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Sony Corp. (NYSE:SNE)

F2Q07 (Qtr End 9/30/07) Earnings Call

October 25, 2007 9:30 am ET

Executives

San Levenson - SVP of IR

Nobuyuki Oneda - CEO, EVP and CFO

Robert Wiesenthal - Group Executive in charge of CorporateDevelopment and M&A

Analysts

Jason Mauricio - Arete

Evan Wilson - Pacific Crest

Jessica Reif Cohen - Merrill Lynch

Daniel Ernst - Hudson Square Research

Ben Williams - GAN

Luke Mazong - BNP Paribas

C. J. Muse - Lehman Brothers

Su Lzu - Investec Asset Management

Operator

Good day ladies and gentlemen. Thank you very much for yourpatience and welcome to the Sony Corporation Second Quarter Fiscal Year 2007 EarningsConference Call. My name is Bill, and I'll be your conference coordinator fortoday.

At this time, all participants are in a listen-only mode.However, we will be conducting a question-and-answer session towards the end oftoday's conference. (Operator Instructions) As a reminder, today's conferenceis being recorded for replay purposes.

I would now like to turn the conference over to your hostfor today's presentation, Mr. Sam Levenson, Senior Vice President of InvestorRelations. Please proceed, sir.

Sam Levenson

Thank you very much for that introduction, Bill. Thank youall for joining us today, October 25, 2007 for the discussion of Sony's resultsfor the quarter ending September 30, 2007. I'm San Levenson, Senior VP ofInvestor Relations of Sony Corporation of America.

I am joined this evening in Tokyoby Nobuyuki Oneda, Corporate Executive Officer, EVP and CFO of Sony Corporation;and by Robert Wiesenthal, Group Executive in charge of Corporate Development andM&A for Sony Corporation, and EVP and CFO of Sony Corporation of America. Thankyou both very much for joining us. In just a few moments I'm going to give abrief summary of today's announcement. Then, Mr. Oneda and Mr. Wiesenthal willbe available to answer your questions.

Please be aware that statements made during the followingremarks and Q&A session, with respect to Sony's current plans, estimates,strategies, press release and other statements, are not historical facts, and areforward-looking statements about the future performance of Sony. Thesestatements are based on management's assumptions in light of the informationcurrently available to it, and therefore, you should not place undue relianceon them.

Sony cautions you that a number of important factors couldcause actual results to differ materially from those discussed in theforward-looking statements. For additional information as to the risks anduncertainties, as well as other factors that could cause actual results todiffer, please refer to today's press release, which can be accessed byvisiting www.sony.net/ir. With that, I'm now going to turn to today'sannouncement.

I'll begin with a discussion of our consolidated results andsegment results for the quarter ended September 30, 2007 and then review ourrevised forecast for the year ended March 31, 2008. Consolidated sales and netincome set a new record for the second quarter, as did equity and net income ofaffiliated companies.

Consolidated sales rose 12% year-over-year. All segmentsexcept financial services recorded sales gains. Consolidated operating incomeof 90.5 billion yen [recorded] compared to a loss of 20.8 billion yen in thesame quarter of the previous year. Electronics had a large increase inoperating income, however the games segment recorded increase losses.

Restructuring charges, which are recorded as operating expenses,amounted to 18.5 billion yen for the quarter, compared to 5.3 billion yen forthe same quarter of the previous year. A 60.7 billion yen gain on the sale ofthe site of our former headquarters is included in the operating income forthis quarter.

Non-operating income improved 2.7 billion yen to a 2.5billion yen loss. This was due to the recording of the foreign exchange gainduring the current quarter, compared to a foreign exchange loss in the samequarter of the prior year, despite an increase and loss on devaluation ofsecurities investments.

Equity and net income of affiliated companies increased 7%year-on-year to 21.1 billion yen. The contributions of the major affiliates areas follows: Sony Ericsson contributed equity and net income to Sony of 21.1billion yen, a decrease of 700 million yen compared with the prior-year period.S-LCD, our joint venture with Samsung, contributed a loss of 500 million yen,over 3.4 billion yen lower than last year due to its investment in 8thgeneration equipment.

SONY BMG, our joint venture with Bertelsmann, alsocontributed a loss of 500 million yen, which is an improvement of 1.8 billion yen,year-over-year. As a result of these factors, net income increased 72 billion yenyear-over-year to 73.7 billion yen.

Now, I will take a few moments to discuss the quarterlyresult on a segment-by-segment basis. First, electronics, and sales in the electronicssegment increased 21% or 17% on a local currency basis. Sales to outsidecustomers increased 12%.

By product, LPD TVs, VAIO PCs and Cyber-shot digital camerascontributed to the sales increase.

On the other hand, there was a decrease in the sales of LCDrear-projection televisions, the market for which is shrinking. Intersegmentsales increased significantly, mainly due to sale of PS3 semiconductors.

Operating income in electronics was approximately 13 timesthat of the comparable period last year. If you exclude the 51.2 billion yenprovision in the prior year for the battery pack recall, operating income rose 80%year-on-year.

The largest profit generating products were, in order ofmagnitude, digital cameras, video cameras, system LSI, PCs and broadcasting professionalequipment.

Now, looking more specifically at the TV and semiconductorcategories, overall sales of the television category, and for the quarter wereapproximately 307 billion yen, an increase of 20% year-over-year.

Operating loss was approximately 21 billion yen, about 11billion yen lower than last year. Impairment losses against certain assetscontributed to losses in the quarter. During the second quarter, LCD TVscontinue to be impacted by price. However, as we approach the holiday-sellingseason, we introduced new large screen and full HT models in Europe, Japan and Asia, as we had in the U.S., inAugust.

Through expanding sales of these new models and improvingour panel cost- competitiveness by utilization of the 8th generation plant, we willwork to increase sales and improve our profitability in the second half of thefiscal year.

LCD rear-projection TVs were impacted by continued marketshrinkage and price declines.

In semiconductors, overall sales of the semiconductorcategory, for the quarter, were approximately 225 billion yen, an increase of59% year-on-year.

Operating income was approximately 24 billion yen, animprovement of approximately 31 billion yen year-over-year. Sales and profitincreased due to the sale of chips for the PS3. We aimed to make thesemiconductor business profitable over the full fiscal year.

Now Sony Ericsson, Sony Ericsson's sales increased 7% to EUR3.108million. Unit sales were approximately 25.9 million, an increase of 31%. Incomebefore income taxes decreased 11% to EUR384 million, reflecting the exceptionallyhigh level of profit record, in the comparable quarter of last year. Walkmanand Cyber-shot phones contributed to the results of the quarter.

Sony Ericsson gained approximately 1 percentage point ofmarket share over the past year and finished the quarter at over 9% share. Theequity and net income Sony recorded from Sony Ericsson decreased year-on-yearby 700 million yen to 21.1 billion yen.

In the game segment, sales increased 43%, with 38% on localcurrency basis. Approximately 70% of sales came from hardware and accessories,while the rest came from software.

Looking to each of our PlayStation platforms, first PS2, webegan 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 wehave reached the same sales level as last year's first half. The entirebusiness including software is solidly performing above expectations.

As a result of the strong performance, we have increased ourPS2 unit sales forecast for this fiscal year from 10 million units to 12million units.

Next PSP, hardware sales increased due to a significantincrease in unit sales year-on-year. We launched a new lighter, slimmer PSPmodel in Japan, in the U.S. and Europein September. Penetration of PSP is gaining speed in every region, withSeptember unit sales in Japanreaching a record high. Through the introduction of new colors and other region-specificproduct roll outs, we are appealing to a wider user base.

As a result, we're also increasing our full-year unit salesforecast for PSP from 9 million units to 10 million units. Although PS3contributed to increased sales, actual results for this quarter were below our originalexpectation.

As we approach the year-end holiday selling season, we'llaccelerate the expansion of the PS3 platform through enhancement of thesoftware line-up, and proactive measures ended expanding sales, which is therecent introduction of new models in Japan,the U.S. and Europe, as well as the recent adjustments to the price ofthe 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 weekwere two to four times higher than the previous week, depending on the country.

In Japanand North America, where the new models willbe introduced in November, sales have already doubled due to price adjustmentsand current models. We continue to make every effort to achieve our first yearunit sales goal of 11 million units.

Next, turning to software; during the second quarter, we'verecorded a significant PS3 software sales whereas there is no such sales in thecomparable quarter of the previous year. However, overall software salesdecreased in the second quarter, as unit sales of PS2 and PSP software werelower than last year.

Operating loss in the game Segment increased 53.2 billion yenyear-over-year to 96.7 billion yen. Segment losses increased primarily due toloss recorded from selling the PSP at a strategic price points lower than itsproduction cost, and an increase in write-downs of PS3-related inventoryrelated to the new pricing structure. Write-downs of holiday selling season PS3inventory and major components came to 71.1 billion yen.

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

Operating income was 2.7 billion yen compared to a loss of15.3 billion yen in the same quarter of the prior year. Lower marketingexpenses resulting from the fewer number of theatrical releases in the currentquarter, compared to the same quarter of the prior year. That's one of theother factors which contributed to the improvement and 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 124.5 billion yen. Although insurance premium revenue increased due to anincrease in policy amounts enforced, net gains from investments in the separateaccount and net valuation gains from convertible bonds in the general accountdecreased.

Operating income decreased 6% to 23.1 billion yen, as a resultof the decrease in operating income at Sony Life. Operating income at Sony Lifedecreased 31% to 17.7 billion yen. Although insurance revenue increased, netvaluation gains from convertible bonds in the general account decreased.

Results at Sony Assurance trended well, primary due to carinsurance. And Sony Bank had a steady increase in its business, as total assetsheld increased.

On October 11, we successfully completed an IPO of minority stakesin Sony Financial Holdings. The offering raised 290 billion yen for SonyCorporation and 30 billion yen for SFH. As of last night's closing price, Sonyhas retained a 63% stake in SFH, worth564 billion yen for our shareholders.

All Other; due primarily to a year-on-year increase in albumsales at Sony Music Entertainment of Japan, as well as the consolidation of theU.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.-basedmusic publishing subsidiary, Sony/ATV Music Publishing.

Operating income increased 66%. This increase was primarily theresult of the increased sales recorded at Sony Music, Japan, an increase intrademark royalty income from Sony Ericsson and higher fee revenue from the newbroadband subscribers at So-net Entertainment Corporation.

Sales of Sony BMG decreased 10% to $851 million. Thisdecrease 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 theprior year.

Sony BMG recorded income before income taxes of $8 millionas compared to a loss before income taxes of $31 million in the same quarter ofthe previous year. This improvement was primarily due to the lower marketing,overhead and restructuring cost. As a result of a number of one-time itemsrecorded in the quarter, including reductions to deferred tax assets in Germanystemming from a recent tax rate change, and a number of return-to-provisionadjustments, a net loss of $8 million was recorded by Sony BMG. Consequently, Sonyrecorded $4 million is equity in that loss.

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

Next, I would like to review our forecast for the fiscal yearended March 2008. We have revised upward our forecast for the fiscal year fromthe forecast we announced on July 26. The foreign exchange rate assumptions usedin the forecast of the second half are approximately 115 yen to the dollar andapproximately 160 yen to the Euro. In July, we had 117 yen to the dollar and158 yen to the Euro for the nine-month period.

There are five factors that led to the changes in our forecast.First, second quarter result, as a whole, exceeded our previous forecast. Second,all second half sales are expected to slightly exceed the previous forecast. Weexpect lower income in the Game segment as compared to our July forecast. Inaddition, certain one-time gains, which are expected to be recognized in thesecond half had been incorporated into the revised forecast.

Third, we've increased our forecast for restructuring chargesby 10 billion yen, mainly as a result of additional impairment charges frommanufacturing facilities relating to rear-projection televisions.

Four, in connection with the IPO of SFH and its concurrent listingon the Tokyo Stock Exchange, we expect to record a gain in income before incometaxes of approximately 75 billion yen and net income of approximately 11billion yen in the third quarter. However, we also expect consolidated netincome to be offset by the expected increase in minority interest, arising fromthe IPO of SFH.

And finally, we've increased by 10 billion yen our forecast forequity income affiliated companies due to better than anticipated results,during the start-up period of production for the 8th generation LCD panels andS-LCD. As a result of these factors, our new forecast is for [8.980 trillion] yenin consolidated sales, 450 billion yen in operating income, and 500 billion yenin income before income taxes and 330 billion yen in net income.

Before Mr. Oneda and Mr. Wiesenthal take your questions, Iwould like to summarize the key points discussed today. The Electronic segmentcontinues to achieve significant growth in sales and profitability. Results forthe quarter reflect 21% top line growth and an operating profit margin of over6%.

In the Game segment, PS2 and PSP sales continue to bestrong, resulting in an increased unit sales forecast. While PS3 results were abit behind our July forecast, the overall majority of the losses associatedwith PS3 for the year have already been reflected, and we will approach theholiday selling season with an expanded software offering, new models, and moreattractive pricing.

The Pictures and Financial Services segments continue on theirpath to significant profit transmission for the fiscal year.

So, our full year earnings forecast has been revisedslightly higher, and we are on track to achieve a six-fold increase inoperating income and our operating margins are forecasted to be 5%.

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

Question-and-AnswerSession

Operator

(Operator Instructions) And ladies and gentlemen, your firstquestion comes from the line of Jason Mauricio of Arete. Please proceed.

Jason Mauricio -Arete

Hi, thanks a lot. Just a few questions, one is, I waswondering if you could talk about gross margins overall, and what contributedto the decrease in gross margins, given sales volume was roughly in line withthe previous quarter?

Second, could you detail how much of the game loss wasinventory write-down versus the console loss, and what were the reasons for theinventory write-down?

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

Nobuyuki Oneda

Okay. The gross margin overall is basically decreased from5% to -- the operating margin was from 5% to 4.3%. But, if you exclude the oneshot restructuring type expenses, the quarter-to-quarter basis of margin is5.2%, which is almost equivalent to first quarter and second quarter. So, it’sprimarily because of this, the restructuring type expenses is the main deal.And, how much of the game loss was inventory related with, were write-downs

Jason Mauricio -Arete

Yeah.

Nobuyuki Oneda

This is of course of the only PS3 hardware products only.And about the 711, Oaklandis included in the second quarter.

Jason Mauricio -Arete

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

Nobuyuki Oneda

As of this moment, the cost fee is still higher than theselling price, and the forming of the write-down is as follows. The denominatoris the production cost of the latest in the current month, okay?

The numerator is the average selling price for the comingthree months minus the last months, the production cost of the current month.So, the denominator and the numerator, comes up to the negative growth ratio.That is the percentage that we write down against the current on-hand inventory.

Jason Mauricio -Arete

Okay. So you’re writing down --

Nobuyuki Oneda

Yeah, this is basically, the cost is higher than the sellingprice. And the on-hand inventory isdevaluated, so that we will not to lose the future notice. In other words, theloss is recorded in advance.

Jason Mauricio -Arete

So, this is a write-down of finished goods inventory tobasically a mark-to-market of finished components, rather than raw materials.

Nobuyuki Oneda

Right. Not only finished goods, but also the raw materialslike, the Cell chip inventories are also devaluated.

Jason Mauricio -Arete

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

Robert Wiesenthal

It’s Robert Wiesenthal speaking. I think the product mixthat we've had has definitely added to the increase in sales in terms of justSony, generally, and obviously the choice of colors and such.

But overall, what we are seeing in the market is the growthis continuing, given we've conditioned to customers to really think about theseproducts in an upgrade cycle, the prices have been maintaining very well, it'snot been subject to the kind of commoditization as a number of other products.

So you'll see additions such as image stabilization, Wi-Fiface detection, and yet these cameras kind of maintain their price overtime.

If you look at some of the analyst reports, the analysts arenow talking in terms of cameras per person where they used to talk aboutcameras for household. So the growth continues and Sony is playing a very bigpart in that growth, and we have a very full lineup from very small Cyber-Shotsto full SLRs.

Jason Mauricio -Arete

Okay. Thanks a lot guys.

Operator

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

Evan Wilson - PacificCrest

Good morning. I have three questions for you. The first onthe television business, you indicated this morning that the TV businessoperating income forecast to be lower than previously expected for the year.Should we be thinking about the second half the same or just remove theunderperformance from Q2 from our previous fiscal year expectations?

The second question would be on whether not we're seeing anyimpact from subprime market here in the U.S. on your sales, and whether notyou factored in any weakness into your forecast for the rest of the year?

And the third question would be on the game business. You increasedyour sales forecast on a unit basis for both the PS2 and PSP, with nocorresponding increase in software. Could you square up the change in theforecast, up for hardware, but not for software?

Nobuyuki Oneda

Okay. Your first question is the operating profit of the TV.It could roll down the previous forecast. You are talking about the future?

Evan Wilson - PacificCrest

Yeah, I'm wondering if the forecast is lower for the secondhalf or is it just greater profits from Q2?

Nobuyuki Oneda

Yes, the past half, the product is actually the models thatare produced springtime. Those products are not so competitive compared to ourcompetitors. The reason of this is the competitors prepare the fullhigh-definition type products, compared to our regular high-definition TV.

So therefore, we are basically, our product was notcompetitive. But the second half, our product is fully competitive, more in alarge size and the full HD products.

So therefore, we are expecting that the second half of TVprofitability would be better than the first half. So therefore, we had theloss operations for the LCD television in the first half, but we are expectingthe profitable operation for the second half.

Evan Wilson - PacificCrest

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

Nobuyuki Oneda

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

Evan Wilson - PacificCrest

Okay.

Nobuyuki Oneda

Okay. And the second question is the impact from thesubprime 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 situations.At this moment, we don't see any drastic downside adjustment.

And what is the third one?

Evan Wilson - PacificCrest

Yes,

Robert Wiesenthal

I think that your third question was about increased PS2,PSP hardware forecast without the software forecast being increased. I thinkwith respect to PSP, clearly there was a little bit of lap before the PSPhardware really took off where some game manufacturers migrated. I think thosewho didn't stay on, surely missed a unique window, because the new thin PSP isdoing extremely well.

In fact, there are lot of places that have been out of stockon it, and we were working hard to keep up with production and there it hasbeen a very exciting to come the hardware side with this device, becauseclearly it is a lower price point center, a great form factor and is now beingpackaged in different colors with unique game combinations.

So, I think you will be seeing a big pickup in PSP software sales,both in first party and in third party.

Nobuyuki Oneda

And adding to that factors, that the PSP, we had the commonaccessories like the GPS type functions and one set of type of function thatyou can enjoy the TV programs through this PSP, and also the light and the slimtype of hardware shape, that could increase the quantity, without -- they are increasingin the software drastically.

Evan Wilson - PacificCrest

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

Nobuyuki Oneda

The PS3 software -- the expected software numbers would notbe changed. So still, we are shooting about 200 titles compared to the currentabout 100.

Evan Wilson - PacificCrest

Thank you.

Robert Wiesenthal

Next question please, Bill.

Operator

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

Jessica Reif Cohen -Merrill Lynch

Hi, I've a couple of entertainment related questions. Thefirst on the stereo side, what preparations are you making for strike on thefilm and television businesses and what are your expectations?

Robert Wiesenthal

In terms of the impending strike or so, it seems to be. Imean clearly we have an inventory of films and we are also -- it is somethingthat is in the short-term, we really don't see any kind of real economic impactin the short-term depending on the length of strike. If there is one, therecould be some bluffs I think.

Our role here is to take some of our inventory and fill outour pipeline and take advantage of open dates, and we will see how it goes. Andreally no one really knows what is going to happen yet. Everybody is bracingfor this. We are hoping for the debt, but we really don't have any greatinformation yet about how this is all going to pan-out.

But again from a financial perspective, no real short-termeconomic impact for us and long-term, we'll wait and see and we'll use ourinventory, both on the film and TV to take advantage of date and programs both.

Jessica Reif Cohen -Merrill Lynch

Okay. I've got three more questions. So the second questionis, can you discuss what you're saying on Blu-ray versus HTV, HTDVD in themarket, both the U.S. and outside the US, and how do you expect things to shakeout with some of the payments sort of [acquainted] couple other studios. I amsorry, but it's part of that. Could you also talk about the calendar fourthquarter expectations since there are so many titles coming into the market?

Robert Wiesenthal

Sure. In terms of Blu-ray, I mean obviously we'redisappointed with some of these other studio decisions. I think that Jessicayou're 100% right, these payments have obviously had a lot to do with it. Ourformat is exceeding on merit, if you listen to what Rupert Murdoch said at theGoldman Conference. He was quoted saying the public is going to want Blu-ray,because the public can tell the difference, we agree with Rupert.

There is a greater capacity. There is a greater potentialtrend or activity and I think that we have a good strong suite of partners. Andright now Blu-ray is still selling two-to-one. And I think the power of thePlayStation 3 is clearly going to have a big impact on the balance in themarket. We'll probably have 15 million Blu-ray players out there by the end ofthe year. And in the new PS3 bundles, you'll see Spider-Man 3 which I think isgoing to really start picking up the take-up rates for PS3 users to reallyenjoy full high definition experience.

And we've got market titles. We take a look at the top 20high-definition titles this year, 19 are available on Blu-ray, and 13 of thoseare available on Blu-ray only. And we also have a lot of key retailersblockbuster announced that they was going to exclusively carry Blu-ray in a1,450 out of 1,700 stores, targeting DJs, they are only selling Blu-ray playersto listen. It's a war out there and I think we're in a very good position basedon the hardware and the software. But we're taking extremely seriously. Andwe're hoping again that both the customers, the studios and the retailers pickthe format on its merits and if that's what has happens, so we will be okay.

Jessica Reif Cohen -Merrill Lynch

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

Robert Wiesenthal

Well, I think it's really all over Jess. I think India where Sony Entertainment Television isgrowing extremely well and also our local film production which we're pickingup in India and also Russiais a huge market for us. China,as you know, we have been involved in local Chinese production for many, manyyears, so it's across the Board. Sony Pictures has been a leader in localproduction in all of the European countries and also in Asia.

I can't pin at one specific territory, again our businessesdivide into local language production, local channels and also distribution andthey are all up firing on all the cylinders, so we're very excited about it.

Jessica Reif Cohen -Merrill Lynch

Okay. And then just finally for me on music, do you have anysense of when the market will stabilize, meaning when do you think the declineat physical will be offset by the increase in digital, and for Sony BMGspecifically should we expect further restructuring charges this year?

Nobuyuki Oneda

Well, this fiscal year, I mean the calendar year, thepackage media could be reduced by 11% and download probably will be increasedvery drastically, but overall the industry maybe declined by 5% to 6%, thattrend maybe continued. But hopefully in the future, the download type operationwould be increased and then hopefully that will offset the package media.

Robert Wiesenthal

I think for the first time, it's interesting, Jessica, weare seeing certain artists that actually are selling, the majority of theirincome in coming from digital and something we haven't seen, especially in theurban arena, both in terms of ring tones and master tones.

And I think that was the music company films, the job of isreally trying to pursue more of a -- what they call a 360 licensing opportunitywhere at least with young emerging artists, they are participating in theentire revenue stream from branding, merchandising, touring, video.

Obviously, they work close with Sony Pictures and Televisionsegments. You are not going to be able to do that for Celine Dion, but you aregoing to be able to do that for some younger emerging artists, but it's goingto take awhile. I think the next couple of years are going to be tricky, but Ithink we have to pin the benefits of restructuring if finally happen.

We cut over $400 million of cost to enjoy the savingsannually and I think over the next couple of years, you are going to startseeing the real business emerge, but it's going to be difficult for awhile.

Jessica Reif Cohen -Merrill Lynch

Should we expect for the restructuring charges?

Robert Wiesenthal

Probably a bit for the year ending '08, you could probablysee $75 million for this year.

Jessica Reif Cohen -Merrill Lynch

In total?

Nobuyuki Oneda

The cumulative basis is over 600 million yen, but annualsaving is over 400 million yen. So theoretically, less than two years, we couldget the return of investments, that's we are predicting.

Jessica Reif Cohen -Merrill Lynch

Thank you

Robert Wiesenthal

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

Operator

Surely, next question comes from the line Daniel Ernst ofHudson Square Research. Please proceed

Daniel Ernst - Hudson SquareResearch

Yes, thanks for taking my call. Three questions, if I might.First to (inaudible) pretty straightforward. The first on Sony FinancialHoldings, the net gain, just to clarify, will be offset 100% by the minorityinterest offset?

And then secondly, on the call this morning in Tokyo, just to clarify, Ibelieve you said that the Game division second-half operating income would beabove break-even, clarify that?

And then third on the LCD business, could you walk methrough the kind of trajectories there on gross margins or operating margins.Now that the 8th G fab is up, so I assume that also in this quarter was apassthrough on the full D&A on the 8th G fab and the fact that it's notoperating at full capacity, probably at full yield yet.

But you did raise your forecast for LCD. So, could you walkme though the flow through of that into your expectations for the LCD operatingmargin going forward? Thank you.

Nobuyuki Oneda

Your first question, SFH net gains, the net gain for thistransaction for the bottom, I mean a net-net after tax basis is, yes, the approximatelylittle over 100 (inaudible). So, that will be offset in the second half becausethe minority of the profit would be eliminated from our bottom number. Yes, itwill be offset.

The second question is the game second half operating profitdue to the breakeven. As I explained before, the hour within the first half, wetook very high inventory write-down that was due to the offset in the secondhalf.

So therefore, we didn’t see any big loss associated withthis inventory write-down. But rather, there could be the income from thisinventory write-down. So that is the main reason that we could do breakeven inthe second half.

Nobuyuki Oneda

Got a third one?

Daniel Ernst - Hudson SquareResearch

The third question involves, walking me through the trajectoryof LCD operating profits, you know, now 8th G fab?

Nobuyuki Oneda

The eighth generationLCD operation in Koreais good for the, you know, is a very economically good product for the largestscreen size like a 46 inch and the 52 inches. And for example, we could get theeight panels from the generation eight production line compared to the sixth ofgeneration seventh.

That would really help the cost, the efficiency and becauseof the various smooth start-up, we could enjoy the quantity much faster than weexpected. That will help to improve our profitability for the LCD operationsfrom now on. But this eighth generation line would become full capacity veryquickly.

Daniel Ernst - Hudson SquareResearch

So could the LCD business spend be the operating margins --in the second half or the calendar second half?

Nobuyuki Oneda

Yes. In the second half we’re expecting profitable operationfor LCD, yes.

Daniel Ernst - Hudson SquareResearch

Great. Okay. Thank you, sir.

San Levenson

Thanks, Daniel. Ournext question, please.

Operator

The next question comes from the line of Ben Williams ofGAN. Please proceed.

Ben Williams - GAN

Hi. It’s Ben Williams from GAN in London. Sorry, just following up on the 71billion yen write-down on in the game business, because I am just looking hereyour full costing 11 million units for the fiscal year. And, as far as I cansee, you’ve sold just over 2 million so far.

So we’ve got about another 9 million to go for the secondhalf. I’m trying to guess in the third quarter bigger than the fourth quarterbecause of the holiday season there let to the breakdown of 5 million thirdquarter, 4 million in the fourth quarter. Could you give us an idea of whatyour monthly production capacity is?

This seems that, you know, with such a high units bigger forthe next two quarters to come, you must have been building many millions ofunits of inventories. So, if you could, if you could perhaps walk us through abit more clearly in terms of that 71 billion in terms of how many units you’vegot in inventory and how much you have actually written down on these number,that will be great.

Nobuyuki Oneda

Capacity wise, I think, that we could go as a high as the 2million per month But our, you know, we’re using the outside, you know, themanufacturing companies, and they are flexible to adjust the productioncapacity. So we could go, you know, 1million set, or even to 2 million sets.

And the inventory pile-up mainly comes from the devicesarea, because of the activities longer deal time for the sale of chips,especially in RSX chips. So, therefore, we have tied up some of the inventorieswhere they will keep us a little bit ideas on the production of the finalassembly operation.

Ben Williams - GAN

But it just seems that the 71 billion figure, I guess,that's what $650 million. So when they are talking figures of let’s say, youmight have, I don't know 2 million to 3 million units in inventory that’s allPlayStation units that's what we are talking about [200 million] units roughly?

Nobuyuki Oneda

Okay the result for inventory write-down is a monthly--everymonth of the year we increase the reserves and we decrease the previous years-- previous months the reserves depending up on the inventory level, anddepending upon the gross margin, the improvement.

The inventory write-down amount is always changing. Soseven, eleven medium is the number that we charge it to the first half and thesecond half, the amount of the inventory write-down, which is on the balancesheet side, reserve is much, much higher than the seven eleven.

Ben Williams – GAN

Okay. Could I just, sort of follow-up question. I have reada couple of analyst notes which suggests the shift to 65 nanometer product forthe cell chip, could potentially and, I think with the graphic chips could costby close to $200 per unit for the PlayStation 3. Is that an accurate -- is thatsort of ballpark figure?

Nobuyuki Oneda

We don’t disclose those kind of details, I am sorry. Icannot tell you exactly.

Ben Williams – GAN

Okay.

Nobuyuki Oneda

Roughly speaking from a 90 nano to 65 nano, theoreticallythe cost would be reduced about 30%.

Ben Williams - GAN

Okay.

San Levenson

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

Operator

The next question comes from the line of Luke Mazong of BNPParibas, please proceed.

Luke Mazong - BNPParibas

Yeah, hi. Good afternoon, just to follow-up on the previousquestion, is that basically, when do you expect the production cost of PS3 tomove closer to the selling price, and how about you adjust those selling priceespecially in Europe, quite chopped it down?

Should we expect like six months ahead, 12 months ahead, andif could you give, maybe some specific measures that you have been taking tomatch with the price decline on your cost base? Thanks.

Nobuyuki Oneda

As of this moment, we are expecting sometime in fiscal year'08, we could achieve the breakeven for the PlayStation 3. But I cannot tellyou because that’s pretty (inaudible) at this moment.

Luke Mazong - BNPParibas

Okay. And with regards to cost reduction is there, youmentioned that you would not give the details from the sale sheet costs but, isthere any other specific measure that you've been implementing?

Nobuyuki Oneda

Okay, not on the assertive, but also other RSX chips, whichis the graphic related chip. Also would get the similar benefit by shrinkingthe size of chip, and also we are planning to change the, what is called,optical pickup, by changing the design, and also we are improving the cost ofPCs. So not only the sales, but also the we can reduce the cost of those chiefcomponents.

Luke Mazong - BNPParibas

Okay. And just a follow up, we would love to know SonyEricsson pricing margin that you could expect for the second half as far as Iunderstand from your answers and the various expression.

You expect the EBITD margin to come slightly down compared towhere you stand at mid year, which is a 6.2%, as far as, your thoughts areconcerned. But while keeping then such a low 4% EBIT margin, what are therationales behind that 4% margin, knowing that you are now running at 6% plus.

Nobuyuki Oneda

We are taking a little bit of the conservative numbers -- conservativeviews for the electronic products. Even though the TV may be included, but weare taking some conservative view for the DIs and audios, and the VAIOs.

Luke Mazong - BNPParibas

Okay.

Nobuyuki Oneda

So, hopefully, our focus is wrong and it could be betterthan the first half at this moment because of the market and the competitionsituations, we are going to take a little bit conservative the NOA.

Luke Mazong - BNPParibas

Okay. Thank you.

Operator

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

C. J. Muse - LehmanBrothers

Yeah. Good morning, good evening. Thank you for taking mycall. Couple of questions, First on CapEx, that JPY8 billion, does that includeS-LCD?

Nobuyuki Oneda

JPY8 billion is what.

Robert Wiesenthal

C.J., where did you get the JPY8 billion figure from? Yougot us all confused.

C.J. Muse - LehmanBrothers

I’m sorry, the LCD CapEx number.

Robert Wiesenthal

Are you referring to expanding the production lines ofS-LCD?

C.J. Muse - LehmanBrothers

Yeah. The number's in the presentation on the CapEx side.

Robert Wiesenthal

Stay with us a second.

Nobuyuki Oneda

We are investing close to the $1 billion to LCD generation 8lines.

C.J. Muse - LehmanBrothers

Okay. And that’s in fiscal 2007?

Robert Wiesenthal

Well, we'll give the answer now. While, do you have a secondquestion for us?

C.J. Muse - LehmanBrothers

Yes. Sure. I guess that’s sort of initial gen-8 ramp. Whatkind of CapEx are you planning for 2008 as you fill up that line?

Robert Wiesenthal

Again the question is specific to S-LCD?

C.J. Muse - LehmanBrothers

Exactly.

Nobuyuki Oneda

The S-LCD related investment is for the generation 8 only doyou see. Did you see that in the next year or last year and this year, we’vealways the $1 billion.

C.J. Muse - LehmanBrothers

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

Nobuyuki Oneda

There is no specific front to invest for the generation 8 or10 at this moment.

C.J. Muse - LehmanBrothers

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

Nobuyuki Oneda

Sorry, we don’t know. The capital investment for this fiscalyear, that mainly comes from the CMOS-related, and also the investment in the slowback here for our LCD manufacturing operations. And these in LCD are the maininvestments for this fiscal year.

C.J. Muse - LehmanBrothers

And on the semi-conductor side?

Nobuyuki Oneda

Excuse me.

C.J. Muse - LehmanBrothers

And on the semi-conductor side?

Nobuyuki Oneda

Semi-conductor side is the main investment for the CMOSsensor.

C.J. Muse - LehmanBrothers

Okay. And then, your outlook for 2008?

Nobuyuki Oneda

2008, we don’t have the any specific data yet.

C.J. Muse - LehmanBrothers

Okay. Over to your TV business. Can you talk about yourability to source panels, and what percentage of our Bravia TV line are yououtsourcing to ODMs this year?

Nobuyuki Oneda

Our Bravia panel is basically coming from our outsidesuppliers. And the -- but the 50% is coming from the S-LCD, which is a jointventure Company. And the 50% is primary coming from the Taiwan. Okay?

C.J. Muse - LehmanBrothers

And in terms of your outsourcing the module manufacturing toODMs, how is that progressed this year?

Nobuyuki Oneda

Module, what do you mean by the module?

C.J. Muse - LehmanBrothers

Where you outsourced the manufacturing -- the actualmanufacturing of the TVs, for instance TPV guys like that in Taiwan?

Nobuyuki Oneda

In terms of the finished LCD, I mean the completed LCD TV.We don't think that that will be outsourced to the Taiwanese makers. The onlypanel, we'll buy from the Taiwanese manufacturers.

C.J. Muse - LehmanBrothers

So you are saying you are not outsourcing to ODMs certainproduction of TVs that you sell to Chinaand Taiwan?

Nobuyuki Oneda

Yeah, the components only.

C.J. Muse - LehmanBrothers

Okay. Final question, can you talk about your outlook formix, I guess in the second half this year of 1080p and 120-Hz panels and thenhow you see that progressing in 2008?

Nobuyuki Oneda

Primarily the strength of the -- I mean the forecast of theBravia TV could be the large size and full HD with at 120-Hz. So, thispercentage, we'll be continuing and increasing.

C.J. Muse - LehmanBrothers

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

Nobuyuki Oneda

As of this moment around 30%.

C.J. Muse - LehmanBrothers

And where could you see that going next year?

Nobuyuki Oneda

We don't have a specific numbers yet.

C.J. Muse - LehmanBrothers

Okay. Thank you very much.

Robert Wiesenthal

Bill, can you take our next question please?

Operator

Sure. Our next question comes from the line of Su Lzu ofInvestec Asset Management. Please proceed.

Su Lzu - InvestecAsset Management

Thank you. I have a few questions about your PSA business,the first one is about the inventory write-down, given that, it just seems thatyou've brought down your cost price of PS3 to level off the average selling price over the nextthree months.

So, is it fair to say that assuming you are not going to cutprice further, you will simply be able to achieve obviously a breakeven in thesecond half, and also if, kind of, the cost reduction continues, you will beable to even reverse some of the inventories write-down that you have thisquarter?

Nobuyuki Oneda

The PS3 inventory write-down have already, partially did itwithin the second quarter. That will cover the two, three months the inventory level,but if we have to cut the price further more, yes then additional write-down maybe required, but at this moment we don't have any plan to reduce the price ofthe PS3 further more.

Su Lzu - InvestecAsset Management

Okay, the other question is about your software titles forthe PS3, I am just wondering if you can give an update about the long chase ofthe key titles over the Christmas shopping season, if you see any further delayof any title? Thank you?

Nobuyuki Oneda

Yeah we have about six, seven big titles like the Ratchetand the Clank feature, Heavenly Sword, World Soccer Winning Eleven, GranTurismo - 5, Time Crisis 4 can complete. Those are the, could be the big hitwithin this calendar year.

Su Lzu - InvestecAsset Management

Okay, thank you.

San Levenson - SVP ofIR

And unfortunately we have run out of time. So, if there isanyone left in the queue, we would like to ask you to call our InvestorRelations team directly in Tokyo.The number is 813-6748-2180, in New York it’s212-833-6722 and in Londonit’s 44-207-444-9713. So, again, thank you very much for joining us today andthat concludes today's call.

Operator

Thank you very much, ladies and gentleman for yourparticipation in today’s conference call. This does concludes your presentationfor today, and you may now disconnect. Have a good day.

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