Consolidated Results for the First Quarter Ended June 30, 2004

Q&A summary

Click on the appropriate question to view the answer.

Information-Related Equipment

Q1
The information related equipment segment had operating income of 14.9 billion yen in the first quarter. Second-quarter operating income is forecast at 10 billion yen. You stated that you are starting to see the effects of the steps being taken to improve earnings, so why the drop in operating income for the second-quarter?
A
August is traditionally slow in America and Europe, and sales drop off. So, this year is no different from any other.
Q2
Operating income in information-related equipment is expected to come in at 25 billion yen in the first half and 41 billion yen in the second half. How much of this revenue will be generated by inkjet printers, and how much by other products in the segment?
A
We expect the contribution of inkjet printers to grow. Outside of inkjet printers, we expect demand for such traditional products as serial-impact dot-matrix (SIDM) printers and compact POS systems to remain stable throughout the year. As we said at the start of the year, in the second half we will replace our entire line of inkjet printers with new, lower-cost models. These reduced-cost printers will be a significant source of operating income.
Q3
Does that mean that you are pretty confident in the 41 billion yen forecast?
A
We think it is achievable. We originally forecast operating income of 6.5 billion yen in the first half and 41 billion yen in the second half. Since we revised the first-half figure to 25 billion yen, we have full confidence that we can reach 41 billion yen..
Q4
How much will PictureMate (Colorio Me in Japan) contribute to first half sales revenues?
A
We would like to refrain from giving a detailed breakout by product. However, PictureMate has had a large impact since its release in the United States, and we are continuing to increase production.
Q5
First-quarter inkjet printer sales revenues increased by 4% compared to the year-ago period, but how do you see the trend when you break down sales by hardware and cartridges? Looking ahead, do you see any change in your initial forecast of cartridge growth of about 4 to 6%?
A
We do not release figures broken out like this. We can say, however, that our efforts in cartridges are bearing fruit and that we expect sales growth to be in line with plan.
Q6
Why have photo printers suddenly begun to sell this year in Europe and America? Also, do you expect this to be a temporary spike or do you see demand continuing in the second half?
A
Structural changes are clearly under way in Europe and America. The changes are due to the spread of digital cameras. For several years now in Japan, Epson has focused on six-color photo printers. Moreover, at the end of 2003 we had a huge hit with the PM-A850 photo multifunction printer (the Stylus Photo RX600 overseas). Only recently, however, have American consumers begun to recognize the benefits of owning a photo printer, and sales of the single-function R200 and R300 are strong. The Stylus Photo RX600, a multifunction printer (MFP) that succeeded in Japan, has also been very well received in Europe and America. Six-color systems are thus assuming an increasing share of total sales. Single-function printers sales overall are on a downward trend, yet six-color models are showing growth of 4% to 5%.
Q7
SIDM and POS sales have been quite strong. Did this take you by surprise or did you see it all along? Do you expect this strength to be temporary, or do you see it continuing into the second half and the next fiscal year? Also, how has demand for Epson products been affected by the forthcoming Olympic Games?
A
The SIDM market had been shrinking over the past 10 years, but our sales and share grew as other companies withdrew from the market. We have also invested efficiently in R&D and other areas. The end result has been a rise in profits. In the POS business, we drove through improvements in our profit structure, abandoned unprofitable programs, and managed to sharply raise profits. SIDM and POS products are an important source of income, as sales reached about 120 billion yen and margins were in double digits. Therefore, I do not think this is temporary. Going forward, SIDM printer demand will be high in China, Eastern Europe, and South America, while worldwide POS demand will be steady.
Q8
You show income increasing in the information-related equipment segment in and after the third quarter. Does this mean essentially that you will be covering the increase in selling, general and administrative expenses by reducing costs?
A
Yes. The product line is being completely revamped, and we have already succeeded in cutting variable costs for MFPs by 30%.
Q9
You mentioned Epson's new $129 MFP, but how many units do you plan on selling in the second half in an even lower price zone?
A
We will offer products in an even lower price zone, but basically we will not be focusing on the very low end.

Electronic Devices

Q10
You stated that you have not revised second-half figures for the electronic device segment. However, the fact that you are forecasting operating income of 37 billion yen for the first half and 20 billion yen for the second half would seem to indicate that there is the potential for the second half figure to nudge upward.
A
We are not that optimistic. Mobile phone production is showing signs of overheating and, since the possibility of second-half production adjustments is very real, we see prices eroding even more sharply. In addition, depreciation and amortization of capital investments in production lines in Toyoshina and the Philippines will begin in the second half. We will also begin incurring certain costs associated with the Chitose plant, which is gearing up for HTPS panel production. Taking these factors into account, we felt that, at this stage, there is no news that changes the assumptions on which our forecast is based. Therefore, we let the second half figures stand.
Q11
Among the reasons you gave for the increase in income in the electronic device segment was that unit prices for liquid crystal panels did not fall as far as anticipated, but about how far did panel unit prices fall during the first-quarter?
A
The average unit price for active panels actually rose compared to the year-ago period. Compared to the fourth quarter, prices for active panels slid only several percentage points.
Q12
Your outlook indicates that unit prices will not drop that far in the first-quarter, but how about after that?
A
We expect the second quarter to follow the same trend as that seen in the first quarter; that is, we do not expect unit prices to fall all that far. However, we see the pace of price erosion picking up in the second half, and we expect prices to decline by more than 10% on an average unit price basis.
Q13
The forecast for HTPS panels has not changed substantially since the initial outlook, but word is that your HTPS lines are operating at full capacity and that demand exceeds your current supply capacity. So, what will you do to grow sales? In connection with this, are you thinking of moving up the start of operations at the Chitose plant?
A
HTPS panel orders are strong. We initially thought the capacity utilization rate would be around 90%. In actuality, however, we are running at full capacity, and both sales revenues and income are growing. In the second half we anticipate an even higher level of orders. Since our production capacity will reach its limit, we are adding an extra 10% capacity to our existing facilities. We are also doing everything we can to bring the start of operations at the Chitose plant forward.
Q14
What kind of contribution do you see SEID (Sanyo Epson Imaging Devices Corp.) making to sales and operating income in the second half?
A
Revenues from sales of displays are projected to be 371 billion yen, of which 238.3 billion yen will be in the second half. SEID second-half sales will be equal to this sales figure, minus the 15% accounted for by HTPS panels. The initial forecast of 18.8 billion yen in second-half operating income in the electronic device segment has been revised to 20 billion yen. The 1.2 billion yen increase is essentially equivalent to the amount by which Epson's operating income will increase due to the establishment of SEID
Q15
A high percentage of Sanyo Electric's amorphous TFT panels, which will be folded into SEID, are used for monitors and notebook PCs. Will you be changing this structure?
A
We will explain the strategy for SEID sometime after September. Basically, however, we want to concentrate on small panels as much as possible – and that goes for amorphous TFT panels, too – so that's the direction our investment will take.
Q16
Will capital investment in SEID take place within the scope of SEID's cash flow, or will the parent company (Seiko Epson) also contribute? Do you have any funding options through the next year?
A
We originally planned to invest a total of 320 billion yen over the three years ending March 2007, but investment in SEID will cause this amount to increase slightly. Basically, however, capital investment in SEID will be handled within our consolidated financial structure, and we will continue to promote efforts to reduce interest-bearing debt. Therefore, we are not considering allowing SEID to independently procure its own financing. We may review and revise our mid-range plan, including portions involving investment and reduction of interest-bearing debt. At the present time we are working to improve our cash flows from operating activities, and we are not considering the procurement of any special funds.
Q17
How will display sales break out by application this year?
A
Nearly all color STN and MD-TFD displays will be directed toward meeting mobile phone demand. HTPS panels are going to projectors and projection TVs. We speculate that amorphous TFT panels will go to PCs and TVs, while low-temperature polysilicon (LTPS) TFT panels will be for digital cameras.
Q18
Do I understand correctly that you expect MD-TFD unit prices to fall by 20% in the second half?
A
It is true that, initially, we expected MD-TFD unit prices to fall by about 20%. However, the reality is starting to shape up somewhat different. We have thus concluded that, even when a certain amount of risk is factored in, unit prices in the second half will likely slip only slightly more than 10%.
Q19
Operating income in the electronic devices segment for the current fiscal year is expected to come in at 57 billion yen, up from 40.6 billion yen in the 2003 fiscal year. What percentage of this total will be accounted for by displays, semiconductors, and quartz devices, respectively?
A
In the last fiscal year, displays accounted for 60%, semiconductors 20% and quartz devices for the rest. This year, we see displays accounting for around 55%, semiconductors 30% and quartz devices more than 10%.

General

Q20
In a span of three weeks, operating income was upwardly revised by 13 billion yen for the first half and 14 billion yen for the full year. What changed between now and the announcement of July 5th?
A
June results were not factored into the figures announced on July 5th. After factoring in the June results and reviewing estimates for the second quarter, information-related equipment upwardly revised its first-half operating income forecast from 16.9 billion yen to 25 billion yen. The reason for the anticipated increase in income is traceable to the steps we have been taking to improve earnings. First, we have a more advanced product mix. We used to gear ourselves up to sell as many units as possible, both on the low end and on the high end with pigment ink printers. This year, however, we are focusing on models that provide relatively good profitability. Specifically, we have focused on the Stylus C64 and C84 pigment printer, as well as on the R200 and R300 photo printers. Second, we have maintained selling prices. In the past, when rivals lowered prices, we followed suit. This year, however, we switched to a strategy of maintaining prices. Third, we are seeing the effects of having reduced manufacturing costs. This quarter we started to see the results of our efforts to improve earnings. These efforts include reducing R&D, administrative and other fixed costs, as well as selling, general and administrative costs, at the operations divisions. A comparison between income improvement targets and actual improvement shows that the largest effect is being seen in the inkjet printer business and in the business systems business. In the electronic device segment, meanwhile, our efforts to reduce costs in mobile displays for mobile phones started to bear fruit this year. We responded to this improvement by raising the first-half operating income estimate for the electronic device segment to 37 billion yen, up from 33.4 billion yen.
Q21
Doesn't the fact that you made such a significant upward revision after just three weeks indicate an internal problem with your forecasting system? If so, are you considering steps to address this issue?
A
We do feel that we need to make improvements in this area, and the top executives are leading an ongoing effort to improve the accuracy of our forecasts.
Q22
There was a significant decrease in the "Other" category under selling, general and administrative expenses. What does this include, and will you maintain this level?
A
It is true that selling, general and administrative expenses are declining overall. Expenses for after-sales service in particular were on the high end during the previous period. These have come down this period. In addition, we have also trimmed expenses associated with R&D, logistics, warehousing, packaging and so forth.
Q23
I would like to know approximately how you expect net income to break out from ordinary income.
A
Non-operating income is declining, and we expect a loss of 4 billion yen paid out primarily as interest on loans. We expect to record an extraordinary gain of approximately 2.2 billion yen due to changes in the European accounting standard for retirement benefits. We will also take a charge of approximately 3 billion yen on the disposal of fixed assets. The amount left over after subtracting these items is ordinary profit, or income before taxes. The tax rate will be a fairly normal 40%. Except for SEID, the impact of minority interests is very slight.