Consolidated Results for the nine months ended December 31, 2006

Q&A summary

Click on the appropriate question to view the answer.

Information-Related Equipment

Electronic Devices

General


Information-Related Equipment

  • Q1

    How were sales of inkjet printer hardware and consumables in the third quarter on a revenue base?

  • A

    Our strategy for this fiscal year has been to emphasize profitability by curtailing shipments of unprofitable models. Based on this, hardware sales declined by more than 20% compared to the previous year and consumables saw a decline in the low single digits.

  • Q2

    The proportion of all-in-ones (multifunction printers) rose, but was this a result of poor sales of small-format photo printers?

  • A

    Sales of small-format photo printers have not met our expectations in North America. The market environment is changing rapidly, and we are analyzing trends to see if this situation will continue. We are currently considering our approach in the North American market.

  • Q3

    Operating income in the information-related equipment segment increased by 17.3 billion yen compared to the previous year. What was the cause of this? Is it true that more than half of this total can be attributed to exchange rates?

  • A

    Compared to last year, the effect of exchange rates was a gain of 4.6 billion yen on a companywide basis. The information-related equipment segment accounted for more than 90% of this total. Other reasons for the improved profitability were the effects of cost cutting including reductions of fixed and variable costs, and a reduction in procurement costs.

  • Q4

    I expect the model mix for inkjet printers improved dramatically in the third quarter. Have you managed to improve the profitability of printer hardware?

  • A

    We have to take into account the effect of exchange rates, and do a detailed analysis of actual hardware profitability before we can get the full picture. Broadly speaking, we are continuing to reduce variable and fixed costs, and are finding they are no longer weighing on profitability to the extent they once did.

  • Q5

    Second half operating income in the information-related equipment segment has improved compared to the previous forecast. Is this the result of an improvement in the third quarter, or have you revised your forecast for the fourth quarter?

  • A

    We have downwardly revised our forecast for the fourth quarter. This forecast includes increased promotional expenses, in particular for inkjet printers.

  • Q6

    Although you are booking extra charges in promotional expenses for inkjet printers in the fourth quarter, the forecast sales volume is down from the same period last year. Explain the reason for this.

  • A

    The market has contracted compared to last year. While we emphasized profitability and strategically curtailed sales volumes in the period up to the third quarter, it will take time before we can accelerate sales. In the fourth quarter we will build momentum for our recovery as we seek to build the foundations for the next fiscal year.

  • Q7

    The level of profitability in the information-related equipment segment was extremely high in the third quarter. Will this continue in the next fiscal year and beyond?

  • A

    Curtailing sales of unprofitable models to improve profitability is the same as saying there are still many profitability issues with our inkjet hardware. Costs are now lower than they were several years ago, and we are making steady improvements. However, there are still structural issues we must address before we can boost hardware sales and increase profitability beyond the current level. Exchange rates had a significant effect on the third quarter so it is difficult to use the current level of profitability as a basis for forecasts for the next fiscal year onward.

  • Q8

    When will you seek to boost sales of inkjet printers?

  • A

    Although we are still preparing our forecasts for the next fiscal year we hope to move sales in a positive direction compared to the current fiscal year. The fourth quarter will be the key to increasing sales volumes, and we are now organizing our sales force accordingly.

  • Q9

    Would increased sales of inkjet printers mean improved net sales in the information-related equipment segment next year?

  • A

    It's too early to be optimistic.

  • Q10

    Can you say that inkjet printer prices will not decline compared to your original forecasts?

  • A

    It's possible that after examining market conditions we would reduce prices to boost sales. The result of this may be a decline in ASPs.

  • Q11

    Are you seeing any positive effects of the lawsuits you have filed against manufacturers of counterfeit ink cartridges?

  • A

    In each region of the world we are taking measures most appropriate to that region. We are already seeing benefits in some parts of the world.


Printing Solutions

  • Q12

    You say we will be taking drastic measures to improve profitability in small- and medium-sized displays. When will you announce these measures?

  • A

    We can't discuss the exact schedule at this stage. We are looking to make an announcement about these measures before the end of the current fiscal year.

  • Q13

    Could these drastic measures include significant actions like selling off some of your LCD technology, closing some production lines, or making an alliance with another manufacturer?

  • A

    We can't talk about the nature of the measures at this stage. By drastic measures, we mean that we are not setting any preconditions as we seek to make speedy and thorough reforms to the business.

  • Q14

    In the current forecast you have downwardly revised net sales, but have maintained profitability forecasts. Do these figures include the drastic measures you mentioned?

  • A

    The present figures do not include any drastic measures. The measures we take could involve an extraordinary loss, and an impact on income before taxes and net income.

  • Q15

    Is it true to say that it would have been impossible to take any dramatic measures without making the former Sanyo Epson Imaging Devices a wholly-owned subsidiary? Exactly what kind of measures are you considering?

  • A

    We can't talk about any concrete measures at this stage. We do consider it essential that these drastic measures must be implemented in a short and appropriate time frame. We made the company a wholly-owned subsidiary to allow us to implement the required reforms in a suitable time.

  • Q16

    What do you consider to be the biggest issues facing the small- and medium-sized display business?

  • A

    This year we increased capacity in anticipation of increased demand for amorphous TFT LCDs for use in mid-range and high-end handsets. However, our reading of the market was overoptimistic and sales did not grow as forecast. We have recognized a series of structural problems as our response to these market changes was poor, and profitability has declined.

  • Q17

    Was the delayed response to market changes a result of having too many LCD technologies? Or is there any one technology that is suffering from poor competitiveness?

  • A

    To date, we have maintained four LCD technologies and believe the ability to offer a wide range of products in response to customer needs has been a strength. Going forward, we consider it necessary to look at the competitiveness of each of our technologies.

  • Q18

    The proportion of sales of low-temperature polysilicon TFT LCDs (LTPS) in the fourth quarter has fallen to nearly half of the total for the previous fiscal year. Is this an indication you have already started to take drastic measures in this business?

  • A

    We are still finalizing details of the drastic measures, so this is not an effect of those reforms. LTPS volume was originally forecast to decline this fiscal year. In addition, the fourth quarter is generally the low season so we are expecting an extremely tough ride for this product.

  • Q19

    You downwardly revised the net sales forecast for the display business in the second half. Net sales of displays fell in the third quarter, but are you also reducing your forecast for the fourth quarter? Please explain the situation.

  • A

    We made downward revisions to the previous forecast for both third and fourth quarters. This was largely a result of failure to achieve volume targets, but declining ASPs were also an issue.

  • Q20

    Will net sales of displays decline even further in the fourth quarter?

  • A

    Epson's management team is extremely concerned about the series of downward adjustments in the display business. Although we cannot deny the risk of fluctuations in demand from our customers before the end of the fiscal year, we do not at this stage believe that there will be a major additional impact on profitability.

  • Q21

    Second half operating income in the electronic devices segment is down compared to the previous forecast. Will there be a decline in the fourth quarter to accompany the downward trend in the third quarter.

  • A

    Yes.

  • Q22

    What will be the cost of the drastic measures you are proposing in the display business?

  • A

    They may be a one-off charge associated with the drastic measures we are proposing. However, we are in no position to discuss the scale of such a charge at this stage.


General

  • Q23

    You have passed your annual target of 40 billion yen in ordinary income after only nine months. Considering the improvements in inkjet printer profitability, the 40 billion yen target would appear to be conservative. Are you being cautious after making so many downward adjustments to your forecast last year? Or is there some kind of risk in the fourth quarter?

  • A

    Although we are extremely concerned about the series of downward adjustments we made last year, we did not insert a buffer zone into this year's forecasts. Coming after the year-end selling season, the fourth quarter is a tough one for us every year. In particular this year we'll be incurring charges as we seek to boost sales of inkjet printers, and are forecasting poor results caused by the slump in our display business.

  • Q24

    What are the forecasts for SGA costs in the fourth quarter?

  • A

    We can't give out specific figures, although SGA costs already account for 20% of net sales. We'll be increasing promotional expenses for inkjet printers, so the proportion may rise in comparison with the figure for the third quarter.

  • Q25

    Does the fact you will be taking drastic measures in the electronic devices segment mean that you will achieve the quantitative targets in the mid-range business plan on the strength of the information-related equipment segment?

  • A

    In the electronic devices segment, the quartz device business is proceeding steadily, and we hope to bolster the structure of the business further to allow us to include increased net sales and income in the next year's forecast. We plan to announce drastic measures in displays and semiconductors this fiscal year to ensure that these businesses do not negatively impact the balance sheet in the coming fiscal year. In the information-related equipment segment, the inkjet printer, projector, and business systems businesses are proceeding smoothly and are approaching their quantitative targets. In inkjet printers, we have curtailed net sales in our efforts to improve profitability in the current fiscal year. We will carefully watch the situation as we attempt to boost sales in the fourth quarter, and make plans for the coming fiscal year.


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