Oki Management Strategies Feb. 17, 2006 Oki Electric Industry Co., Ltd. Table of Contents 1. Full Year Projections for FY ending Mar. 2006 1) 2) 3) 4) 2. Revision of Full Year Projections P/L Projections Projections by Segment Cash Flow Projections Revamp Business Structure 1) Status of Business and Reforms 2) Revamp Business Structures 2-1) Review and Enhancement of Conventional Businesses - Business for Financial Market - Business for Telecom Carriers - Semiconductor Business - Printer Business 2-2) Expansion of New Businesses - Enhancement of Software and Service Business - Enhancement of China Business (Reference) Financial Results for Q3, FY ending Mar. 2006 2 Full Year Projections for FY Mar. 2006 Net sales is projected to be 690.0 B yen, decreased by 20.0 B yen due to reduction in sales for telecom carriers and sales of semiconductors (Accelerated digital deflation, delay in responding to customers’ business environment changes) Operating income is projected to be 10.5 B yen, decreased by 8.5 B yen, according to sales reduction (Billion yen) Recurring income and net income decreases accordingly Incomes Net sales 688.5 710.0 690.0 27.0 137.7 25.0 29.0 150.7 157.0 158.0 Operating income Others 163.0 Printers Net income 27.2 148.0 Semiconductors 19.0 11.2 373.1 Mar. 05 370.0 Oct. 27 350.0 6.5 Info-Telecom Feb. 17 Mar. 06 Projections 10.5 Mar. 05 Oct. 27 4.0 Feb. 17 Mar. 06 Projections 3 P/L Projections for FY Mar. 2006 (Billion yen) (Ref.) FY Mar. 05 Results Projections (FY Mar. 2006) Feb. 17 Net sales Oct. 27 Variance 690.0 710.0 (20.0) 688.5 Operating income 10.5 19.0 (8.5) 27.2 Other income (4.0) (6.0) 2.0 △6.0 6.5 13.0 (6.5) 21.2 Recurring income *1 Extraordinary income *2 9.5 3.0 6.5 4.2 Extraordinary loss *3 7.5 5.0 2.5 6.9 Income before taxes 8.5 11.0 (2.5) 18.5 Income taxes 4.5 4.5 0 7.3 Net income 4.0 6.5 (2.5) 11.2 *1: - Gain in currency exchange: 1.0 *2: - Gain on sale of marketable securities: 7.5 - Gain on sales of fixed assets: 2.0 *3: - Loss on disposal of fixed assets: 1.1 - Impairment loss: 3.0 - Disaster loss (earthquake in Miyagi): 0.9 - Special retirement payments: 1.7 - Bad debt allowance, etc.: 0.8 4 Analysis of Changes in Operating Income Operating income expected to be 10.5 B yen, decreases by 8.5 B yen from Oct. 27 projections, due to decline in marginal profit caused by decrease in volume, and continuous price drop in semiconductors and printers Operating income Decrease in sales due to volume 19.0 B yen reduction (Billion yen) - 7.5 Decline in price Others + 1.5 - 3.7 + 2.0 - 0.8 Operating income 10.5 B yen Gain in currency exchange Cost reduction Oct. 27 projections Feb. 17 projections 5 Full Year Projections: Info-Telecom <Net sales> 350.0 B yen, decreases by 20.0 B yen from Oct. 27 projections Sales for the financial market decreases by 4.0 B yen due to: - expected demands for security-enhanced ATM moves to the next fiscal year - over estimated demands for backyard and network systems Sales for telecom carriers decreases by 16.0 B yen due to: - decrease in carriers’ investments due to fluctuated demand for video delivery and for direct collection of fixed-phone - shift of investment to mobile by new common carriers <Operating income> Net sales (Billion yen) 373.1 370.0 21.5 20.0 67.6 73.0 52.6 110.2 121.2 Mar. 05 350.0 20.0 Others 73.0 Enterprises 55.0 Public sector 115.0 99.0 Telecom carriers 107.0 103.0 market 55.0 Financial Oct. 27 Feb. 17 Mar. 06 projections Operating income 11.0 B yen, decreases by 4.0 B yen Decrease in marginal profit according to sales reduction (-5.0 B yen) 15.8 15.0 11.0 Cost reduction, etc. (+1.0 B yen) 6 Full Year Projections: Semiconductors Profitable with effects of fab-free strategy, despite business environment worsens <Net sales> 148.0 B yen, decreases by 10.0 B yen from Oct. 27 projections System LSI: Decreases by 2.0 B yen due to delay in product development, etc. Net sales 150.7 2.3 48.1 (Billion yen) 158.0 3.0 45.0 148.0 3.0 Optical component 40.0 System memory Logic LSI: Decreases by 3.0 B yen due to volume decline in driver LSI by fiercer competition 65.5 81.0 78.0 Logic LSI System memory: Decreases by 5.0 B yen due to decline in volume and price in P2ROMs caused by fiercer competition, etc. 34.8 29.0 27.0 System LSI Mar. 05 Oct. 27 Feb. 17 <Operating income> 2.5 B yen, decreases by 3.0 B yen Decrease in marginal profit according to sales decline (-3.0 B yen), price drop in driver LSI (-1.0 B yen), etc. Currency exchange gain, cost reduction, etc. (+1.0 B yen) Mar. 06 projections Operating income 12.0 5.5 2.5 7 Full Year Projections: Printers Though competition becomes fiercer, shipment volume for color NIP is expected to grow 50% on a year-on-year basis Net sales 137.7 (Billion yen) 157.0 163.0 68.0 73.0 Others 89.0 90.0 Color NIP <Net sales> 163.0 B yen, increases by 6.0 B yen from Oct. 27 projections Slight increase in unit shipment of color NIP against the plan Sales increase in monochrome NIP, due to increase in unit shipment. SIDM sales is as planned 2.5 B yen from gain in currency exchange <Operating income> 4.0 B yen, decreases by 2.0 B yen. While sales grows, competition accelerates. Price drop worsens profitability in color NIP. Mono NIP income increases with the growing shipment volume. SIDM operates as planned. (-2.7 B yen) Gain on currency exchange (+0.7 B yen) 74.5 63.2 Mar. 05 Oct. 27 Feb. 17 Mar. 06 projections Operating income 7.8 6.0 4.0 8 Cash Flow Projections for FY Mar. 2006 Increase in working capital worsens free cash flow by 31.8 B yen on year-on-year basis (Billion yen) Reduce interest-bearing debts by 2.0 B yen Mar. 05 Mar. 06 Variance Oct. 27 projections Notes 59.3 29.3 Income before income taxes 18.5 8.5 Depreciation & amortization 34.2 38.0 Changes in working capital 11.7 (23.6) Others (5.1) 6.4 (41.5) (43.3) (1.8) (49.0) (33.9) (37.0) (3.1) (37.0) (7.6) (6.3) 1.3 (12.0) 17.8 (14.0) (31.8) 3.0 (26.9) (3.8) 23.1 (6.8) 5.0 (10.0) (15.0) (10.0) (31.9) 8.0 39.9 5.0 0 (1.8) (1.8) (1.8) Net cash flows (I+II+III) (9.1) (17.8) (8.7) (3.8) IV. Cash and cash equivalents at the period end 49.4 31.6 (17.8) 45.6 265.2 263.2 (2.0) 260.2 I. Cash flows from operating activities II. Cash flows from investing activities Purchases of property, plant & equip. Others Free cash flows (I+II) III. Cash flows from financing activities Issuance and redemption of bonds Changes in other interest bearing debts, etc. Payment of dividends V. Interest-bearing debt at the period end (30.0) (10.0) <Working capital> Mar.05 3.8 Receivables 13.6 (35.3) Inventories (9.0) Payables 7.1 11.5 Total 11.7 52.0 Mar.06 (10.0) (12.9) (0.7) (23.6) 11.0 38.0 (9.0) 12.0 9 Table of Contents 1. Full Year Projections for FY ending Mar. 2006 1) 2) 3) 4) 2. Revision of Full Year Projections P/L Projections Projections by Segment Cash Flow Projections Revamp Business Structure 1) Status of Business and Reforms 2) Revamp Business Structures 2-1) Review and Enhancement of Conventional Businesses - Business for Financial Market - Business for Telecom Carriers - Semiconductor Business - Printer Business 2-2) Expansion of New Businesses - Enhancement of Software and Service Business - Enhancement of China Business (Reference) Financial Results for Q3, FY ending Mar. 2006 10 Status of Businesses and Reforms 1998 1999-2001 2002-2005 Phoenix 21 Sept. ’98 1st reform (Urgent measure) Biz. reforms 2nd 2006 Phoenix 21 Sky-High Aug. ‘01 Oct. ‘02 reform 3rd reform (Sky-high preparation) (Shift & enhance quality) First phase Second phase <Status of Each Business> Steady achievement for overall Oki group Info-Telecom: Need further reforms in partial conventional businesses - Stable profit in public sector and enterprise segments owing to reform results Continued response to market changes - Decrease in sales and profit in financial market and telecom carrier segments Become stable profit businesses by further reforms Semiconductors: Profitable, though require further reforms - Profitable, owing to fab-free strategy - Weakened product competitiveness, continuous price drop Printer: Growing, shift to higher added-value While color NIP sales is expanding, slow profit growth due to fiercer price competition In-house Venture Companies: Steady growth 11 In-house Venture Companies’ Performances Steady growth in sales of in-house venture companies Enterprise Solution Company (ESC) grew to a business division, and IPnet merged with two companies and grew to an integrated network SI company Both graduated from venture company status (Billion yen) 40 IPnet->OKINET 35 30 Media-network Appliance Company (MAC) Broadband Media Company (BMC) Multimedia Messaging Company (MMC) 25 20 Enterprise Solutions Company (ESC) -> Enterprise biz. div. NetBusiness Solutions Company (NBC) 15 10 5 0 Mar.00 Mar.01 Mar.02 Mar.03 Mar.04 Mar.05 Mar.06 (Proj.) Note 1: Establishment IPnet: FY Mar. 00 NBC, ESC: FY Mar. 01 MMC, BMC: FY Mar. 03 MAC: FY Mar. 06 (Sales in FY Mar. 03 and 04 were included in sales of IP Systems Company) Note 2: ESC - Reformed in FY Mar. 04 - In FY Mar. 06, integrated with other business areas, and became a business division of System Solutions Company Note 3: IPnet - In FY Mar. 06, integrated with a part of Oki Customer Adtech and IP Systems Company, and restructured to Oki Network Integrations (OKINET) 12 Current Issues and Measures Issues: - Enhancement in product competitiveness (cost reduction, new product creation) - Strengthen sales capability - Respond to customers’ business environment changes Measures: Revamp Business Structures Innovate conventional-type businesses and expand new businesses <Issues> Lower costs responding to decline in price Create high value-added products and strong businesses Strengthen sales capabilities Respond to customers’ business environment changes <Measures> Revamp Business Structures Refine conventional businesses - Further clarify focus business areas - Enhance product planning and development - Strengthen indirect sales Expand new businesses Expand service and software businesses Expand China business 13 Changes in Customers’ Business Environments Changes in society (diversification, speeding-up) -Environment -Depopulation -Aging -Wealthy aged Return to core business and outsource Biz opportunities to professionals Ubiquitous services Era of borderless personal and company activities Era of competitions M&A, restructuring, and oligopoly Deregulations Infrastructure - Spread of broadband - Ubiquitous network - Globalization - Open standards Now, “era of change” User-centric services Expansion of customer-centric services Expansion of private services Expansion of remote services Expansion of new services Customers select services Conventional customer services From “quantity” to “quality,” and “expansion of quantity” again Flexible and quick responses to various service requirements Biz opportunities Use professional biz and operations Face-to-face services Diversified usage channels Changes in customer Whenever, wherever, with whomever (inexpensive & Required information in the desired style high quality) Securely, reliably and appropriately-priced 14 Revamp Business Structures 1998 2002-2005 1999-2001 Phoenix 21 reform (Urgent measure) 2nd 2007 2008 Phoenix 21 Sky-High Aug. ‘01 Oct. ‘02 reform 3rd reform (Sky-high preparation)(Shift & enhance quality) Biz structure reform First phase Revamp Business Structures Second phase Company with stable profitability Sept. ’98 1st 2006 Revamp Business Structure Urgent issue: Flexibly respond to customers’ business environment changes Refine conventional businesses - Review and reform existing business to become a company with stable profitability Expand new businesses 1. Enhance service and software businesses: Double the sales by FY Mar. 2011 2. Expand China business: Enhance localization and target 10% of sales in FY Mar. 2011 15 Policy to Revamp Conventional Businesses Clarify focusing business area, enhance product planning and development capabilities, and strengthen indirect sales by looking ahead to the market trend, including customers’ business environment changes Printers Semiconductors Info-Telecom Clarify focus biz area Enhance product planning and development capabilities Strengthen indirect sales Financial market: In addition to mechatronics and branch systems, focus on systems for diversified channels (e-finance) and service biz. Enhance response to privatization of postal biz. Strengthen China ATM. Telecom carriers: In addition to current areas, focus on systems for network edge and services, Oki products for FMC, and broadband home routers for domestic and overseas markets Development structure: Strengthen divisions for financial and network systems Indirect sales: Enhance domestic and overseas indirect sales of mechatronics, enterprise network and carrier network products Focus area: Focus on high voltage process, low power consumption, non-volatile memory, and telecom LSI (wireless). Concentrate resources and enhance product planning and development capabilities Sales: Establish stable business in Japan, and expand sales in Asia Focus area: Focus on high functioned, value-added color NIP. Enhance SIDM lineup Development structure: Strengthen planning and development for solution business deployment Sales: Further strengthen domestic sales 16 Enhance Indirect Sales in Info-Telecom Indirect sales ratio: 17% in FY Mar. 2006 Î 25% in FY Mar. 2011 (target) <Status in FY Mar. 2006> Increasing indirect sales for enterprise network products (increase by 40% on a year-on-year basis) ¾ Expand IP-PBX products: SS9100 (large-scale PBX), IPstageEX300 (Mid & small PBX) <For FY Mar. 2011> Further expand enterprise network products: Target for FY Mar. 2011 Large-scale PBX: 35% PBX/key-phones: 18% Create new products ¾ Develop new domestic and overseas channels ¾ Strengthen channel support structure (FY Mar. 05 =100) 300 Share Indirect sales index 20.0% 200 10.0% 100 100 Share Enhance sales channel Sales and share of PBX/key-phone Indirect sales ¾ Improve PBX/key-phone lineup ¾ New terminals following Oki PHS and wireless applications 40％ up 0 0.0% 2001 2002 2003 2004 2005 2010 17 Financial Systems: Business Status and Market Trend <Status in FY Mar. 06> Inaccurate estimation of customers’ investment timing (Investment grows after initial evaluation) ¾ Delay in full-scale investment on security-enhancement, including personal information protection and biometrics ¾ Delay in replacement for backyard systems and back office operation concentration systems Decline in prices of ATM unit, ATM maintenance, back office operation concentration systems (fiercer competition) Delay in rise of market for Oki targeted products: ATM, backyard, e-financial sys. Sign of slight recovery <Market trend> Investment trend: Recovery in commercial banks and postal offices, delay in local banks and cooperative banks Accelerated cooperation beyond the industry Diversifying retail channels according to deregulation in representative business by banks Personal information protection law, crimes using counterfeit card Î Increasing demand for security Various measures for management reconstruction (outsourcing, requirements for price) 18 Financial Systems: Measures Enhance existing products and sales capability ¾ New organization clarifying market and product responsibilities (Jan. 06). Shift resources ¾ Enhance product capabilities of ATMs, bank-branch systems, and back office operation concentration systems, and gain market shares Keep top share in ATMs and back office concentration systems Take over No. 1 share in bank-branch systems ¾ Recover profitability by reforming support service business Close relationship with customers/ Improve satisfaction/ Enhance support for non-Oki products ¾ Expand business area and enhance structure for the privatization of the postal service Accelerate planning, commercializing, and sales of focusing products ¾ Enhance security products for compliance and crime preventions ¾ Create products for e-finance and services as retail channels diversify beyond industry (enhance ubiquitous service) ¾ Expand new businesses including outsourcing (Enhance JBO and network services) Strengthen mechatronics products ¾ Create and expand sales for new cash management-related mechatronics products ¾ Expand overseas business (China, Korea, Taiwan, Europe) Enhance organization and structure ¾ Concentrate SE and development team into Financial Systems div. Plan and develop new products, and enhance SE skills ¾ Strengthen Chinese ATM business by localizing ATM development structure 19 Financial Systems: Strengthen Mechatronic Business Japanese Market: Enhance cash management business in addition to ATMs ATM for banks: Increase in replacement demand for security enhanced functions (i.e. IC card, biometrics) ¾Increase sales of security-enhanced ATM BankIT and expand No.1 market share (Target: 50% or more) ATMs for public-use: Replacement increase/ Deployment for IC cards and biometrics accelerates ¾Maintain No.1 market share (80%) by introducing new large-capacity, high-speed models, and deploy new channels Retail market: Tightening of cash management, increasing needs in power savings ¾Launch new products according to market needs (banknote organizer, coin terminals, sales deposit) ¾Expand sales through new channels Overseas Market: Deploy ATMs and cash management terminals to China, Taiwan, Korea and Europe China: Expand ATM sales through OEM channels. Replace CDs to small ATMs. Enhance local support Korea: Launch small-size banknote organizer to respond to new banknotes. Increase ATM share Taiwan: Launch ATMs and small-size banknote organizers Europe: Examine conditions to join the Euro ATM market New focus area Retail MKT Cash MGMT terminal Small-size banknote organizer Coin terminal Current focus area Sales deposit terminal Bank ATM Public ATM ATM for China ATM Japan China ATM for Korea Korea ATM for Taiwan Taiwan Euro ATMs Europe 20 Financial Systems: Enhance Service Business Ubiquitous service expands with the increase of net business Key for ubiquitous service is business infrastructure service (payment, security, outsourcing) Expand business infrastructure service area, based on products and services which Oki is planning and developing, along with customers alliances ¾ Expand ATM outsourcing as ATM channels expand ¾ Increase sales and business area for fee service business by working with new channel service such as wallet-phone service ¾ Expand services by working with customers in financial institutions, telecom carriers and transportation and retail market Whenever, wherever, with whomever Banks Securities Insurance Credit Double sales from FY04ÎFY05 * ATM outsourcing NW integrations and outsourcing OWT* OKINET* Ubiquitous service Transportation Telecom carrier Retail Net business Business infrastructure service System * Net payment service Mobile software OAT* Network Infrastructure * Oki group companies JBO: Japan Business Operations, OWT: Oki Wintech, OKINET: Oki Network Integration, P1st: Payment First, OAT: OKI ACCESS Technologies 21 Telecom Carriers: Business Status and Market Trend <Status in FY Mar. 06> Broadband Home Router: ¾ Steady growth all year with the expansion of ＦＴＴＨ. Expand sales (Maintain top share) ¾ However, does not offset the sales decrease of broadband IP network equipment Broadband IP Network Equipment: ¾ Enjoyed steady sales of optical transmission equipment in the 1H ¾ Investments slows down with fluctuated demand for video delivery and direct collection service in the 2H ¾ Sales decrease as the new common carriers’ investments shift to mobile related business <Market trend> Continued investment for 30 million optical subscribers ¾ Lights and shades for the rise of broadband applications including video delivery Investments for existing nodes are inclined to decrease Trials start for full-scale investment for the 2007 next-generation networks Focus on the convergence of fixed, mobile and the Internet for differentiation ¾ Searching killer services New mobile phone carriers increase capital expenditure for mobile and wireless investments 22 Telecom Carriers: Measures Concentrate resources on planning and development of Oki products Enhance development structure Continue to strengthen products for optical access and optical IP phones ¾ Increase market share with higher value added broadband home routers, ahead of other companies Accelerate development of new products for next-gen network as trials begin ¾ Accelerate and strengthen network migration products with expertise based on existing networks ¾ Enhance company structure to develop Oki products for edge nodes, broadband applications, new service controls and FMC areas Strengthen broadband applications to support new services from carriers ¾ Actively propose with SipAｓ on WebLogic to customer base Expand overseas business including China ¾ Deploy home routers and middleware for the digital home network market ¾ Create products for Japan and overseas mobile phone carriers maximizing the alliance with ACCESS 23 Telecom Carriers: Accelerate Creation for Focus Products Changes in focusing area in the NGN market (Shift resources to increase profitability) Enhance product development structure to accelerate in developing products for: Edge node area, broadband applications/ new service control, FMC area Continue focusing with Oki products: Broadband home routers, optical access, network migration - Core/edge market (non-Oki product area) is shrinking Major Major telecom telecom carrier carrier capital capital investments investments (projections) (projections) Capital investment amount Existing NW/ NW migration 既存NW/NWﾏｲｸﾞﾚｰｼｮﾝ Access/ Broadband home router ｱｸｾｽ・ﾌﾞﾛｰﾄﾞﾊﾞﾝﾄﾞﾎｰﾑﾙｰﾀ BB-AP/ Service control/ FMC BB-AP・ｻｰﾋﾞｽ制御・FMC Core/ edge コア・エッジ Mobile (Base stations/core) 移動体（基地局・コア） Enhance development structure BB-AP, new service control, FMC 投 資 額 Optical access, BB home-router Enhance development structure Edge node (Oki product) Core/edge (Non-Oki products) Î sales decrease 01 02 03 04 05Year 06 07 08 Network migration Source: Oki’s estimation based on CIAJ and Fuji Chimera Research Institute’s data 24 Telecom Carriers: Oki Target Area Fixed Network Mobile Network Broadband applications Application New service control Service platform Core Core network Edge Optical Edge node Optical access Metal NW migration Mobile FMC Access Wireless (WiMAX, etc) Broadband home router Current focus areas: Fixed core/ edge network, optical access/ broadband Home router, etc. Additional focus areas: New service control, broadband applications, FMC, etc. 25 Telecom Carriers: Global Deployment of BB Home Routers Oki will deploy business in the digital home network market, with its strong market share in Japan, known as the world-leading broadband country Create strong products based on Oki and non-Oki core competence ¾ Expand core products including BB home router/ server/ client, middleware, and LSIs Deploy business through active alliances Target various carriers/xSPs, home appliance vendors, and overseas diverse customers Product Category Home servers （Digital Home APL LSI） DH-APL middleware （Digital Home APL LSI） Equipment Home server Home clients Information Middleware home appliance LSI vendors Deploy LSIs and middleware business in addition to equipment VoIP routers (High share in Japan) Home gateway Digital TV ( with DMA/IPSTB) Provide to vendor Overseas market Equipment Expand product lineup Middleware DH-APL LSI Middleware LSI LSIs New Business deployment Product lineup IP video phone System Integrators Deploy IP-STB targeting the IPTV services, expected to grow in China (Shanghai) Existing biz deployment Telecom Carriers / SPs Japanese carriers IP-STB (ground wave digital) DMA （Digital Media Adapter） China/ Europe/ US Telecom carriers Equipment ISPs/ASPs 26 Semiconductors: Business Status and Market Trend <Status of FY Mar. 06> Expect to be profitable with effects of Fab-free strategy, despite business environment worsens ¾ Market: Overall recovery trend. Strong demand in flat screen TV, digital audio, laptops raise the level, though Oki’s strong areas experience slow growth (PHS, sound generator, DSC) ¾ Price drop: Continued price drop, severer than expected. Especially in areas Oki has strengths in: TFT driver, P2ROM, PHS, sound generator ¾ Cost reduction: While measures to reduce materials and chip shrinks for TFT drivers and P2ROMs, profit does not improve due to severe price falls ¾ Volume decline: Sales decline against projections caused by volume decline due to changes in customer demands (Mix change). Obsolescence of existing products, and delay in developing new products <Market Trend> ¾ Overall: Though recovery trend continues, no change in partial applications being the driver. While recovery trend in part of Oki’s strength areas, price fall continues 9In-vehicle: Shift from audio to visual for car electronics increases semiconductor volume. ITS enters the full-scale practical-use stage 9Consumer: Flat Panel TV and DVD recorders continues to soar, though unit price falls significantly. Companies shift to higher function, higher definition. Acceleration in pricing pressure for materials. Amusement products continue to be steady 9Telecom: Low-end mobile phones for rising countries increases by 6.6%. Increase in terminals with sound generators. PHS remains at the FY Mar. 06 level. Price competition for base-band LSI continues 27 Semiconductors: Measures Re-establish a business structure less subject to market Concentrate resources to strong businesses Businesses where Oki can exert its strengths, and where steady sales and profit is expected Focus on SOS products. ¾ Establish a strong business based on manufacturing - Technologies in high-voltage processing, low power consumption(SOS, SOI), nonvolatile memory: Display drivers, P2ROM, power control, RF, radio controlled watches, sensors - Pursue high-quality and low costÎMaximize Oki fabs, work with material manufactures ¾ Expand value-added business based on core system technologies - Focus on telecom system technologies: PHS base-band, VoIP, ZigBee, power line communication, identified low electric power, communication between cars - Industry-leading technologies, proposal skillsÎWork closely with major customers Enhance business and organization through speed ¾ Enhance organization and structure Improve product planning, developing,and supporting skills through close relationships with marketing and development team ¾ Develop promising new products Plan to launch new products with sales ratio of over 20%. Accelerate development by utilizing resources effectively and through management ¾ Increase alliances Enhance and expand focusing business by making alliances with companies that complement each other through products and technologies 28 Semiconductors: Manufacturing-based Business Strategies for Major Products TFT Driver Large TFT driver production 500 ¾ Policy: Expand market share by driving the market with (Volume in FY Mar. 04 = 100) differentiating products 400 ¾New products: - Focus on developing differentiating products that enable high 300 value-added products for customers (high definition, low power 200 consumption). Drive the market - Provide various control LSI chipset, including timing controllers 100 ¾Cost reduction: - Reduce costs prior to other companies by chip shrink, utilizing 0 (Projections) in-house assembly fabs, efficient testing FY Mar 04 FY Mar 05 FY Mar 06 Recent announcement (Jan.24): Oki succeeds in developing 13-bit LCD source driver with 500Mbps high speed interface; a key component for high-definition LCD systems LCD Systems P2ROM P2ROM sales ratio (amount) ¾ Policy 100% 1G - Create new market with functions and specs that cannot 80% be done by flash memory 256M Large capacity and high-speed, prevents falsification and 60% 128M unauthorized reading, includes ID functions ¾New products 40% 64M - Focus on developing products with high-density cell, highspeed circuits, custom logic, and security functions 20% Under 32M ¾Cost reduction 0% (Projections) - By adopting new cell structure, chip shrink, improving FY Mar 04 FY Mar 05 FY Mar 06 production efficiency 29 Semiconductors: Strategies based on Core System Technologies Telecom LSIs ¾ Policy: Provide attractive products that lead the personal and mobile industry by converging telecom system technologies and low power consumption semiconductor technologies ¾ New products - Short distance: Provide main wireless communications functions (RF and base-band) Î Expand to application and system proposals - Wide area: Provide single function LSI such as sound, tuners and antenna switches (SOS) Î Expand entry areas, consider entering WiMAX Main products for FY Mar. 07 Where Oki provides wireless communications Where Oki provides single function LSIs Where new entry is considered Long Distance Radiocontrolled watch DTV tuner Mobile phone PHS WiMAX WLAN Small wireless ZigBee Short DSRC/SNP RF-ID 300MHz 500MHz 1GHz 2GHz Frequency 3GHz 5GHz 10GHz ¾ PHS: - RF and BB 1chip for China - Data communications use BB LSI for high performance PHS ¾ Mobile phone: - SOS antenna switch for GSM/WCDMA - Ground wave DTV 1/3 segments demodulated LSI - Electronic compass ¾ WLAN: - VoIP-LSI for WiFi phone ¾ Short distance wireless: - ZigBee for sensor networks - LSI and network software for low electric power ¾ ITS : - RF for DSRC＋demodulated 1 chip 30 Printers: Business Status and Market Trend <Status of FY Mar. 06> Though shipment volume for color NIP increases, profit decreases due to price fall, growth in ratio for low price models, and decline in consumable ratio ¾ Sales for SIDM decrease with the shrinking market ¾ Though shipment volume increase for mono NIP for a large account, impacted with significant price drop ¾ Launch of new MFP product (Overseas: Jul. 2005, Japan: Dec. 2005) <Market Trend> Color NIP and MFP markets continue to expand. The most expanding lowprice-model-market goes through severe price competition SIDM market shrinks/ Severer price drop against increased shipment for mono NIP ¾ Color NIP: - Though units shipped increase by 30%, experience 20-25% price fall - MFP ratio in color NIP rapidly increases (U.S.: 10% of color NIP) ¾ SIDM: Though price is steady, market decreases by 5% yearly. Shipment volume is expected to increase for low price model in BRICs ¾ Mono NIP: Units shipped increase by 3% yearly with the low price model market expanding, though price falls by 16% 31 Printers: Measures <Measures to Expand Profit> Enhance profitability for the color NIP business ¾ Improve sales ratio for high value added products 9 Enhance product lineup focusing on high function models. Reduce sales for low price models 9 Strengthen Oki unique products and create solutions to maximize such products ¾ Improve cost competitiveness 9 By renewing major color NIP products. Reorganize production structure ¾ Strengthen sales in Japan (Target: 20% or more share in Japan’s color NIP market) 9 Expand channels by reorganizing sales structure to improve indirect sales 9 Strengthen push-sales and support activities toward existing channels and retail stores ¾ Enhance consumable business Maximize existing profit ¾ Maximize SIDM profit by launching low-end model 9 Launch products to growing markets ¾ Reorganize resources to maximize existing profit 32 Printers: Strategies for Products and Consumables Product strategy ¾ ¾ ¾ Focus on mid/high-end models Increase sales ratio of high value-added products by improving MFP lineup Differentiate with first-class printing quality utilizing characteristics of LED heads <Plans of Improving Sales Ratio> 販 売 台 数 比 率 の 推 移 と目 標 イメージ A3・高 速 機 ・M FP ミドル ・中 速 機 デ ス クトッ プ・低 速 機 100% A3/ high-speed/ MFPs 80% Expand in this area 60% Middle/ mid-speed 40% 20% Desktop/ low-speed 0% Y 0 4 05 FY FMar Y 0 5 06 FY FMar 目標 Target Consumable strategy ¾ ¾ Expand demand for consumables by shifting sales to mid/high-end models Improve profitability by creating solutions which increase use of consumables 33 Printers: Strategies for BRICs Russia ¾ Redeveloping the market by launching SIDM low-end and mono NIP low-end models ¾ Sales target for FY Mar. 2011: £90M (Current: £30M) China ¾Plan to establish sales office in Beijing ¾Expand SIDM share with launch of low-end models ¾Develop software based on market needs through software development company in Dalian ¾Target for FY Mar. 2011: Market share: Color NIP 15%, SIDM 30% Sales target: 10.0 B yen (Current: 3.7 B yen) India ¾ No.2 SIDM market size in the world, following China ¾ Increase market share with low-end SIDMs ¾ Sales target for FY Mar. 2011: £50M Brazil ¾ Deploy low-end SIDMs and mono NIPs, and POS products ¾ Sales target for FY Mar. 2011: $65M (Current: $25M) 34 Expand Service and Software Businesses Currently, 62% of Info-telecom Business sales come from hardware – a hardware dependent business model in sales and profit Shift to a business structure to generate income from service and software in addition to hardware profit Double the sales of service and software business in FY Mar. 2011 (c.f. FY Mar. 2005) Sales Ratio of Hardware/Software/Service for Info-Telecom Segment 100% 90% 80% 70% Sales ratio for service and software biz in FY Mar. 05: 15% 60% Hardware Hardware related service 50% 40% Software/ Software related service 30% 20% ar .1 M Sales ratio for service and software biz in FY Mar. 11: 25% FY FY M ar .0 1 5 4 ar .0 3 M FY ar .0 2 M FY FY M ar .0 ar .0 0 M FY ar .0 9 M ar .9 FY FY M 0% 1 10% 35 Expand China Business FY Mar. 2011 target: Overseas sales ratio 50%, China sales ratio 10% Shift Oki’s business in China from a Japan-controlled style to a locally controlled business ¾ Deploy business with strong products/technologies as core competence ¾ Enhance new business cultivation, product planning, and support for existing businesses ¾ Plan to conduct business planning, proposal, design, production through to sales in China by 2007-2008 100% Sales ratio 30％ 50％ Overseas 3％ China 10％ 50% 70％ 50％ Domestic 0% FY Mar. 2005 FY Mar. 2006 FY Mar. 2008 ＦＹ Mar. 2011 36 Table of Contents 1. Full Year Projections for FY ending Mar. 2006 1) 2) 3) 4) Revision of Full Year Projections P/L Projections Projections by Segment Cash Flow Projections 2. Revamp Business Structure 1) Status of Business and Reforms 2) Revamp Business Structures 2-1) Review and Enhancement of Conventional Businesses - Business for Financial Market - Business for Telecom Carriers - Semiconductor Business - Printer Business 2-2) Expansion of New Businesses - Enhancement of Soft and Service Business - Enhancement of China Business (Reference) Financial Results for Q3, FY ending Mar. 2006 37 Outline of Q3 Results Sales decreased by 13.1 B yen on a year-on-year basis, due to reaction of ATM demands related to new-banknote issuance, and decline in price of semiconductors Operating income decreased by 12.3 B yen, impacted by price decline in semiconductors and printers Total assets increased by 30.4 B yen, due to increase in inventories and improvement in evaluation of marketable securities (Billion yen) Q3 (Nine months) Dec. 04 Dec. 05 Q3 (Three months) Variance Dec. 04 Dec. 05 Variance 478.4 465.3 (13.1) 158.7 146.2 (12.5) Operating income 6.4 (5.9) (12.3) 4.9 (1.7) (6.6) Recurring income 1.7 (7.9) (9.6) 2.3 (2.3) (4.6) Net income (1.1) (6.2) (5.1) 1.8 (2.3) (4.1) Total assets 589.1 619.5 30.4 Shareholders’ equity 111.5 127.1 15.6 Interest-bearing debt 286.1 293.9 7.8 Net sales 38 Q3 P/L (Nine Months) Net sales Consolidated P/L comparison (Billion yen) Dec. 04 Net sales Dec. 05 Variance 478.4 465.3 (13.1) (74.1%) (76.9%) (-2.8 points) Cost of sales 354.6 357.8 3.2 SG&A 117.4 113.4 (4.0) 6.4 (5.9) (12.3) (Cost of sales ratio) Operating income Other income Recurring income Extraordinary income Extraordinary loss Income before taxes Income taxes Net income (4.7) (2.0) 2.7 1.7 (7.9) (9.6) 2.7 2.0 (0.7) 5.3 2.7 (2.6) (0.9) (8.6) (7.7) 0.2 (2.4) (2.6) (1.1) (6.2) (5.1) Dec. 04 Dec. 05 Variance Info-Telecom 246.8 218.8 (28.0) Semiconductors 113.8 112.0 (1.8) Printers 97.9 111.4 13.5 Others 19.9 23.1 3.2 Operating income Dec. 04 Dec. 05 Variance Info-Telecom Semiconductors 1.5 7.8 (1.3) (0.8) (2.8) (8.6) Printers 3.7 2.1 (1.6) Others 1.7 1.9 0.2 (8.3) (7.8) 0.5 Corp & Elimination Other income improved due to gain in currency exchange (1.1), increase in dividend income (0.5), and decrease in interest cost (0.4), etc. Extraordinary loss includes decrease in loss on disposal of fixed assets (1.2), write-down loss in marketable securities (1.0), and special retirement payments (0.9), while records disaster loss (-0.9) 39 Segment Information: Info-Telecom <Nine months results> Sales for the financial market decreased by 20.8 B yen on year-on-year basis, due to reaction to ATM demand related to new-banknote issuance Sales for telecom carriers increased by 4.2 B yen, due to increase in systems for broadband IP network, while reaction to initial investments on service for direct collection of fixed-phone Operating income decreased by 2.8 B yen due to sales decline (Billion yen) Net sales Others Enterprises Public sector 246.8 12.1 47.8 24.8 Operating income 218.8 1.5 11.7 40.6 21.0 Telecom carriers 71.7 Financial market 90.4 69.6 Dec. 04 Dec. 05 75.9 (1.3) Dec. 04 Dec. 05 40 Segment Information: Semiconductors <Nine months results> Sales in logic LSI increased, including effect of acquiring Japan TI’s driver business Sales in system LSI decreased due to volume decrease mainly in PHS base-band LSI Sales in system memory decreased due to decline of volume and price in P2ROM for amusement and AS-DRAM for audio equipment Operating income decreased by 8.6 B yen due to decrease in volume and price decline (Billion yen) Net sales Optical component 113.8 2.0 Operating income 112.0 System memory 37.9 2.1 30.0 Logic LSI 47.4 60.8 System LSI 26.5 19.1 Dec. 04 Dec. 05 7.8 (0.8) Dec. 04 Dec. 05 41 Segment Information: Printers <Nine months results> Sales increased due to expansion in shipment units of color NIP and MFP Steady sales in SIDM and mono NIP While net sales increased, operating income decreased due to impact of price decline (Billion yen) Net sales 111.4 97.9 Operating income 3.7 53.6 Others 54.0 Color NIP 43.9 Dec. 04 2.1 57.8 Dec. 05 Dec. 04 Dec. 05 42 Balance Sheet (1) <Assets> Inventory increased by 24.0 B yen from Dec. 04, due to preparation for increasing units of printers and depreciation in yen, etc. (Billion yen) 609.6 600 55.4 155.3 589.1 608.0 38.7 46.6 119.7 146.0 400 121.9 182.9 149.3 30.1 35.0 33.1 30.9 119.7 126.2 126.5 124.9 110.1 110.6 106.5 123.4 Dec. 04 Mar. 05 Cash and deposits - 3.2 Notes and accounts receivable + 2.2 Inventories 0 Mar. 04 Variance with Dec. 31, 2004 35.5 158.9 139.0 200 619.5 Dec. 05 + 24.0 Other current assets - 4.1 Propety, plant and equipment - 1.3 Investments and other + 12.8 assets 43 Balance Sheet (2) <Liabilities and Shareholders’ Equity> Interest-bearing debt increased by 7.8 B yen from Dec. 04 Shareholders’ equity ratio was 20.5%, 1.6 point improvement, due to increase in evaluation of marketable securities by 11.3 B yen (Billion yen) 609.6 600 135.8 400 200 589.1 608.0 120.0 144.5 619.5 Variance with Dec. 31, 2004 118.1 Notes and accounts payable - 1.9 138.0 Short-term borrowings - 4.3 Other current liabilities + 1.5 129.8 142.3 135.3 31.1 23.7 24.0 161.7 143.8 129.9 40.7 47.8 49.5 55.2 110.5 111.5 124.8 127.1 25.2 155.9 0 Bond and long-term debts Other fixed liabilities and minority interests Shareholders' equity Mar. 04 Dec. 04 Mar. 05 + 12.1 + 7.4 + 15.6 Dec. 05 Bonds due within a year and commercial paper are included in bond and long-term debt, and short-term borrowings respectively. 44 Cash Flows Free cash flow worsened by 30.3 B yen, mainly due to increase in working capital by 32.7 B yen (Billion yen) Nine months Dec. 04 Dec. 05 Variance I. Cash flows from operating activities 24.8 (18.6) (43.4) Income before income taxes (0.9) (8.6) (7.7) Depreciation & amortization 23.7 25.2 1.5 9.4 (23.3) (32.7) (7.4) (11.9) (4.5) (35.9) (22.8) 13.1 (30.5) (20.3) 10.2 (5.4) (2.5) 2.9 (11.1) (41.4) (30.3) (5.6) 28.6 34.2 5.0 (10.0) (15.0) (10.6) 40.4 51.0 0 (1.8) (1.8) (16.7) (12.8) 3.9 41.7 38.4 (3.3) Changes in working capital Others II. Cash flows from investing activities Purchases of property, plant & equip. Others Free cash flows (I+II) III. Cash flows from financing activities Issuance and redemption of bonds Changes in other interest bearing debts, etc. Payment of dividends Net cash flows (I+II+III) IV. Cash and cash equivalents at the period end Notes <Working capital> Mar.05 Mar.06 26.2 Receivables 37.8 Inventories (19.6) (31.8) (8.8) (17.7) Payables 9.4 (23.3) Total 45 Glossary P6 P7 ATM LSI P2ROM P8 NIP SIDM FMC NW IP PBX SE OEM CD FTTH BB-IP WiMAX P16 P17 P19 P20 P22 P24 P25 P26 STB ISP ASP Automated Teller Machine Large Scale Integration Production Programmed Read Only Memory Non-Impact Printer Serial Impact Dot Matrix Fixed Mobile Convergence Network Internet Protocol Private Branch Exchange System Engineer Original Equipment Manufacturer Cash Dispenser Fiber To The Home Broadband- Internet Protocol Worldwide Interoperability for Microwave Access Set Top Box Internet Services Provider Application Service Provider P27 P28 P29 P30 PHS DSC TFT ITS SOI SOS VoIP LCD DTV RF-ID DSRC SNP WCDMA GSM P31 P34 WiFi MFP POS Personal Handy-phone System Digital Still Camera Thin Film Transistor Intelligent Transport System Silicon on Insulator Silicon on Sapphire Voice over Internet Protocol Liquid Crystal Display Digital TV Radio Frequency Identification Dedicated Short Range Communication Smart Number Plate Wideband Code Division Multiple Access Global System for Mobile Communications Wireless Fidelity Multi Function Printer Point Of Sales system * The projections and plans on this material are subject to change depending upon the changes of business environments and other conditions. 46 47 Printed by Oki’s color LED printer 48