Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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 Corporate Development 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 your patience and welcome to the Sony Corporation Second Quarter Fiscal Year 2007 Earnings Conference Call. My name is Bill, and I'll be your conference coordinator for today.

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

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

Sam Levenson

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

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

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

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

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

Consolidated sales rose 12% year-over-year. All segments except financial services recorded sales gains. Consolidated operating income of 90.5 billion yen [recorded] compared to a loss of 20.8 billion yen in the same quarter of the previous year. Electronics had a large increase in operating 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 for the same quarter of the previous year. A 60.7 billion yen gain on the sale of the site of our former headquarters is included in the operating income for this quarter.

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

Equity and net income of affiliated companies increased 7% year-on-year to 21.1 billion yen. The contributions of the major affiliates are as follows: Sony Ericsson contributed equity and net income to Sony of 21.1 billion 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 8th generation equipment.

SONY BMG, our joint venture with Bertelsmann, also contributed 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 yen year-over-year to 73.7 billion yen.

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

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

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

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

The largest profit generating products were, in order of magnitude, digital cameras, video cameras, system LSI, PCs and broadcasting professional equipment.

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

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

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

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

In semiconductors, overall sales of the semiconductor category, for the quarter, were approximately 225 billion yen, an increase of 59% year-on-year.

Operating income was approximately 24 billion yen, an improvement of approximately 31 billion yen year-over-year. Sales and profit increased due to the sale of chips for the PS3. We aimed to make the semiconductor business profitable over the full fiscal year.

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

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

In the game segment, sales increased 43%, with 38% on local currency 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, we began the year thinking PS2 unit sales would be less than the previous year, but the strength in the first quarter continued in the second quarter and we have reached the same sales level as last year's first half. The entire business including software is solidly performing above expectations.

As a result of the strong performance, we have increased our PS2 unit sales forecast for this fiscal year from 10 million units to 12 million units.

Next PSP, hardware sales increased due to a significant increase in unit sales year-on-year. We launched a new lighter, slimmer PSP model in Japan, in the U.S. and Europe in September. Penetration of PSP is gaining speed in every region, with September unit sales in Japan reaching a record high. Through the introduction of new colors and other region-specific product roll outs, we are appealing to a wider user base.

As a result, we're also increasing our full-year unit sales forecast for PSP from 9 million units to 10 million units. Although PS3 contributed to increased sales, actual results for this quarter were below our original expectation.

As we approach the year-end holiday selling season, we'll accelerate the expansion of the PS3 platform through enhancement of the software line-up, and proactive measures ended expanding sales, which is the recent introduction of new models in Japan, the U.S. and Europe, as well as the recent adjustments to the price of the models currently in the market.

I'm pleased to report that in Europe, where we first introduced the new models and pricing, sales in the first week were two to four times higher than the previous week, depending on the country.

In Japan and North America, where the new models will be introduced in November, sales have already doubled due to price adjustments and current models. We continue to make every effort to achieve our first year unit sales goal of 11 million units.

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

Operating loss in the game Segment increased 53.2 billion yen year-over-year to 96.7 billion yen. Segment losses increased primarily due to loss recorded from selling the PSP at a strategic price points lower than its production cost, and an increase in write-downs of PS3-related inventory related to the new pricing structure. Write-downs of holiday selling season PS3 inventory and major components came to 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 theatrically released and made-for-TV movies in the television market, as well as higher advertising and subscription revenues from several of Sony Picture Entertainment's international channels. The film that contributed the most revenue during the quarter was Superbad.

Operating income was 2.7 billion yen compared to a loss of 15.3 billion yen in the same quarter of the prior year. Lower marketing expenses resulting from the fewer number of theatrical releases in the current quarter, compared to the same quarter of the prior year. That's one of the other 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 an increase in policy amounts enforced, net gains from investments in the separate account and net valuation gains from convertible bonds in the general account decreased.

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

Results at Sony Assurance trended well, primary due to car insurance. And Sony Bank had a steady increase in its business, as total assets held increased.

On October 11, we successfully completed an IPO of minority stakes in Sony Financial Holdings. The offering raised 290 billion yen for Sony Corporation and 30 billion yen for SFH. As of last night's closing price, Sony has retained a 63% stake in SFH, worth 564 billion yen for our shareholders.

All Other; due primarily to a year-on-year increase in album sales at Sony Music Entertainment of Japan, as well as the consolidation of the U.S. music publishing company, Famous Music, sales in all other increased 17% compared to the same quarter of the previous fiscal year.

Famous Music was acquired from Viacom by Sony's U.S.-based music publishing subsidiary, Sony/ATV Music Publishing.

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

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

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

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

Next, I would like to review our forecast for the fiscal year ended March 2008. We have revised upward our forecast for the fiscal year from the forecast we announced on July 26. The foreign exchange rate assumptions used in the forecast of the second half are approximately 115 yen to the dollar and approximately 160 yen to the Euro. In July, we had 117 yen to the dollar and 158 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. We expect lower income in the Game segment as compared to our July forecast. In addition, certain one-time gains, which are expected to be recognized in the second half had been incorporated into the revised forecast.

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

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

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

Before Mr. Oneda and Mr. Wiesenthal take your questions, I would like to summarize the key points discussed today. The Electronic segment continues to achieve significant growth in sales and profitability. Results for the quarter reflect 21% top line growth and an operating profit margin of over 6%.

In the Game segment, PS2 and PSP sales continue to be strong, resulting in an increased unit sales forecast. While PS3 results were a bit behind our July forecast, the overall majority of the losses associated with PS3 for the year have already been reflected, and we will approach the holiday selling season with an expanded software offering, new models, and more attractive pricing.

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

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

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

Question-and-Answer Session

Operator

(Operator Instructions) And ladies and gentlemen, your first question 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 was wondering if you could talk about gross margins overall, and what contributed to the decrease in gross margins, given sales volume was roughly in line with the previous quarter?

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

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

Nobuyuki Oneda

Okay. The gross margin overall is basically decreased from 5% to -- the operating margin was from 5% to 4.3%. But, if you exclude the one shot restructuring type expenses, the quarter-to-quarter basis of margin is 5.2%, which is almost equivalent to first quarter and second quarter. So, it’s primarily 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, Oakland is 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 the selling price, and the forming of the write-down is as follows. The denominator is the production cost of the latest in the current month, okay?

The numerator is the average selling price for the coming three 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 selling price. And the on-hand inventory is devaluated, so that we will not to lose the future notice. In other words, the loss is recorded in advance.

Jason Mauricio - Arete

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

Nobuyuki Oneda

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

Jason Mauricio - Arete

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

Robert Wiesenthal

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

But overall, what we are seeing in the market is the growth is continuing, given we've conditioned to customers to really think about these products in an upgrade cycle, the prices have been maintaining very well, it's not been subject to the kind of commoditization as a number of other products.

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

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

Jason Mauricio - Arete

Okay. Thanks a lot guys.

Operator

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

Evan Wilson - Pacific Crest

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

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

And the third question would be on the game business. You increased your sales forecast on a unit basis for both the PS2 and PSP, with no corresponding increase in software. Could you square up the change in the forecast, 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 - Pacific Crest

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

Nobuyuki Oneda

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

So therefore, we are basically, our product was not competitive. But the second half, our product is fully competitive, more in a large size and the full HD products.

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

Evan Wilson - Pacific Crest

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

Nobuyuki Oneda

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

Evan Wilson - Pacific Crest

Okay.

Nobuyuki Oneda

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

And what is the third one?

Evan Wilson - Pacific Crest

Yes,

Robert Wiesenthal

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

In fact, there are lot of places that have been out of stock on it, and we were working hard to keep up with production and there it has been a very exciting to come the hardware side with this device, because clearly it is a lower price point center, a great form factor and is now being packaged 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 common accessories like the GPS type functions and one set of type of function that you can enjoy the TV programs through this PSP, and also the light and the slim type of hardware shape, that could increase the quantity, without -- they are increasing in the software drastically.

Evan Wilson - Pacific Crest

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

Nobuyuki Oneda

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

Evan Wilson - Pacific Crest

Thank you.

Robert Wiesenthal

Next question please, Bill.

Operator

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

Jessica Reif Cohen - Merrill Lynch

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

Robert Wiesenthal

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

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

But again from a financial perspective, no real short-term economic impact for us and long-term, we'll wait and see and we'll use our inventory, both on 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 question is, can you discuss what you're saying on Blu-ray versus HTV, HTDVD in the market, both the U.S. and outside the US, and how do you expect things to shake out with some of the payments sort of [acquainted] couple other studios. I am sorry, but it's part of that. Could you also talk about the calendar fourth quarter expectations since there are so many titles coming into the market?

Robert Wiesenthal

Sure. In terms of Blu-ray, I mean obviously we're disappointed with some of these other studio decisions. I think that Jessica you're 100% right, these payments have obviously had a lot to do with it. Our format is exceeding on merit, if you listen to what Rupert Murdoch said at the Goldman 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 potential trend or activity and I think that we have a good strong suite of partners. And right now Blu-ray is still selling two-to-one. And I think the power of the PlayStation 3 is clearly going to have a big impact on the balance in the market. We'll probably have 15 million Blu-ray players out there by the end of the year. And in the new PS3 bundles, you'll see Spider-Man 3 which I think is going to really start picking up the take-up rates for PS3 users to really enjoy full high definition experience.

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

Jessica Reif Cohen - Merrill Lynch

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

Robert Wiesenthal

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

I can't pin at one specific territory, again our businesses divide into local language production, local channels and also distribution and they 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 any sense of when the market will stabilize, meaning when do you think the decline at physical will be offset by the increase in digital, and for Sony BMG specifically should we expect further restructuring charges this year?

Nobuyuki Oneda

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

Robert Wiesenthal

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

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

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

We cut over $400 million of cost to enjoy the savings annually and I think over the next couple of years, you are going to start seeing 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 probably see $75 million for this year.

Jessica Reif Cohen - Merrill Lynch

In total?

Nobuyuki Oneda

The cumulative basis is over 600 million yen, but annual saving is over 400 million yen. So theoretically, less than two years, we could get 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 of Hudson Square Research. Please proceed

Daniel Ernst - Hudson Square Research

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

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

And then third on the LCD business, could you walk me through 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 a passthrough on the full D&A on the 8th G fab and the fact that it's not operating at full capacity, probably at full yield yet.

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

Nobuyuki Oneda

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

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

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

Nobuyuki Oneda

Got a third one?

Daniel Ernst - Hudson Square Research

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

Nobuyuki Oneda

The eighth generation LCD operation in Korea is good for the, you know, is a very economically good product for the largest screen size like a 46 inch and the 52 inches. And for example, we could get the eight panels from the generation eight production line compared to the sixth of generation seventh.

That would really help the cost, the efficiency and because of the various smooth start-up, we could enjoy the quantity much faster than we expected. That will help to improve our profitability for the LCD operations from now on. But this eighth generation line would become full capacity very quickly.

Daniel Ernst - Hudson Square Research

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 operation for LCD, yes.

Daniel Ernst - Hudson Square Research

Great. Okay. Thank you, sir.

San Levenson

Thanks, Daniel. Our next question, please.

Operator

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

Ben Williams - GAN

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

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

This seems that, you know, with such a high units bigger for the next two quarters to come, you must have been building many millions of units of inventories. So, if you could, if you could perhaps walk us through a bit more clearly in terms of that 71 billion in terms of how many units you’ve got 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 2 million per month But our, you know, we’re using the outside, you know, the manufacturing companies, and they are flexible to adjust the production capacity. So we could go, you know, 1 million set, or even to 2 million sets.

And the inventory pile-up mainly comes from the devices area, 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 inventories where they will keep us a little bit ideas on the production of the final assembly 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, you might have, I don't know 2 million to 3 million units in inventory that’s all PlayStation units that's what we are talking about [200 million] units roughly?

Nobuyuki Oneda

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

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

Ben Williams – GAN

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

Nobuyuki Oneda

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

Ben Williams – GAN

Okay.

Nobuyuki Oneda

Roughly speaking from a 90 nano to 65 nano, theoretically the 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 BNP Paribas, please proceed.

Luke Mazong - BNP Paribas

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

Should we expect like six months ahead, 12 months ahead, and if could you give, maybe some specific measures that you have been taking to match 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 tell you because that’s pretty (inaudible) at this moment.

Luke Mazong - BNP Paribas

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

Nobuyuki Oneda

Okay, not on the assertive, but also other RSX chips, which is the graphic related chip. Also would get the similar benefit by shrinking the 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 of PCs. So not only the sales, but also the we can reduce the cost of those chief components.

Luke Mazong - BNP Paribas

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

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

Nobuyuki Oneda

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

Luke Mazong - BNP Paribas

Okay.

Nobuyuki Oneda

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

Luke Mazong - BNP Paribas

Okay. Thank you.

Operator

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

C. J. Muse - Lehman Brothers

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

Nobuyuki Oneda

JPY8 billion is what.

Robert Wiesenthal

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

C.J. Muse - Lehman Brothers

I’m sorry, the LCD CapEx number.

Robert Wiesenthal

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

C.J. Muse - Lehman Brothers

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 8 lines.

C.J. Muse - Lehman Brothers

Okay. And that’s in fiscal 2007?

Robert Wiesenthal

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

C.J. Muse - Lehman Brothers

Yes. Sure. I guess that’s sort of initial gen-8 ramp. What kind 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 - Lehman Brothers

Exactly.

Nobuyuki Oneda

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

C.J. Muse - Lehman Brothers

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

Nobuyuki Oneda

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

C.J. Muse - Lehman Brothers

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

Nobuyuki Oneda

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

C.J. Muse - Lehman Brothers

And on the semi-conductor side?

Nobuyuki Oneda

Excuse me.

C.J. Muse - Lehman Brothers

And on the semi-conductor side?

Nobuyuki Oneda

Semi-conductor side is the main investment for the CMOS sensor.

C.J. Muse - Lehman Brothers

Okay. And then, your outlook for 2008?

Nobuyuki Oneda

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

C.J. Muse - Lehman Brothers

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

Nobuyuki Oneda

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

C.J. Muse - Lehman Brothers

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

Nobuyuki Oneda

Module, what do you mean by the module?

C.J. Muse - Lehman Brothers

Where you outsourced the manufacturing -- the actual manufacturing 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 only panel, we'll buy from the Taiwanese manufacturers.

C.J. Muse - Lehman Brothers

So you are saying you are not outsourcing to ODMs certain production of TVs that you sell to China and Taiwan?

Nobuyuki Oneda

Yeah, the components only.

C.J. Muse - Lehman Brothers

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

Nobuyuki Oneda

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

C.J. Muse - Lehman Brothers

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

Nobuyuki Oneda

As of this moment around 30%.

C.J. Muse - Lehman Brothers

And where could you see that going next year?

Nobuyuki Oneda

We don't have a specific numbers yet.

C.J. Muse - Lehman Brothers

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 of Investec Asset Management. Please proceed.

Su Lzu - Investec Asset 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 that you've brought down your cost price of PS3 to level off the average selling price over the next three months.

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

Nobuyuki Oneda

The PS3 inventory write-down have already, partially did it within 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 may be required, but at this moment we don't have any plan to reduce the price of the PS3 further more.

Su Lzu - Investec Asset Management

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

Nobuyuki Oneda

Yeah we have about six, seven big titles like the Ratchet and the Clank feature, Heavenly Sword, World Soccer Winning Eleven, Gran Turismo - 5, Time Crisis 4 can complete. Those are the, could be the big hit within this calendar year.

Su Lzu - Investec Asset Management

Okay, thank you.

San Levenson - SVP of IR

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sony F2Q07 (Qtr End 9/30/07) Earnings Call Transcript
This Transcript
All Transcripts