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Sony Corp. (NYSE:SNE)

Q1 FY08 Earnings Call

July 29, 2008, 9:30 AM ET

Executives

Sam Levenson - Sr. VP, IR

Nobuyuki Oneda - Corporate Executive Officer, EVP and CFO

Robert Wiesenthal - Group Executive, Corporate Development and M&A for Sony Corporation as well as EVP and CFO of Sony Corporation of America

Analysts

Evan Wilson - Pacific Crest

Jessica Reif Cohen - Merrill Lynch

Jason Mauricio - Arete

Daniel Ernst - Hudson Square Research

Ben Williams - GAM

Benjamin Lu - Seligman

Operator

Good day, ladies and gentlemen and welcome to Sony Corporation's Fiscal Year 2008 First Quarter Earnings Results. My name is Lauren and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes.

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

Sam Levenson - Senior Vice President, Investor Relations

Thank you, Lauren. And thank you all for joining us today, July 29, 2008 for the discussion of Sony's results for the quarter ended June 30, 2008. I'm Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America. I'm joined this evening in Tokyo by Nobuyuki Oneda, Corporate Executive Officer, EVP and CFO of Sony Corporation; and by Robert Wiesenthal, Group Executive, Corporate Development and M&A for Sony Corporation as well as EVP and CFO of Sony Corporation of America.

Thank you both very much for joining us. In just a few minutes, I'll give a brief summary of today's announcement. Then Mr. Oneda and Mr. Wiesenthal will be available to answer your questions.

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

For additional information as to risks and uncertainties as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting www.sony.net/ir.

With that, I'm now going to turn to today announcement.

I'll begin with a discussion of our consolidated results, and segment results for the quarter ended June 30 and then review our forecast for the year-ended March 31, 2009.

Consolidated sales for the quarter were flat compared to the same quarter of the previous fiscal year. On a local currency basis, sales increased by 8%. Regarding operating income, beginning with this fiscal year we're reporting equity and net income or loss of affiliated companies as a component of operating income because we believe Sony Ericsson, S-LCD and SONY BMG are integral to Sony's operations.

For the first quarter of the current fiscal year, however, equity and net income of affiliated companies decreased by 90% to ¥2.2 billion, primarily due to continuing challenges at Sony Ericsson. For this and other reasons, operating income including equity and net income of affiliated companies decreased by 39% compared with the same quarter of last year.

Excluding equity and net income of affiliated companies, operating income decreased by 28%. Other matters of note on a consolidated basis for the quarter are income taxes and minority interest. Income taxes were ¥19.0 billion for an effective tax rate of 30.2%. This rate was lower than Japanese statutory tax rate due to the reversal of valuation allowances at certain subsidiaries for tax benefits which are now expected to be realized.

Minority interest in income of consolidated subsidiaries, which is deducted from Sony's consolidated income rose to ¥8.9 billion in the current year period as compared with ¥0.4 billion benefit in the same quarter of the previous fiscal year. The increase in minority interest deducted from Sony Electronics earnings resulted from the SFH IPO. As 40% of SFH's earnings are now allocable to the minority shareholders.

As a result, of all these factors, consolidated net income for the quarter was ¥35 billion as compared with ¥66.65 billion in the prior year period. I would now like to explain the results for each of our business segments.

First, Electronics; sales in Electronic segment increased by 1% and sales to outside customers increased by 3% despite the negative impact of the appreciation of the Yen against the U.S. dollar.

By product category, LCD TVs had a significant increase in sales as unit sales in all regions expanded. Operating income in Electronics decreased by 57% year-on-year due primarily to increased price competition in digital camera and PC categories and the decrease in equity and net income for Sony Ericsson, which along with S-LCD is now reflected in the Electronics segment.

Foreign exchange rates also had a negative impact. The largest profit generating product categories were in order of magnitude, video cameras, digital cameras, imaging sensors, and broadcasting professional equipment. Although it had a significant improvement in profitability year-on-year, the largest loss making product category was LCD TV.

Through out this fiscal year we will continue to disclose the sales and operating profit of the TV category because the losses recoded last year, they were aiming to bring that category to profit this year. Sales for the TV category during the quarter increased by 33% year-on-year to ¥313.0 billion. And operating profit improved by ¥18 billion to a loss of ¥19 billion.

Next Sony Ericsson; Sony Ericsson sales decreased 9% year-on-year, due to unfavorable exchange rate fluctuations, continued slowing market growth in mid to high-end phone and increased competition.

Income before income tax has decreased significantly year-on-year due to a less favorable product mix as mid to high-end phones faced difficulty in Europe, where Sony Ericsson has been particularly strong, and due to overall price competition and higher R&D investments reflecting platform development investments for future growth. As a result Sony recorded equity and net income of ¥0.6 billion for Sony Ericsson.

Next Game; sales in the game segment increased 17%. On a local currency basis sales increased 25%. About three-fourth of the sales came from hardware and accessories, and balance came from software.

Looking at hardware; overall hardware sales increased due to significant year-on-year increase in PS3 and PSP unit sales. As expected, sales of PS2 decreased. But the business continues to be strong in Europe, the Americas, and Asia. PS3 unit sales were 1.56 million for the quarter, 2.3 times what we recorded in the same quarter last year. With hit titles being released all around the world, these games are helping to propel the penetration of the platform and it is accelerating.

We'll continue to strengthen our game software lineup as well as expand our offering of non-game content and services. The PSP has maintained it's momentum with unit sales up 75% year-on-year, to 3.72 million units. Due to enhancement of the software line up, add-on hardware features and color variations as well as the introduction of network services, user acceptance of the platform continues to grow through continued marketing efforts tailored to each market, we are working to further expand penetration.

Looking at software; overall software unit sales increased due to strong sales of PS3 and PSP. However on a value basis, overall sales, software sales decreased at PS2 software's decreased significantly.

Next, Network Services; with a number of registered accounts in the PlayStation network now exceeding 10 million and the number of pieces of content having been downloaded approaching 200 million, our business is expanding smoothly. Moreover, we recently expanded our network services with the launch of a video download service on July 15 in the United States. We are pleased to report that the game statement reported an operating profit of ¥5.4 billion for the quarter, an improvement of ¥34.6 million from the loss recoded in the prior fiscal year.

This was primarily due to an improvement in the operating performance of the PS3 business, as a result of PS3 hardware cost reductions, and increased sales of PS3 software, as well as strong sales of PSP hardware. Although profits in the PS2 business decreased year-on-year, it continues to contribute to profit for the segment.

Next pictures; as is typical in the pictures business, the timing of key theatrical releases makes quarter versus quarter comparisons difficult. In the first quarter of last year the blockbuster Spiderman 3 was released which drove revenues and profit. In the current year period we did not have a blockbuster release on the scale of Spiderman 3. In addition, in the first quarter of this year, we recorded significant marketing cost for the pending release of upcoming films, including Hancock, which has posted U.S. box office revenue of over 200 million thus far in the second quarter.

As a result of last year's success with Spiderman 3, sales decreased by 31% year-on-year. Although our motion picture revenue decreased, television revenues increased due to higher adverting revenues from several international channels. The film that contributed the most of motion picture revenue during the quarter was You Don't Mess With The Zohan. An operating loss of ¥8.3 billion was reported during the quarter compared with the operating profit of ¥4.6 billion in the same quarter of last year.

The change was due to the decrease in motion picture revenue and recording a significantly higher theatrical marketing expenses for upcoming film releases. Television operating income increased due to the higher adverting revenues.

Next, Financial Services; revenue decreased by 1% due to a decrease in revenue at Sony Life. Although insurance premium revenue increased, revenue at Sony Life decreased by 4% to ¥155.2 billion due to a decrease in net valuation gains from convertible bonds in the general accounts and lower net gains from investments in the separate account.

Due to a decrease in operating income at Sony Life, segment operating income decreased by 9%. Although the increase in insurance premium revenue contributed positively to results, the decline in net valuations gains from convertible bonds caused the operating income at Sony Life to decrease by 20% to ¥27.6 billion.

Business is going smoothly at Sony Assurance and Sony Bank and if we were to exclude the impact of the decrease in net valuation gains, Sony Life and the segment as a whole would've seen an increase in operating income year-on-year.

All other; sales in all other increased by 10% year-on-year, primarily due to the recognition of revenue from a settlement payment related to copyright infringement claims in the music business, higher fee revenue from broadband convection services at So-net, and an increase in sales of Sony Music Entertainment, Japan.

Sales at Sony Music Entertainment Japan increased year-on-year mainly due to an increase in music download sales and animation DVD sales.

Operating income increased by 24% year-over-year, primarily due to deterioration in equity and net income for... sorry, operating income decrease by 24%, primarily due to deterioration in equity and net income for SONY BMG which is now reflected in all other. Partially offsetting this decrease was the recognition of the revenue from the Sony Entertainment [ph] that I just mentioned.

Next SONY BMG; sales of SONY BMG decreased by 6% year-on-year due to the continue decline in the physical music market worldwide not being fully offset by growth in digital product sales. A loss before income taxes of $42 million was recorded, compared to income before income taxes of $31 million in the same quarter of the previous fiscal year. The decrease in profitability reflects to continuing decline in revenue resulting from the shrinkage of physical music market.

A year-on-year increase in restructuring cost of $46 million and the non recurrence of a prior year gain on sales of an interest in a joint venture of SONY BMG. As result Sony recorded equity and net loss of ¥2.5 billion. Best selling releases during the quarter included our Usher's, Here I Stand, Leona Lewis' Spirit and Neil Diamond's Home Before Dark. For those of you with more contemporary taste in music would have noticed that it was the Usher album you were listening to at the beginning of this call.

Next, I would explain our revised forecast for the March 2009 fiscal year. There are a number of factors impacting our revised forecast for the balance for this year. First, with respect to exchange rates, our forecast from the second quarter onward assumes a rate of approximately 105 Yen to the US dollar and approximately 162 Yen to the Euro. This compares with our prior forecast which is 100 Yen to the dollar and 158 Yen to the Euro. So the change has a positive effect on our forecast.

Second, operating income for the first quarter slightly exceeded our previous forecast due to Yen exchange rates appreciating with respect to the dollar and Euro and favorable results in the Game segment. These positive impacts have also now been factored into our revised forecast.

Third we revise our outlook for equity and net income at affiliated companies downward from ¥17 billion to ¥10 billion, as the operating result of Sony Ericsson are expected to be significant lower then the May forecast. And finally, we have adopted a more cautious outlook about the business environment for the electronic segment compared to the May forecast. As result of these factors, we have raised our consolidated sales forecast by ¥200 billion to ¥9.200 trillion.

The forecast for operating income including equity in net income of affiliated companies, income before income taxes and net income have each decreased by ¥50 billion. Our forecast for CapEx depreciation amortization and R&D is unchanged from the previous forecast.

Before Mr. Oneda and Mr. Wiesenthal take your questions, I would like to conclude with a few key points. During the first quarter we made substantial progress on our key initiative to achieve profitability in the TV and Game businesses this year. The TV business substantially reduced losses year-over-year, the Game business recorded a profit in the quarter. Both businesses remain on track for full year profitability. Another milestone achieved just subsequent to the quarter-end was the launch of the PlayStation network video download service in the U.S. This is an important footstep in our mission to leverage content and become the leading global provider of network consumer electronics and entertainment.

We are pleased with the progress achieved during the quarter and while may challenges remain in the markets which we compete we remain consciously optimistic about the current fiscal year.

With that, we will be please take your questions.

Question And Answer

Operator

Ladies and gentlemen, [Operator Instructions]. Your first question comes from the line of Evan Wilson with Pacific Crest.

Evan Wilson - Pacific Crest

Hi, guys thanks for taking the question. I have two. First you saw a 7.5% decline in sales year-over-year in U.S. which is the most penetrated region. Did you talked about what portion of that decline you think is from any weakness in the U.S. economy and what portion you think is the impact of product mix?

And second, you started to increase some price competition on Digital Cameras in your statement as the negative driver to your OI [ph] and Electronics. Last conference call you said your expectation was for a 10% decline in pricing this year, would you update what your current expectations are and if there is have any change to that 10% decline expectation?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

I think that the... even though you said that the seven... 7.5 sales starting above in U.S. the year-on-year basis. This is based on I think on Yen basis. Local currency basis, in other words the dollar basis, the... our sales is not down compared to the last year.

Evan Wilson - Pacific Crest

So have you seen any weakness relative to the U.S. economy on your business so far and can you just talk about that?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

I know at this moment that the overall the consumer electronics business is not so much deteriorating because of the television business. I think you are referring to the LCD businesses. So therefore at this moment we don't see any drastic downturn for the electronics business in the United States.

Evan Wilson - Pacific Crest

And on price competition in digital cameras?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

Yes the price competition on the digital camera is becoming severe. Not only in the U.S. but also in Europe, the operation too, but that was already included into our budget.

Evan Wilson - Pacific Crest

On the last call you said --

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

The quantity will be increased over 6%, but the price deterioration is more than that. So that on Dollar basis, the industry of the digital still camera in U.S. will be deteriorating 5% to 6%.

Evan Wilson - Pacific Crest

Thank you.

Operator

And your next question comes from the line of Jessica Reif Cohen with Merrill Lynch.

Jessica Reif Cohen - Merrill Lynch

Thanks. I have a couple of questions, entertainment related. First on the phone side, can you talk about what actions you've taken regarding the strike or potential strike, if there is an effective strike, how you operating the phone business right now and also on the phone side, could you talk about current trends in both home video and Blueberry market, what your expectations are through the balance of calendar '08?

Robert Wiesenthal - Group Executive, Corporate Development and M&A for Sony Corporation as well as Executive Vice President and Chief Financial Officer of Sony Corporation of America

Sure. With respect to the strike issues we're trying to get closure on this final deal with the [Indiscernible]. We have obviously successfully concluded our four previous agreements of the past year. We are prepared for a possibility of a work stoppage, but we are also proceeding with the production as the best we can. And so we're in all our work with the studio we are making preparations. But we're still... we're still cautiously optimistic and hope that both sides get to an agreement.

In terms of on the home video side, let me explain, it just a second talking about Blu-ray which is been doing extremely well. If you take a look at just kind of year-to-date at January to June, we're about little bit under five times the amount of Blu-ray sales for this half of the year versus the previous year. We're running about, I would say 8% of the total DVD business but on certain new releases it is close to 15%. Remember last year Blu-ray sales were only 2% of the total DVD business and we now have about 15 million BD capable players out there worldwide.

And we sold about 12 million Blu-ray disks to-date just in the U.S. All the studios are making disks right now, and I think there are about 1,700 titles worldwide. In terms of what we are seeing, new releases seem to continue to be doing well in both formats. However, I would take catalog title remained pressured from a pricing perspective, you know have retail and that has a bit to do with the amount of space that retailers are giving catalog and just kind of generally give most of the film libraries.

Is there is anything else you have Jess?

Jessica Reif Cohen - Merrill Lynch

Actually, just wanted to switch a gear a little bit to music, if we can. Could you talk about, I mean obviously the markets so... physical market's still under a lot of pressure, just wondering if you can give a little bit more color in terms of what you think or what your expectations are for the balance of the year physical digital and digital? and also how's the speculation that you are about to buy out [indiscernible]. Can you talk about, both like strategic value to you as a company of owning all of music and then from an economic standpoint when do you internally expect the market to bottom and where would you expect it to bottom?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

The music business in the physical, in the United States from a January to June doing about six months. The physical market is declining about 25% and the digital area is now including about 6%. The overall declining is about 15% to 16% in United States. For a global basis the physical market is declining above 17% and digital is up by 15%. So the net is the -12%, that's the last few months... the six months result. So that's kind over the trend that to probably continue the rest of the fiscal year?

Robert Wiesenthal - Group Executive, Corporate Development and M&A for Sony Corporation as well as Executive Vice President and Chief Financial Officer of Sony Corporation of America

And right now, kind of globally for this year I think we are looking about 25% total sales being digital, that's increasing all the time. I think in terms of the trends there were seeing that should create value for all the music companies. We are really looking too paid up subscriptions, both for portable devices and mobile phones being the important driver of economies going forwards. With respect to the importance of the music company, going forward we think deeper integration with our devices, is going to be critical for creating value throughout Sony.

Music continues to be a strong driver of economic value and innovation, if you look at the top TV shows worldwide in U.S. or elsewhere their music related shows like Popeye, The American Idol, and Betty Has Got Talent. If you look at the top video games right now in some of the software sales you have got Guitar Hero's Sing Star and Rockstar and they needless to say obviously MP3 players and mobile phones with music capability are important CE devices.

So we see music driving value everywhere not to mention at home entertainment and I think we are very well positioned to kind of harness that and the more integration we can get the better, you mention the speculation in the press. Right now there is nothing for us to discuss if at such time we have something to announce we will obviously announce it.

In terms of when the music industry will have bottom

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

This year will be bottom.

Robert Wiesenthal - Group Executive, Corporate Development and M&A for Sony Corporation as well as Executive Vice President and Chief Financial Officer of Sony Corporation of America

I hope you are right, Nic. I think that over the next couple years in terms of our business I think we're in and Nick is right we are in pretty good shape we've done a most of our restructurings behind us. But as an industry, the next couple years are really going to be transition years.

Jessica Reif Cohen - Merrill Lynch

And I have just one last question on an absolutely different topic. Bob can you comment on, since you have given your consumer... or you can say some products, how much savings would you expect from marketing this year given the weakness in advertising... the U.S. and we're hearing UK is started to really decline. Is that an area of savings?

Robert Wiesenthal - Group Executive, Corporate Development and M&A for Sony Corporation as well as Executive Vice President and Chief Financial Officer of Sony Corporation of America

It depends on the kind of media, it's a mix and I think we still broad as a company but geographically in terms of types of media. I can't really look towards specific weakness in the advertising market driving us any savings in advertising spending. Obviously, we hope to get the best deals you we can a get this much bang for our buck. But we have not factored into our forecast any kind of real dollar decrease in our cost of advertising.

Jessica Reif Cohen - Merrill Lynch

Okay. Thank you.

Operator

And your next question comes from the line of Jason Mauricio with Arete.

Jason Mauricio - Arete

Yes. Hi, there. Just a couple of quick questions, did you take any sort of accelerated depreciation in pictures this quarter given the losses you took there? And also on the game business I know there were some puts and takes in terms of reserves that you were running to the business. Were there any material reserve reversals in the last quarter? And finally, just a clarification on one of the earlier questions? Can you talk about constant currency sales growth in the United States for the entire Sony Group. I know you gave it for Electronics but I was curious if you could provide it for all of the business units from the U.S.? Thank you.

Unidentified Company Representative

One second, Jason.

Jason Mauricio - Arete

Sure.

Robert Wiesenthal - Group Executive, Corporate Development and M&A for Sony Corporation as well as Executive Vice President and Chief Financial Officer of Sony Corporation of America

No,We didn't take accelerated depreciation in the pictures business. In Q1, I mean... the losses that you see in Q1 again, you have to look at the pictures business, holistically over the course of the year, we have a lot of marketing cost in this quarter related to the bigger summer films and the comparisons are obviously difficult given that we had Spiderman which was a May release, versus spending this year and Hancock which is the July 4 release and a lot of upfront spending for our upcoming summer films.

Jason Mauricio - Arete

Okay.

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

The previously related write-down, or write-up stock. The past quarter the write-down is a positively reflected into our bottom number. About 148 open [ph] is included in there. But the second quarter, because of the timing issues, in other words that is a time that we would increase the inventory level of PS3, there might be some negative write-downs effect into our bottom number.

And your last question is the local currency sales growth in the U.S?

Jason Mauricio - Arete

Yes, for the business. For the entire business rather than just electronics.

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

We will just check it so please wait.

Jason Mauricio - Arete

Okay. Can I ask a quick follow up on the PS, on the Game Group? You mentioned there was a gain this quarter, and there may be some charges next quarter for reserves, can you talk about what your expectation for the entire fiscal year might be in terms the magnitude of either net reversals or net charges for PS3 cost?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

On the annualized basis it would be the positive impact towards the bottom number. The magnitude of this impact is about [indiscernible] due to 400 million of debt.

Jason Mauricio - Arete

Okay, Thank you very much.

Sam Levenson - Senior Vice President, Investor Relations

We'll come back to the other answer after we take the next question.

Jason Mauricio - Arete

Great, thanks, Sam.

Operator

And your next question comes from the line of Daniel Ernst with Hudson Square Research.

Daniel Ernst - Hudson Square Research

Yes. Good evening and good morning. Thanks for taking my call. Few questions if I might, first on the TV business, continued to report a loss in LCD, but yet maintained a goal of operating profit for the full year. Was the loss in the quarter in plan, above plan, below plan, on the loss side, and can you talk through to that about pricing trends with LCD units up double year-on-year but revenues up 30% I guess the offset is there as you are not knowing guarantees, I mean it gives a sense of LCD revenue growth verses unit growth.

And then on the net income guidance changes you effectively reduced the equity of Sony Alliance by ¥60 billion but reduced the overall by 50. So that implies a ¥10 billion actual improvement in core Sony, you talked about the drivers there is... both of that is coming from FX or there other positive contriving factors for that? Thanks.

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

The LCD business over the past quarter, this is the still the negative, but within our original expectation. On the annualized basis, our performance over the TV would be a profitable operation as originally expected. The pricing of the LCD, if you are expecting that, are we expecting that the price deterioration for the smaller inch size, it would be 20% year-on-year basis and large screens size is probably 25%. That is slightly slower declining compared to the last years.

Your last question is the excluding the equity income the profit of other business is in terms of operating profits is improved by about 100 OPM, that is primary because of the foreign currency, and related trouble.

And then compared to the original plans, our foreign currency more revised towards the weaker Yen for both dollar and Euro. That is a main reason that we revised the operating profit guidance excluding the equity to debt [ph] ratio.

Daniel Ernst - Hudson Square Research

Understood. Thanks for the answer.

Operator

And your next question comes from the line of Ben Williams with GAM.

Ben Williams - GAM

Hi, hello. I have a question, can I firstly ask question on the Game business and then, can I ask you a question on digital still cameras. On the Game business, can you give us a bit more detail in terms of the profit drivers. A couple a question ago I think you gave some detail about inventory related gains. But could you possibly go into a bit more detail about sales decline in software despite unit sales growth. Because it seems a bit misleading because you suggested PS2 related sales were down.

And but we should see the software for PS3 increase significantly. So it's not really clear why overall sales are down, unless that includes a large amount of bundling. And also I guess like that, can you give us a bit more flavor in terms of profit growth, given the fact that overall sales revenue for the software was down. Can you give us breakdown in terms of profit between hardware and software.

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

Okay. We normally have three platform PS2, PSP, PSP3 and both the PS2 and PS3 software, both in quantity and balanced [ph] basis, its improving substantially compared to the last year and I had last May project. The PS2 because of the line clear of this platform, the boost in hardware and sales in the software businesses is now declining.

But the overall the sales of the software is deteriorating, primarily because two reasons one is the mixture of the first party and the third party mix related issues and the another main issue is the PS2, the software these days is the very relatively cheap in the software are sold on basis the couple of years ago. It's basically the mixture of the platform console and mixture of the first party and the third party and although within the PS2 category the software itself depending upon the content itself, some of the content is much cheaper than the usual game business. Like [Indiscernible], Karaoke software. In short the software is cheaper than the game business. It's a mixture of those two.

Ben Williams - GAM

Okay so from that we can really deduce that the profit growth really came through cost cutting rather than revenue generation?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

Yes.

Ben Williams - GAM

Can you give us an idea of SG&A to sales, and in terms of Software and Hardware?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

We are not disclosing the SG&A into the hardware and software itself, but we can say but we can say that the hardware businesses for our PlayStation 3 is still losing. In other words the cost is higher than the sales price. But other the hardware business is making money and of course all the software businesses fall to the platform are making money.

Ben Williams - GAM

Okay can you give us an idea how many people have signed out for movie downloads on the PS3 in the last couple of weeks since you announced that?

Unidentified Company Representative

No, we don't have that data at our fingertips. Bear in mind that we just launched that service in some of the other studios. We signed three days leading up to the launch date. So, we're actually still populating it with a lot of content.

Unidentified Company Representative

I think right now we have all the studios signed up except universal. There's the full breadth of television film available for download. I think the take up rate is been fairly good considering there hasn't been much publicity and this service, I am happy to report, is being completely stable.

So I would look forward to a much greater promotion going forward about and now that we know that its working right and also... an interesting point out that is there is a very interesting mix of skewing towards paid, purchase business opposed to rental and also a lot of people using the functionality of moving films from their PS3 to their PSP.

Ben Williams - GAM

Just a slightly different question, in London here there's been a few stores I've been into and they've had the PSP have been sold out, PS3 has been sold out, which seems quite unusual, I am just wondering whether that is showing either it's showing that sales are good or production issues, but I am not quite sure, but there seems to be a sort of a lack of channel inventory particularly in the UK. or may be I am just going to the wrong shops?

Unidentified Company Representative

I don't know, a year ago you talked about how the shelves were full then, you were worried about no one buying them now the shelves are empty and you think there are production problem.

Ben Williams - GAM

Well I don't know. I am not sure. I am just getting in here.

Robert Wiesenthal - Group Executive, Corporate Development and M&A for Sony Corporation as well as Executive Vice President and Chief Financial Officer of Sony Corporation of America

No,that's right, the glass is half full or half empty. Specifically in the UK I don't know if any real issues, if we're exceeding expectations on PSP everywhere and obviously in the UK and in Europe in general, PS3 really doesn't have much competition in terms of Xbox or anything like it. So I think we're doing pretty well over there.

Ben Williams - GAM

Okay so the 10 million unit forecast for the year is conservative?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

Well, we want to be very cautious about the Christmas season, therefore you may say we are reasonably conservative.

Ben Williams - GAM

Okay, can I ask just one more question on digital still cameras. What were your unit sales year-on-year for digital still cameras in the first quarter, and how does that tie in with your forecast for the full year. So I think it's about 10%or 11% unit growth for the full year?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

The full year basis the still the quantity is industry service up by about the 11% the annual basis I mean in the year-to-year basis. We do not disclose the quarter-by-quarter business.

Sam Levenson - Senior Vice President, Investor Relations

Well our target for the full year stands at 26 million units.

Ben Williams - GAM

Okay. But were your unit sales up year-on-year in the first quarter?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

The quantity is up but the data bases because of the declining of the price, I think it's down a few places than last year.

Ben Williams - GAM

Okay. Thank you very much.

Sam Levenson - Senior Vice President, Investor Relations

Lauren, let's just take one more question please. We're running out of time.

Operator

Thank your. Your last question comes from the line of Ben Lu with Seligman

Benjamin Lu - Seligman

Hi. Thanks guys for squeezing me in. I just have three quick questions. One, can you comment a little bit further on the PSP inventory situation. You talked about how you may have to add a little bit more PSP inventory in Q2. But can you talk specifically about that PS3 chip inventory where you are today and whether the inventory is very low and you need to replenish that.

The second question is, initially you talked about how you are truing a little bit more cautious on Electronics versus your May forecast. Can you elaborate a little bit more in terms of with specific product lines you are being more cautious. And when you talk about cautiousness are you referring to unit growth Asp's or margins.

And then my last question is on inventory, if I look at your inventory it's up to 57 days it seems like North America is up year-on-year and quarter-on-quarter whereas other regions are down. Can you talk about where you are in terms of inventory situation both geographically and by products. Thank you.

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

We are not disclosing being inventory level by divisional basis, but overall I can say this way, we have little bit excess inventory for the some panels and some fresh memories because of the some of that reason that was the last year we have some shortage of the 32 inch panel and this could happen this fiscal year too. So therefore we have some excess inventories to prepare those situations for the panel. Although excluding those, our inventory level is very healthy. And in terms of the PS3 inventory, we are not in a specific explain the platform basis inventory level, however I could say that PS3 inventory is at the adequate level by division-by-division basis, maybe England maybe will have some shortage, but although our inventory level is a reasonable level.

Benjamin Lu - Seligman

The other question is can you elaborate a little bit more on your cautiousness for electronics versus your May forecast if you can talk to it at first?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

Even though that the... I said that because of the MTV television is still very healthy and glowing category, but other categories may be affected minutely because depending upon the economic incentive for coming for the rest of the fiscal year. So that's the main reason why we are taking a little bit in a cautious way.

Benjamin Lu - Seligman

And when you use the word cautious, are you referring to unit pricing or margin relatively?

Nobuyuki Oneda - Corporate Executive Officer, Executive Vice President and Chief Financial Officer

Particularly we have both quantity and the margin.

Benjamin Lu - Seligman

Okay thank you and congrats again for turning games into a profit this quarter.

Sam Levenson - Senior Vice President, Investor Relations

Thanks Ben. With that I would like to conclude today's call. Remind everyone that the contact numbers for the IR offices in Tokyo, New York, and London are available in the Earnings Release and on our websites at sony.com and sony.net.

And again, thanks very much for joining us and that concludes today's call.

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Source: Sony Corp. F1Q08 (Qtr. End 06/30/08) Earnings Call
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