Consolidated Results for the First Quarter Ended June 30, 2006

Q&A summary

Click on the appropriate question to view the answer.

Information-Related Equipment

Electronic Devices

General


Information-Related Equipment

  • Q1What would the impact be to Epson if other companies in the industry made a full-scale attempt to enter the large-format printer market or enter the Japanese A4 laser printer market? What kind of action would Epson take to counter such moves?
  • AEpson sees large-format printers (LFPs) as a growth segment and is thus allocating management resources to this area. We recognize that because LFPs are a growth market, competition will heat up, but we can leverage Epson's strengths to be competitive in this business. Epson's laser printer business in Japan revolves primarily around A3 color models, an area where there is little direct competition.
  • Q2You seem to be sharply reducing unit shipments of inkjet printers in Europe and the United States. Can you really meet the expectations in your second-half business outlook?
  • AThe decline in unit shipments is due primarily to the increasingly fierce competition resulting from the low-price offensives launched by our competitors. This fiscal year Epson is looking at more than just expanding volume. We are looking hard at the market situation in each region and are emphasizing the marketing of profitable models. The first-quarter results reflect the outcome of our efforts. We do not expect the drop in volume to materially impact profit in a negative way.
  • Q3You said that the competitive environment of the inkjet printer market is growing increasingly fierce. What kind of effect is this likely to have?
  • AWe do see the competitive environment heating up. Our basic plan during the current fiscal year is to shore up the foundation of our earnings, and that is exactly what we are doing right now.
  • Q4Compared to the same period last year, how much, in terms of percentage, did inkjet printer and consumables volumes and revenues change?
  • AIn terms of volume, printer unit shipments declined by somewhat more than 15%, while consumables volume grew by a few percentage points. On a monetary basis, printer revenue declined by somewhere around 15%, while consumables revenue shrank by a few percentage points.
  • Q5Epson's share of the inkjet printer market must have declined due to the intentional curtailment in shipments of some models. Is it possible that at some point in the future, depending on earnings, you might abandon your current emphasis on profitability and switch to a policy of recouping share?
  • AIn Japan we will continue to emphasize share, since we are already rolling out a line of products that will lead to print volume growth. In other regions, the major premise of the business will be profitability, but we will take a somewhat flexible approach. For example, if we have a product that we believe will drive print volume higher, then we may seek to expand sales more aggressively.
  • Q6Is the curtailment in inkjet printer shipments having an impact on sales of consumables?
  • AWe curtailed printer shipments as a means to improve profitability during the current fiscal year. This measure is not intended to be permanent. The strategic curtailment of shipments affects only certain printer models that do not generate significant print volume, so this strategy will not materially affect consumables revenue. From the second half onward, moreover, we will introduce and aggressively expand sales of new models that promise to generate print volume. For this reason we do not anticipate any impact on sales of consumables over either the immediate or mid term.
  • Q7What kind of unit growth do you forecast for the total inkjet printer market?
  • AWe anticipate 7% growth, the same as predicted at the outset of the current fiscal year.
  • Q8How large an effect do you expect the cost reductions in your inkjet printer business to have over the second half? How large are your reductions in comparison with those in past years?
  • AA several percentage point reduction in the variable cost ratio has been factored into our plan, and new products are being developed and designed to meet these cost targets. The effect should become apparent by the start of the third quarter.
  • Q9Inkjet printer prices are trending downward in the market as a whole. What is the impact of this price erosion, and what measures have you devised to deal with it?
  • AOur intention is to maintain prices by carefully tailoring our product lineup to the market situation in each region. On top of that, we will seek to ensure profitability by reducing our fixed costs.
  • Q10What kind of income trend do you expect over the next three quarters in the inkjet printer business?
  • AThe income trend is expected to follow the typical pattern. The second quarter is a period of preparation for the critical third quarter, so we will incur slightly higher expenses. The third quarter, with the year-end shopping season, is traditionally our biggest quarter, and the income level is high. We see a fall in the fourth quarter when income dips.
  • Q11I would like to know more about the factors that contributed to the roughly 10-million yen increase in income in the information-related equipment segment.
  • A The business that contributed the most to this 10-million increase was the inkjet printer business. The chief factors were as follows:
    • An improved variable cost ratio and a higher contribution margin rate due to an improved product mix that emphasizes profitable models.
    • A reduction in fixed costs following detailed scrutiny of a variety of costs.
    • The effect of euro appreciation versus the yen.

Printing Solutins

  • Q12What's the situation with sales of displays for digital cameras?
  • AThe operating environment in the display business as a whole continues to be very difficult. We recognize that there are still issues that must be addressed if we are to increase unit shipments to customers outside the mobile phone market, and that includes the digital camera market.
  • Q13How much progress have you made in improving amorphous-silicon TFT LCD yield?
  • AYields have improved to the point where they are as high as they are for other products, such as MD-TFD LCDs. There still is room for improvement during the ramp-up of new product production, but, overall, the effect of yield on profitability is getting smaller.
  • Q14If amorphous-silicon TFT LCD yield has already been improved, does that mean that further increases will not contribute that much to income in the future?
  • AWe will improve margins by a variety of means. Contributing to the creation of profit in addition to higher yields will be measures such as cost reductions in the design and procurement stages.
  • Q15What kind of income trend do you expect in and after the second quarter in the display business?
  • AWe cannot be overly optimistic about the income trend over the next three quarters. We recognize that we need to win volume orders and, particularly, that we need to capture orders from outside the mobile phone market. We will seek to expand sales and improve income by continuing to strive to increase orders, improve yields and cut costs.
  • Q16How about the business over the mid term?
  • AIn the display business we are starting to see the benefits from the structural reforms, including the impairment charges we implemented last fiscal year. As for volume and prices, the environment will continue to be extremely difficult, but we will deploy measures that will enable us to survive over the mid term.
  • Q17What is the reason for the increase in electronic device inventory?
  • AWe try to maintain steady production levels from month to month because we do not have enough capacity to meet peak demand. This results in a rise in inventory.

General

  • Q18How was first-quarter performance compared to the initial plan?
  • AWe had forecast a slight loss but were able to exceed the initial plan. By segment, information-related equipment accounted for the lion's share of income. Electronic devices and precision instruments both showed billion-yen level improvement.
  • Q19Why weren't the first-half and full-year outlooks changed even though your first-quarter results exceeded expectations?
  • AThe first quarter exceeded our internal plan and we believe we are on track to meet our first-half performance objectives; however, we believe it is important to reach our objective of ¥40 billion in annual operating income this fiscal year. We do not want to be unduly optimistic about the second quarter onward based only on first-quarter results. We left the business outlook as is because we are still in the middle of executing this year's business plan.
  • Q20Why did this quarter end with a net loss even though pre-tax income was positive?
  • AIn April there was a change in the information equipment businesses' revenue stream in Europe. This change meant that income had to be recognized earlier than before on the Seiko Epson end, resulting in an increase in tax expenses. The tax charge was deducted as internal transaction-related unrealized income at the ordinary income and pre-tax income stages, resulting in an income gap.
  • Q21Give us the foreign exchange impact for a ¥1 fluctuation on an operating income basis.
  • AIt was around ¥300 million in dollars and ¥1.5 billion in euros.
  • Q22Are any costs being delayed until the second quarter?
  • AThere are some, but they will not have any major impact on the second quarter onward due to our continuing cost-cutting measures.