and, we would you like to maintain the current price. As you know, the pricing require strategic issues and once we make a price adjustment, we would like to activate those in the PS3 market or just like, the eventful -- the software has come out to make the demand boost in the marketplace. So, those we would like to see that result pricing issues. As always, at this moment, it's very difficult to answer that for this pricing of PS3.

Evan Wilson - Pacific Crest

Got you. Thanks.

Sam Levenson

Thank you, Mr. Yuhara and Mr. Wiesenthal. Before I conclude tonight's conference call, I would like to take this opportunity to remind everyone of our IR contact information. In Tokyo, Investor Relations maybe reached at 813-5448-2180. In New York, Justin, Miki and myself can be reached at 212-833-6722, and in London, Shinji Tomita is available at 44-207-444-9713. Again, thank you all very much for joining us. This concludes today's call.

Takao Yuhara

Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's presentation and you may now disconnect your lines. Everybody have a wonderful day.

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