Consolidated Results for the Nine Months Ended December 31, 2004

Q&A summary

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Information-Related Equipment

Electronic Devices

General


Information-Related Equipment

  • Q1From the third quarter through the fourth quarter in the information-related equipment segment, operating income is shown increasing to 25.6 billion yen, up from 20.4 billion yen, despite declining net sales. Why?
  • AInkjet printer ("IJP") hardware margins are under intense pressure. Profitability suffers in the third quarter because inkjet printers account for a high percentage of sales revenues. On the other hand, since inkjet printer sales were strong during the third quarter, we expect fourth-quarter sales of consumables, which have a higher margin, to increase.
  • Q2What type of growth rate did you see in volume and net sales for inkjet printers and consumables for the first nine months of fiscal year 2004 (ending March 2005)?
  • AVolume growth was 10% for inkjet printers and 16% for consumables. Revenue growth was 10% or more for inkjet printers and in the high teens for consumables.
  • Q3Are there any changes compared to the full-year forecast you provided when you released your half-year results on October 26?
  • AIn the current third quarter, we saw volume rise in all-in-ones (machines that combine printer, copier, and scanner functions) and photo printers. We thus anticipate increased revenues from sales of consumables in the fourth quarter, but we are reiterating our full-year forecast.
  • Q4You appear to be expecting 10% revenue growth year-on-year for inkjet printers in the fourth-quarter. How does that growth break out in terms of printers and consumables?
  • AWe are targeting an revenue growth of at least 20% in consumables.
  • Q5What was Epson's share in the inkjet printer market in the third quarter?
  • AFor the full year, as was reported in some quarters, we saw a reversal of shares with our main competition in the Japanese market. In the third quarter, however, Epson regained the top share, with a share of 48%.
  • Q6Have you seen any effect from Dell on your business?
  • ADell owns a roughly 15% share of the U.S. market for inkjet printers. The fact is, though, that Epson is pursuing an "Epson = Photo" strategy, so we are not competing head-to-head with Dell either product-wise or price-wise. Epson's share in the U.S. for the third quarter of the 2003 fiscal year was 12% for single-function printers and 9% for all-in-ones. In the third quarter of the current fiscal year, however, those shares had grown to 16% and 12%, respectively, as of November. Moreover, we saw our share grow consecutively in the third quarter on the strength of our photo strategy.
  • Q7Your forecast shows operating income in the information-related equipment segment increasing in the fourth quarter as compared to the third quarter. Is there any reason other than higher volume in consumables?
  • AIncreased consumables volume is the main reason. During the recent year-end shopping season, Epson focused its marketing efforts on all-in-ones, machines that use consumabes at a higher rate. As a result, all-in-ones now account for 40% of Epson's inkjet printer sales revenues, up from 20% in the year-ago period. In terms of share, all-in-ones now account for 65% of sales, up from 55%. We are projecting higher net sales of consumables based on this data.
  • Q8I understand the strategy, but can you expect higher all-in-one sales to translate into higher consumables sales in only one quarter?
  • AWe could, depending on how things go, see consumables sales lag so that we don't start seeing substantive benefits until after the current fourth quarter. However, owners of all-in-ones and photo printers use consumables at a high rate, so we expect to see substantive benefits in the fourth quarter.

Electronic Devices

  • Q9Your forecast shows the electronic device segment as a whole losing 2.7 billion yen in the fourth quarter. Can you break that out by business?
  • AThe quartz device and display businesses should be profitable, while the semiconductor business is expected to be in the red.
  • Q10Can you break out the numbers by product for the display business?
  • AThe situation will be challenging for amorphous TFT panels, low-temperature polysilicon panels, and color STN panels.
  • Q11What kind of capacity utilization rates are you seeing at your main fabs?
  • AWe do not disclose individual capacity utilization figures. However, the semiconductor business is feeling the pinch more than other businesses in the electronic device segment. The fourth quarter is shaping up to be quite difficult for mobile displays and large-size amorphous TFT displays.
  • Q12How are you positioning yourselves for the next period in electronic device?
  • AWe are projecting growth of about 10% for the mobile phone market. Globally, approximately 620 million handsets were produced in 2004. In 2005, this figure will climb to 690 million, and the percentage of handsets equipped with an active color display should increase. We are positioning ourselves to capture this demand by converting even more capacity at Sanyo Epson Imaging Devices ("SEID") to the production of smaller amorphous TFT panels. Meanwhile, however, selling prices are expected to drop farther, so we are also examining measures for reducing costs so as to accommodate the lower prices. For the next period we expect higher demand on the one hand, and, on the other, severe price competition due to intensified competition.
  • Q13How much of SEID's amorphous TFT panel capacity will be shifted to small-panel production?
  • ASEID's production capacity is 1800 sheets per day. We will shift 600 sheets, or 30%, over to small-panel production by the end of March 2005. As of now, we have converted 15%.
  • Q14Does that mean that you will not be seeing profit from amorphous TFT panels for the time-being?
  • AWorsening profitability will continue through the end of the current fiscal year.
  • Q15Please comment on SEID's forecast for the current period and its outlook for the next period.
  • AWe do not disclose the financial results of individual subsidiary companies.
  • Q16How far did mobile display prices fall in the third quarter, and how far do you expect them to fall in the fourth quarter?
  • AFor the second half, we expected prices to drop about 15% year-on-year, which is normal. Color STN prices dropped a little more than that, but active panel prices have held up better.
  • Q17When you updated your business outlook in October, you said that you expected the price of a 15-inch TFT panel to drop to 150 dollars. Has there been any change?
  • AWe expect prices to fall even farther, down to less than 150 dollars for a 15-inch panel.
  • Q18Even though display volume is expected to decline 15% from the third quarter to the fourth quarter, net sales revenue is shown increasing to 114.9 billion yen, up from 88.6 billion yen. Why?
  • AThe 15% decline in volume is for the mobile phone display market as a whole. Net sales will increase with the start of operations at SEID because sales of large-sized amorphous TFTs and low-temperature polysilicon displays (LTPS) for digital cameras will accumulate on top of sales for our mobile phone displays.
  • Q19How is it that you can expect sales to increase even if you exclude amorphous TFTs and LTPS?
  • AHTPS sales are expected to increase. Though HTPS sales were adversely affected by customer inventory adjustments in the third quarter, they should increase in the fourth quarter, primarily from fiscal-year-end buying of business projectors.
  • Q20Of the total net sales generated by amorphous-TFT panels in the second half, what percentage to you expect small- and medium-sized displays to account for?
  • AWe are expecting small- and medium-sized displays to account for 50%.
  • Q21You anticipate the fourth quarter to be even tougher than the third quarter in the semiconductor business. What factors do you see playing a role?
  • AOctober and November were strong months for electronic devices as a whole, but both prices and volumes started declining in December. This is due to individual circumstances surrounding our customers.
  • Q22What is the situation for displays, by application?
  • AAmorphous TFT panels for televisions and PCs, LTPS for digital cameras, and all of the various displays for mobile phones are facing a difficult fourth quarter.
  • Q23When do you expect business to bottom out from the fourth quarter through the coming fiscal year?
  • AWe expect the fourth quarter to be the bottom, and we anticipate a recovery from the first quarter of fiscal 2005, but it is possible that we might not see the bottom until later.
  • Q24You expect annual operating income of 48 billion yen in the electronic device segment. Can you break this down by business?
  • AThe display business will account for about 50%, the semiconductor business will account for about one-third, and the quartz business will account for the remainder.
  • Q25Will income from high-temperature polysilicon panels (HTPS) increase next year?
  • AHTPS panels for front projectors are currently undergoing production adjustments, but we expect to see demand recover from about March and anticipate roughly 30% growth in the coming fiscal year. The outlook for HTPS panels used in rear-projection televisions, on the other hand, does not warrant such optimism, as competing companies have captured a fairly large share of the U.S. market.
  • Q26Do you foresee taking a restructuring charge due to the difficulties in the electronic device segment?
  • AWe are not considering taking a major restructuring charge.

General

  • Q27Inventory assets increased. Can you break the increases out?
  • AInventory assets increased 46.7 billion yen between the end of March 2004 and the end of December 2004. Of this increase, 15 billion yen accompanied the start of operations at SEID. The remaining 30-plus billion yen is attributed to existing businesses.
  • Q28What do the inventory asset figures look like if you divide them up by information-related equipment segment and electronic device segment?
  • AThe details can be found in the supplemental information of our consolidated results summary.
  • Q29You implied that there is the potential for a downward revision of estimates in the fourth quarter, but is there also the potential for an upward revision?
  • AIn the electronic device segment, we saw our customers' situation change in December. Electronic device businesses are highly dependent on demand from their customers, so weakness on their end makes the possibility of a downward revision more likely than an upward revision. The information-related equipment segment is also facing a challenging environment, but we will strive to hit our forecast numbers by, for example, expanding sales of inkjet printer consumables.
  • Q30Why did you increase your outlook for free cash flow?
  • AThe 58 billion yen in necessary funds for assets transferred to Epson from Sanyo Electric with the startup of SEID had been recognized as financial cash flow in the past. However, after consulting with an accounting auditor, we decided to begin recognizing it as investment cash flow. Therefore, investment cash flow outlays decreased by 58 billion yen and free cash flow increased by the same amount.
  • Q31What about the effective tax rate for this year and next year?
  • AOn a nonconsolidated basis, Seiko Epson had a loss carry forward from the fiscal 2001 downturn and did not have sufficient taxable income. Along with the taxable income that we are expected to experience this fiscal year, we are applying the various tax credits and tax deductions to which we are entitled and are reviewing our accounting for income taxes. As a result, we expect a lower tax burden. Beginning next fiscal year, we expect our nonconsolidated income taxes to be less than the 40% Japanese standard tax rate. On a consolidated basis, we cannot say anything definite, as the tax rates in various countries differ.
  • Q32Do you see any possibility of increasing profits next year?
  • AWe are still in the process of compiling our business plans, so I cannot provide any specific numbers. However, I can say that in the information-related equipment segment we have become even more competitive and have increased our market share, so we hope to further grow income. In the electronic device segment, we should see the mobile phone market expand, but the fall in unit prices is expected to be quite steep, so we must find a way to address this situation.
  • Q33How did your third-quarter results compare to your internal estimates? Were the results in line with expectations for each business segment?
  • AThe results were closely in line with our expectations.
  • Q34In the past, there was a significant gap between your business results and the estimates that you presented at your results announcements, but the current results are in line with your forecasts, with printers filling the gap created by slumping electronic devices. Does this indicate that you have improved the accuracy of your forecasts?
  • AThis time, we were able to take advantage of strength in the information-related equipment segment to fill the gap created by the slowdown in electronic devices, but we feel that we still have considerable room for improvement in terms of raising the accuracy of our forecasts.