Here are relevant excerpts from their conference call.
http://seekingalpha.com/article/42544
Sam Levenson
Turning to the game segment, sales increased 60%, or 49% on a local currency basis. Approximately 70% of sales came from hardware and accessories, and the balance from software. Looking at each of the hardware platforms, first PS2. Due to the launch of diverse software titles in every region, we are seeing demand for the PS2 which exceeds our expectations. Even though it has entered its eighth year since launch, PS2 recorded an increase in sales, as unit sales increased year-over-year. PSP hardware sales increased due to a significant increase in unit sales year-on-year. Penetration of PSP is [significantly] expanding in every region.
In September, we will introduce a new PSP, which is slimmer and lighter. We will accelerate the product’s penetration by enhancing the software lineup. Although PS3 contributed to the increased sales, actual results of this quarter were slightly below our original expectation. In an effort to expand the user base, we cut the base of the 60 gigabyte PS3 in July, and we introduced an 80 gigabyte PS3 in North America, which will be bundled with a popular software title beginning in August. These actions have led to an increase of sales over the past few weeks, since the announcement of the price cut.
In Japan and Europe we will introduce a PS3 bundled with a popular software title and accessories.
Next trend is software. PS2 software sales increased as we had a hit first party title, which had a high unit price. Despite an increase in unit sales, PSP software revenues decreased because some of the best sellers were affordably priced titles. PS3 software also contributed to sales. At the E3 Game Conference in the U.S. and at the PlayStation premiere in Japan, we revealed our plans to enhance our PS3 software lineup, and we’re currently working to provide various high quality PS3 software titles or the year end holiday sales season.
Making first and third party titles together, we plan to release approximately 200 new disc based games worldwide by the end of March 2008. Operating loss in the game segment increased 2.4 billion yen to 29.2 billion yen. Although profit from software increased, as hardware penetration grew, segment losses increased primarily due to the loss arising from the strategic pricing of PS3 at points lower than its production cost. 5.2 billion yen of the segment loss was a write down of intransient and component inventory.
As you may have notice, we’ve the actual unit disclosure for hardware and software from production shipments to [sell-in]. We’ve also done this for the unit forecast for each game platform. The result, however, is no change in the forecast figures. PS2 hardware unit sales are expected to be 10 million units, PSP hardware unit sales are expected to be 9 million units, and PS3 hardware unit sales are expected to be 11 million units. Overall, software unit sales are expected to be 250 million units.
In the games segment, we’ve seen continued success with PS2, a resurgence of sales for PSP, and we expect to have hundreds of new titles available for the PS3 over the coming months. Our full year earnings forecast remains unchanged, and we’re on track to achieve a six-fold increase in operating income, and out operating margin goal continues to be forecast to be 5%. At this time we’d be pleased to take your questions.
Q&A Session
Evan Wilson – Pacific Crest
Sure. First question is a little more detail on the shift in the guidance on the game business into the recorded sales model from the previous model. When exactly are you counting that as a recorded sale? Is it when it hits the retail channel? And then, secondly, on the game business, some more detail on inventory of the PS3 at the end of the quarter, and how long you think it will take for that inventory to sell through, and what the possibility is to get a cost-down version of the PS3 into the channel by the end of the year?
Nobuyuki Oneda
This is Nobuyuki Oneda. I will answer your questions. We just changed the shipping information from the production basis to the shipping basis starting from this quarter. The reason for this is that, after the last earnings call, we (inaudible) the media and the investors, that the production or shipment unit is not leading to our sales and (inaudible), sale’s amount, so it’s better to change from the production to the sale’s basis, [serene] basis. So that is the main ideas.
And of course there is another reason. That in the past, when we had been competing with Nintendo, they used to ship to the distributors rather than to the dealers. So, in other words, if we ship to the dealers, they ship to the distributors. There are some differences, so therefore, we apply the production basis or shipping basis, rather than the (inaudible) basis, to achieve the closer figure with the Nintendo number. (inaudible) the shipping time. That’s clear?
Evan Wilson – Pacific Crest
Yes.
Nobuyuki Oneda
The second question is the fierce inventory at the end of June? Our (inaudible) season is the November to December timeframe, but those two months are quantitatively so huge, so therefore, we have to pile up inventory, starting from the early stages, like the May-June period, because we have some capacity issues. So it is a monthly supply business. Years we have bigger number compared to the current sales volume. But we don’t think it is too risky inventory at this moment.
And your third question, when the 65 nanometer version would be in the [channel], I couldn’t exactly tell the timing at this moment, but of course within the peak season. That I could say.
Unidentified Analyst
Hello, thanks a lot. A few, quick questions. When you talk about cautiousness for electronics in games. I was wondering if you could go in a bit deeper. You mentioned pricing as one element. Are there any economic or consumer spending concerns over arching, and what in particular would the game business are you concerned about, or cautious about for the rest of the year? As for comparison purposes, can you give us the production shipments for the PS3 as they would have been reported last year, so we can see what the differential is? And finally, you mentioned in the four-year results that you’re planning a sale-leaseback on your headquarters. Can you give us a view on timing, when that might be booked in the P&L?
Nobuyuki Oneda
And the second is the game is also another concern is the bigger services expected from now on and we have so many new plans, sales, the promotion plans, are starting from now. For example, we recently reduced the Play Station 3 from 599 to 499, and we also reduced, at the same time, to $599 with the 80-G products and with bundling of the software. Those are the new promotion programs, which started very recently, so we have to very carefully watch for those results.
Same type of promotion would be made in Europe. For example, 60G model we will bundle the two softwares and possibly the two controllers with the 599 Euro; so those kinds of programs we really have to be very careful, what would be the result of those in a promotion. That’s why we have to be a little more, cautious about those situations.
Unidentified Analyst
Ok, thank you, and on the production shipments, what might be the comparisons, versus previous quarters?
Nobuyuki Oneda
The previous quarter, you mean the fourth quarter?
Unidentified Analyst
I’m just curious, no, for this quarter, if you could give us what the unit numbers would be, from a production standpoint, as a comparison.
Nobuyuki Oneda
Starting from this quarter, we decided not to disclose the production quantity, but it is obviously higher than what we sold this quarter, because as I said, that the selling season is November and December time-frame, but the production capacity is not so huge enough to produce the huge quantity in the November and December period. So we have to increase the inventory starting from now on, so the inventory level is a little higher.
