Sony Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 3 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. It is now time to start this Sony Group's Q FY 2023 Consolidated Financial Results Presentation Meeting. I am Okada over the Corporate Communications. I would like to first introduce the speakers today, President, COO and CFO, Hiroki Totoki, Senior Vice President, in charge of the Corporate Planning Group DNI Promotion also support Financial Service and Entertainment segment, Naomi Matsuoka. And then Senior Vice President in charge of Finance and IR, Sadahiko Hayakawa.

Operator

So those 3 will present the Q1 FY2023 consolidated financial results throughout FY 2023. And there will be a question and answer session and we plan to have a 70 minutes of the session. Thank you. 1st speaker is Mr. Totoki.

Operator

So the speakers today are Matsuoka and Hayakawa. And then toward the end, I'd like to make a summary comment. So first speaker, Hayakawa san. Matsaka and Hayakawa will present the consolidated results. Starting from FY2023 Q1, Sony has adopted a new accounting standard, IFRS 17 new standard pertaining to insurance contracts.

Operator

The annual results for the same quarter of the previous fiscal year and previous fiscal year that we'll show today presented after recalculation based on the new standard. We will explain the details later in the Financial Services segment part. Consolidated sales for the quarter increased a significant 33% compared to the same quarter of the previous fiscal year year on year to JPY 2,963,700,000,000. Consolidated operating income decreased JPY 111,800,000,000 year on year to JPY 253,000,000,000, primarily due to an JPY 84,700,000,000 decrease in operating income of the Financial Services segment. This decrease in operating income of Financial Services segment was primarily due to the impact of the recalculation of the previous fiscal year's results resulting from the application of the new standard and absent of a gain on the sales of real estate recorded in the same quarter of the previous fiscal year, Adjusted EBITDA decreased JPY 90,600,000,000 year on year to JPY 406,200,000,000.

Operator

Income before income taxes increased JPY 73,200,000,000 year on year to JPY 1276,000,000,000. And net income attributable to Sony Group Corporation shareholders decreased 43,500,000,000 yen to 217,500,000,000 yen. Results by segment for the quarter are shown on this slide. Next, I will explain the full year consolidated result forecast for FY 2023. The forecast for the full year is JPY 12,200,000,000,000 for sales, an increase of JPY 700,000,000,000 from the previous forecast, JPY 1,000,000,000,000 JPY 170,000,000,000 for the operating income, no change from the previous forecast and JPY 1,750,000,000,000 for adjusted EBITDA, no change from the previous forecast.

Operator

The forecast for the consolidated operating cash flow excluding Financial Services segment is unchanged from the previous forecast. The assumed exchange rates have been revised to approximately 135 yen to the U. S. Dollar and approximately 146 yen to the euro. The FY 'twenty three results forecast by segment is shown here.

Operator

Now I will move on to an overview of each business segment. First is the Game Machine Network Services segment. FY 2023 Q1 sales increased a significant 28% year on year to JPY 771,900,000,000, primarily due to an increase in sales of third party software and increase in sales of PlayStation 5 hardware and impact of foreign exchange rates. Operating income decreased JPY 3,600,000,000 year on year to JPY 49,200,000,000, primarily due to an increase in expenses, including and acquisition related expenses were JPY 16,600,000,000. Despite the positive impact of higher third party software sales, adjusted or IBDA increased to 5,700,000,000 yen year on year to 75,900,000,000 yen FY 2023 sales are expected to be JPY 4,170,000,000,000, an increase from the previous forecast JPY 270,000,000,000.

Operator

Operating income is expected to be JPY 270,000,000,000, no change from the previous forecast And adjusted OIBDA is expected to be JPY 375,000,000,000, an increase of JPY 10,000,000,000 from the previous forecast. Although we upwardly revised the sales forecast for 3rd party software, which is performing well, we have incorporated the deterioration in the profitability of PS5 hardware, mainly due to the changes in promotions by geographic region and the sales channel mix, primarily due to the release of the Appealing 3rd party software and expansion of PSY penetration, software sales for the quarter reached JPY 406,200,000,000 a significant 27% increase year on year. While there was also positive impact on the exchange rates, This was 14% higher than the Q1 of the fiscal year ended March 31, 2022, when there was a still stay at home demand. Total gameplay time during the quarter was only 2% higher year on year. And we see the year on year growth in software sales as being driven mainly by a considerable increase in spending per play hour by the expanding PS5 user base.

Operator

PS5 Hardware sales were 3,300,000 units, a significant increase of 38% year on year. This amount is somewhat less than the expected progress toward our fiscal year sales target of 25,000,000 units. But due to the promotion begun in July, we are seeing an improvement in the momentum of sales. We have positioned the accelerated penetration of PS5 hardware as one of the highest priorities in this fiscal year, and we will try to work steadily to implement necessary measures to achieve our hardware sales target of 25,000,000 units. Towards the end of the calendar year, the first party title, Marvel's Spider Man 2 and major third party titles are scheduled to be released as well.

Operator

And we expect that the entire game industry and the PS platform will be greatly energized. Next is the Music segment. FY2023 Q1 sales increased a significant 16% year on year to JPY 358,200,000,000, primarily due to the increase in streaming sales and impact of foreign exchange rates. Operating income increased a significant JPY 12,400,000,000 year on year to JPY 73,400,000,000, primarily due to the impact of the increased sales and the recording of a re measurement gain of JPY 6,060,000,000 from making an equity method affiliate, a consolidated subsidiary. Adjusted OIBDA increased JPY 8,200,000,000 year on year to JPY 82,900,000,000.

Operator

Profit contribution from Visual Media Platform was just under 10% of the operating income of this segment. FY23 sales expected to be JPY 1,490,000,000,000, an increase of JPY 80,000,000,000 from the previous forecast. Operating income is expected to be JPY 280,000,000,000 an increase of JPY 15,000,000,000 from the previous forecast and said OIBDA is expected to be JPY 335,000,000,000, an increase of JPY 10,000,000,000 from the previous forecast.

Speaker 1

Streaming revenue for the quarter continued to grow, up 12% for recorded music and 18% for music publishing on a U. S. Dollar basis. In recorded music, we are continuing to deliver hits at high level. During the quarter, 38 of our songs on average ranked in the Spotify Weekly Global top 100 songs.

Speaker 1

More than 70% of songs listened to in the music streaming market in the U. S. Are Catalog songs that were released more than 18 months ago. So creating continuous hits in the short term simultaneously leads to an enhancement of future catalog and increase in sales and market share over the mid- to long term. At Sony Music Entertainment, we have doubled the number of creative personnel in the last 5 years.

Speaker 1

And the number of artists producing songs for streaming worldwide has increased 35%. As a result, current market share in the U. S. Over the 4 years through last fiscal year has risen from 21% to 27%. And sales and operating income for the Sony Music Group, which includes music publishing overseas have increased significantly at CAGLs of 17% 24%, respectively.

Speaker 1

In addition to this continuous investment in artists and labels, we aim to achieve stable growth that outperforms the market by expanding our business in new areas such as rapidly growing emerging markets and social media. In the domestic music business, Yoasobi's TV anime theme song Idol surpassed 300 1,000,000 streams, the fastest song to reach this total number of streams in history according to Billboard Japan study. It held the number A one spot for 16 consecutive weeks in the total domestic song chart. This momentum is spreading overseas. And the song has become a Global hit and the biggest J pop hit, reaching number 7 on Bilbo's global hit chart.

Speaker 1

With expansion of the global anime market as a tailwind, We expect that overseas expansion of artists, which SMEJ has been focusing on, will accelerate further. Next is the Pictures segment. FY 2023 Q1 sales decreased 6% year on year to JPY 320 JPY 400,000,000 mainly due to a decrease in deliveries on television productions and the impact of fewer releases of tentpole films in the Previously in the previous fiscal year in motion pictures, operating income decreased a significant JPY 34,700,000,000 year on year to JPY 16,000,000,000 primarily due to the impact of the decrease in sales and impact increase in Marketing expenses in Motion Pictures adjusted OIBDA decreased JPY 33,400,000,000 year on year to JPY 28,500,000,000. FY 'twenty three sales are expected to be JPY 1,470,000,000,000 down JPY 50,000,000,000 from the previous forecast. There is no change to the forecast for operating income and adjusted OIBDA.

Speaker 1

Spider Man across the Spider Verse, which was released theatrically in June, has become a huge hit With box office revenue exceeding US680 million dollars worldwide as of August 7, making it our highest grossing animated With regard to bringing PlayStation IP to video, the live action drama Twisted, the metal was launched on the Peacock streaming service in the U. S. In July. And the new movie, Gran Turismo is scheduled to be released in theaters in the U. S.

Speaker 1

On August 25th. Regarding Crunchyroll, The number of paying subscribers surpassed 12,000,000 in July, driven by the exclusive distribution of the television anime Demons Lair. Akimetsu no Yaiba sold Smith's Village Arc, which started in April. And our anime business is steadily growing in A multifaceted way with overseas distribution of the anime film, Suzume no Otojimari and the strong sales of mobile game Street Fighter duel. Although it is unclear when the strikes in Hollywood will end, we aim to work with Alliance of Motion And television producers to now state a resolution with the unions as soon as possible so that we can restart normal production activity.

Speaker 1

Next is ET and Edge segment. FY 2023 Q1 sales increased 4% year on year to JPY 571,800,000,000 primarily due to impact of foreign exchange rates despite a decline In smartphone and television sales, operating income was JPY 55,600,000,000, an increase of JPY 2,100,000,000 year on year, primarily due to cost reductions in televisions despite the impact of decreased smartphone sales. Adjusted OIBDA increased JPY 3,900,000,000 year on year to JPY 80,900,000,000. FY 2023 sales expected to be JPY JPY 2,430,000,000,000, an increase of JPY 50,000,000,000 from the previous forecast. There are no changes to the forecast For operating income and adjusted OIBDA, the market environment for major product categories in the current Our quarter continued to be the same as the previous quarter with televisions and smartphones facing severe condition while the market for digital camera, headphones and other products remained strong.

Speaker 1

In each category, we are running our operations so as To respond to changes in the market environment, and we were able to secure stable profits across the entire segment. Inventory levels have grew significantly year on year mainly for television due to the thorough management from production to sales. And we are managing them at the profit level. As business environment for televisions and smartphones is expected to continue to be severe, we will pay close attention to costs and inventory control. We also plan to proceed with early Tree control.

Speaker 1

We also plan to proceed with early reaping of income in the digital camera space by keeping up this recent strong demand. We have introduced the appealing new products that you've seen here, and we are focusing on securing the stable profits by continuing to enhance our profit Next is, I and S segment. FY 2023 Q1 sales significantly increased 23% year on year to JPY 292,700,000 mainly due to high sales of image sensors For mobile products and the impact of foreign exchange rates, operating income decreased JPY 9,000,000,000 year on year to JPY 12,700,000,000 primarily due to an increase in expenses such as depreciation and amortization expenses despite the positive impact of foreign exchange rates and the effect of increased sales. Adjusted OIBDA increased JPY 2,700,000,000 year on year to JPY 70,000,000,000.

Speaker 2

Full FY 2023 sales are expected to be JPY 1,560,000,000,000, down JPY 40,000,000,000 from the previous forecast. Operating income and adjusted OIBDA are expected to decrease JPY 20,000,000,000 from the previous forecast to JPY 180,000,000,000 JPY 4,425,000,000,000 respectively. Recently, the smartphone product market is worsening compared with our expectations due to a delayed market recovery in China, a prolonged slump in Europe and a slowdown in North America. In our previous forecast, we assumed a gradual market recovery from the second half of the current fiscal year, but we have postponed that to the beginning of the next calendar year or the next fiscal year and have incorporated this revised timing into our sales forecast. In addition, in light of such product market conditions, smartphone manufacturers are making even greater further adjustment to their parts procurement, And this is having a significant impact on the Q2 following on the Q1.

Speaker 2

In addition to smartphones, the impact of the Slow economic recovery in China, primarily in image sensors for industrial and social infrastructure is noticeable and we have lowered our forecast. With respect to the increase in cost associated with the launch of mass production of new product for smartphones, We have reflected our latest production situation and have incorporated additional costs. However, production is gradually stabilizing, and we do not think that costs will continue to increase significantly going forward. On the other hand, the trend toward larger die sized image sensors Being adopted by Chinese makers in their new smartphone products in the second half of the fiscal year is becoming noticeable, Not just in flagship and high end phones, but the middle range phones as well. There's no change to our view that the trend towards larger mobile MS sensors will drive the overall growth of the sensor market, which will grow at average annual rate of around 9% until FY 2030.

Speaker 2

We plan to continue to implement measures from a mid- to long term perspective as well, such as strengthening technology development capabilities and securing production capacity so that we can steadily capture growth opportunities when market condition recovers. Last is Financial Services segment. As we said at the beginning, Sony has adopted the new accounting standard IFRS 17 starting this fiscal year. First, I will explain the impact of the adoption of the new standards focusing on the important points. For details, please refer to Page 15 of the handout.

Speaker 2

Under new standard, financial services revenue decreased primarily because the portion of insurance premium revenue amounting to surrender value that used to be recorded as revenue is no longer recorded as revenue. In addition, under the new standard, the amount of liability increase or decreases depending upon Market fluctuations due to insurance contract liabilities being reevaluated based upon financial variables The latest financial variables such as interest rates at the end of each quarter, the increase or decrease of such liabilities related to minimum guarantee of variable Life insurance is recognized as profit and loss and impacts operating income. Next, I will explain the full year results of the previous fiscal year recalculated based upon the new standard. Financial services revenue decreased by 39% from the previous standard to JPY889,100,000,000 mainly due to non recognition of surrender value. Operating income increased by JPY 94,200,000,000 from the previous standard to JPY 318,100,000,000 As a result of a significant decrease in insurance policy liabilities after recalculation, primarily due to the rise in ultra long term interest rates in the previous fiscal year and the recognition of profit due to that decrease.

Speaker 2

Because hedging operations meant to contain the impact Profitability of market fluctuation were undertaken in the previous fiscal year in accordance with the previous standard. A significant difference arose as a result of the recalculation from this fiscal year. We have transitioned to hedging operations in accordance with the new standards. Now I will explain this segment's performance in the current quarter on a year on year recalculated basis. Financial services revenue increased a significant 2 15 percent year on year to JPY 681,400,000,000 mainly due to a significant improvement in net gains and losses in the separate account at Sony Life, which benefited from a rise in stock prices in and outside Japan.

Speaker 2

There is no difference between the new and previous standards when it comes to the impact market fluctuations have on gains and losses in the separate accounts. Operating income decreased a significant JPY 84,700,000,000 year on year to JPY 54,500,000,000 mainly due to the fact that the impact of market fluctuation was controlled as a result of transitioning to hedging operations based on the new standard and due to the fact that there was a gain on the sales of real estate in the same period of the previous fiscal year. Adjusted OIBDA decreased JPY 84,200,000,000 year on year to JPY 61,400,000,000. The FY 2023 financial services revenue forecast is JPY 1,320,000,000,000, an increase of JPY 450,000,000,000 from the previous forecast, reflecting the result of the current quarter. There are no changes to the forecast for operating income and adjusted OIBDA.

Speaker 2

As has already always been the case, The forecast does not reflect the impact of market fluctuations from the Q2 onwards. In addition, we expect insurance service revenue result of Sony Life to continue to stably grow, in line with the expansion of policy amount in force. Finally, I would like to summarize the everything. Business areas such as entertainment and image sensors, which we have positioned as growth areas are reaching opportunities for growth over the mid to long term. And we aim to grow through the unique competitiveness each business has in its area.

Speaker 2

On the other hand, since the operating environment This fiscal year is uncertain and there are many risks. We are operating the businesses with an emphasis on risk management. In the hardware business of ET and S, I and SS and G and NS, we are responding primarily to the stagnation of the Chinese economy, The slowdown of the economy, mainly in Europe and the United States and geopolitical risks, while in the Pictures business, We plan to focus on various issues such as the strikes in Hollywood. We have incorporated the expected impact of these factors and countermeasures into our current forecast. Inside Sony, we have begun to discuss the next mid range plan, which begins next fiscal year.

Speaker 2

While looking to the potential market recovery from next fiscal year as an opportunity and preparing to reach our next stage of growth. That's all for my presentation.

Operator

Thank you very much. Totoki, Matsuoka and Hayaka made the presentation. Now At 16.25, we would like to entertain the questions from the media. At 16.50, we'd like to entertain question from the investors and analysts. And each session consists of about 20 minutes.

Operator

And Some people have already pre submitted the questions. So that please link your phone to that registered phone number. And then as to this way to ask questions in some of the matters of our consideration, please refer to our invitation letter. So please wait for a few minutes before we resume the session. Thank you.

Operator

Thank you very much for waiting. We will now like to have the session to entertain questions from the media. The speakers are the same as this the previous presenters, the 3 people on the screen. So let us start to entertain questions. We'd like to ask you to keep your questions to just 2 questions per person.

Operator

So please push the asterisk and then push number 1 after that if you have a question. The first question is from the Furuoka san from Nikkei. I hope you can hear me. I'm Furoka of Nikkei Newspaper. Thank you very much for this opportunity.

Operator

I have two parts of questions. The first question is that about your financial results as Mr. Tatoki explained to us that the situation is maybe leveling off like games and semiconductors and other issues. But from the Q1, of course, that you are in that the middle of that phase. But Mr.

Operator

Totoki, What is your vision for the growth? Which area and segment are likely to grow more? Do you have a vision on this growth scenario? That's my first part of the question. And my second part of the question is about the situation, the strikes.

Operator

To what extent that the movie, new film release might be delayed because of the U. S. Strikes of doctors and others. So that in the generative AI is linked to this program because that might have adverse impact upon music and films and pictures. Some of the content assets might be undermined by the potentially by the AI.

Operator

So what do you think of that potential impact by AI? Thank you very much for your question. As to your first question, So in the next fiscal year and growth scenario that I have in mind, Actually, in this midterm business plan that the Content IP, DTC, as well as technology investment, as well as this some of the diversified business segments should have intergroup collaboration. Those are promoted. As a result, In the last 3 years, the cumulative that JPY 1,900,000,000,000 of capital investment in equipment, M and N needed JPY 1,800,000,000,000 for that strategic investment.

Operator

So gradually, we made a progress. And so the mid- to long term, we have already planted the seeds for the future growth potential. That's the first point. As to the collaboration within our group companies and segments, PlayStation game IP will be used. ZARASTBAS, HBO did actual drama to be production, but that became a big hit in 2022 that in February, Uncharted was released in the theater and those were success.

Operator

In following those successes, numerous projects are ongoing. Therefore, So there's a strong momentum now like together with the Music business. This kind of entertainment business are 3 segments of the entertainment business. In the next Still a midterm plan that we expect the big growth, sufficient growth to be achieved. As with the INSS segment, For this fiscal year, of course, there could be maybe some stagnation or we are leveling off the growth to a certain extent.

Operator

Of course, the revenues and sales are going up. In terms of profitability, there's slightly some area where we are not fully satisfied. So we must secure the profitability in a growth scenario. That's something we have to implement in the midterm The plan and that's our challenge and priority. In 2024 and afterwards, semiconductor market situation And then maybe the market situation improves, especially in China, like recovery in Chinese smartphone market is expected.

Operator

But we have to be prepared fully so that we will be ready for the next term. As to respond to your second part of your question about the Strike related issues, and it's not directly just linked to the strikes, but of course, the generative has an adverse impact. And I think that's something I'd like to respond to you. It's not only affecting this Films and pictures that the game production is a music production and creator support order for anime that the multilingual the translation and so forth could be supported by So the stakeholders have the rights and copyrights and that should be respected in introduction of AI and so Like music copyright, it might be the violated, so we have to protect the IP as well as the Artisan content related issues must be solved just not by Sony standalone, but we have to have the entire industry involved in order discussed to identify the future solution. That's my thought on this.

Operator

Thank you.

Speaker 1

So we'd like to move on to the next question. Nishita san, who is a freelancer. Please go ahead. Nishida san, please. I'm very sorry, but I cannot hear your voice.

Speaker 1

Can you repeat your question once again? Can you hear me? Your voice is not clear. Your voice is not clear, unfortunately. Can you just put the microphone a little bit more distantly?

Speaker 1

I am very sorry Since the voice is not clear, for the time sake, we would like to move on to the next person Umedaki from Toyo Kaysai, can you hear me? Yes, I can hear you. So please go ahead. I have two questions. And first question is that, As was already mentioned, the 3 areas of segments of entertainment, the total income The exceeds 54%, the 3 segments combined, it is still very high.

Speaker 1

And so you talked about next MLP. What The percentage you would like to reach for the total the income of those 3 segments. And so now, the China slowdown and you have already mentioned in INSS. And for other segment, what is the impact? For instance, for the consumer spending has been quite weak in China.

Speaker 1

So what is impact on overall business of Sony Group? Thank you very much for your question. And so I would like to answer the two questions. And as for Entertainment, 3 segments combined, The operating income, what is our plan to reach the certain percentage that and we do not have any target in terms of the percentage, But 3 segments, entertainment's segments combined and also INSS, where the growth is expected. So comprehensively, I believe that the percentage or the portion of the profit earned by those segments will increase.

Speaker 1

And second question is, other than INSS, what is the slowdown of Chinese economy on other segments? And for the consumer spending, the ET and S will be affected. The TV and smartphones are areas where which is severely impacted. But currently, as far as FY2023 is concerned, the slowdown in China, Since there is great concern about that, so our plan is made quite conservatively. And therefore, management itself has been going quite well.

Speaker 1

But on the other hand, as for the camera, the market, which is quite Performing quite well. And under COVID, the activities have been restricted, in the past. But there is a very good demand in this area. So we would like to reap the profit as early as possible in this area. That's all.

Speaker 2

Now we'd like to move on to the next question. If you have any question, Abe san from Nikkinko, Industry Daily. I'm Abe from Industry Deli Nikanko. Can you hear me? Yes, I can.

Speaker 2

Related to the question asked earlier, ET and S segment, digital camera The sales unit increased which resulted in increased profit About by regions, can you explain, for example, year on year basis growth rate? Can you enlighten me? In addition, in this area, Chinese market, you said that there is robust market demand in China. Going forward, do you expect robust demand will continue in the Chinese market? What is your view of the Chinese market and the demand and market in China.

Speaker 2

Thank you very much for your question. ET and S segment, digital camera In the Q1, Camera Body and Lens both are doing well. By regions, China and Asia sales has been very robust. And Europe and U. S.

Speaker 2

For the competition with others is getting more severe. So in some areas, there is some [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] A slight decline in share, but we are making additional investment such as sales promotion and we are expecting our share to increase. Going forward, we should not be optimistic. And we have to be prepared for the possible slowdown of the market and we have to invest there for new products and also will be controlling both production and sales. Thank you.

Operator

We'd like to entertain next question. Kyodo Tsushin, Endo san please. Endo from Kyoto Tsushin, I hope you can hear me. I have one question about camera. The sales are going up goes that after the COVID-nineteen, there's maybe the repercussion after that that for the people traveling again that they like to use So more digital camera, is that the new demand?

Operator

The link to the COVID-nineteen pandemic, how the demand is increasing after the COVID-nineteen pandemic? Thank you for the question. As I said, there's maybe reaction after the COVID-nineteen pandemic. That is at one time, demand was down. That's a fact.

Operator

So people now have the pent up demand. So last year, already that the people already bought lots of cameras after that. So the strength of demand is still persistent, which is our great pleasure. Then we have a continuing demand. From a macroscopic standpoint, the traveling demand is going up.

Operator

People spend more money on traveling, vacations and so on, I suppose. So that might have a good impact on that demand. Thank you.

Speaker 1

So we'd like to move on to the next question. Nishita san, I have two questions. And the first point is about game business. The 3rd party, the application has increased. How do you assess this?

Speaker 1

Do you think that this trend will be here to stay? Or do you think that you need more efforts to promote this? And so that is related to that. In your document, PlayStation Plus, the number of user, there is a change in the disclosure condition. So is there any reason For that.

Speaker 1

And secondly, about pictures, particularly for drama, the streaming service Thank you very much for your question. The game and network service that you're told You are talking about the increase of 3rd party titles. And I think your question is about our assessment on that. And during the Q1, the new title From the 3rd party, we have a very strong ones. And so the in a software, the overall, Day on year, there has been increased revenue from this.

Speaker 1

So of course, on our part, the strong titles, the 3rd party titles should continue to prosper. And as a platform, we are very happy about it. And first party titles And our new titles, because of the release timing, there has been the reduced sales year on year. But not only the 3rd party titles, but we would like to make greater efforts for the 1st party titles. And your second question is about PS Plus and change of the assumption about disclosure conditions.

Speaker 1

And about PS Plus, we just ceased to announce review and the disclosure. And also there has been some expansion of its disclosure. So Matsuoka san will cover this point. And FY 2022, in June, there was renewal. And after that, The PS Plus in addition to the greater number of the subscribers and move To the more attractive, the titles with the increase in up.

Speaker 1

So we have been expanding the PS plus business. So extra and premium, we would like to continue to Promote the shift in order and in order to do so, we'd like to increase the service appeal. And on this basis, we are able to confirm the growth that's through The network services expansion. And so we stopped disclosing the number of subscribers as a result. And what are included in others?

Speaker 1

That is software sales other than PS Plus, they will be newly released. So in this area, The multi platform will be covered, including PC. So we'd like to Promote this. So with additional disclosure, I hope that we can give update about our progress. And about the pictures, in your second question, drama streaming, Is there any, the impact of overseas market?

Speaker 1

And so in overall, the business environment surrounding this area is that in overseas, a theoretical market, there are the many At 10th fall, the films are released, so they become very active. But as a result of strike, The major studios, the productions have been actually delayed in major studios. And so there is some Concern about advertising. So the theoretical, the business after July, we have to pay close attention And there is the competitive environment among the streamers. And so the contents investment of those players may not decrease immediately.

Speaker 1

But as a result of the strike, there will be the change of the schedule about the production. And therefore, the future development since impact will be will emerge From now, we'd like to pay attention to that. Thank you.

Speaker 2

Time is running short. So the next will be the last question. Because of the constraint of time, I'd like to ask the person to limit to one question. Tsutsumi san from Nikkei Newspaper, please. Tsutsumi from Nikkei.

Speaker 2

Can you hear me? Yes, we can, please. One question. PS5 Sales, the you said that the actual is lower than the forecast. What is the reason for lower than expected sales?

Speaker 2

The sluggish personal spending or other The users went to other game hardware. Can you please explain the reasons? Thank you for your question. 1st quarter sales was 3,300,000 units, slightly lower than the expectation. But from last year, 38% increase.

Speaker 2

We also believe that the demand is strong and promotion itself was rather limited In view of the profitability, we limited promotion activities and slightly weak. So starting from July in some regions, We have started promotion on full fledged basis. So as a sell through, we are looking at the sell through and we are seeing good signs already. So in view of the seasonality of the sales, the first quarter slightly less than the target, but on a fiscal year basis, especially Calendar year, year end calendar year end by that time, we believe that there is ample possibility for us to catch up. Especially towards the Q3, we will be increasing the number of sales and it's important to increase the sales and we will aim to achieve that target.

Speaker 2

Thank you.

Operator

Thank you very much. Now it is time for us to end this media Q and A session. Thank you very much. The Q and A session for this analysts and investors will start at the 4.50. So we'd like to soon start the Q and A session For the analysts and investors, please wait for a few minutes.

Operator

Thank you. Thank you very much for waiting. Let us now start this Q and A session For the investors and analysts, I would like to serve as the MSC. I am Condo of the Finance and IR Group member. The speakers are the same as the media session.

Operator

The photos are shown on this PowerPoint slide. So we'd like to now entertain questions and comments from the analysts and so on. Two questions per person, please. First from Morgan Stanley MAVFG, Ono san, please. Thank you for this opportunity.

Operator

I'm Ono of Morgan Stanley. My question is about games and the other one is INSS. So I have two questions. First of all, that throughout the year that you have the annual plan for gaming network systems In the 207,000,000,000 yen is something that 270,000,000,000 yen so that it actually that it's at JPY 10,000,000,000. So that software, of course, the 3rd party is a focus.

Operator

So You had an analysis of flat, but you have raised that plan. And so there might be some impact maybe the upside of this sales figure. However, this is only that level of the profitability you achieved. So maybe hardware promotion was accumulated and maybe that's the result. But what is the size and Scale you're expecting, you have some hint for the total scale you'd be achieving?

Operator

The second part of the question is I and SS, Previously that you showed the outlook for the downward trend and lowered the revenue and income so that the production costs are very high. And then that is a very challenging situation, which the expense is regarded as an estimated to be very high. On the other hand, China is another place where the mid to low range of the smartphones that the price reduction has to be implemented in China. So the additional JPY 20,000,000,000 downward adjustment was done. But what is change is a change taking place to influence that balance?

Operator

Those are 2 possible questions. Thank you very much for your question. The first one about the game and network service related question. Throughout the year, what is our annual plan? How should we interpret our annual plan?

Operator

Maybe that's the gist of your question. But in terms of profit, profitability, what you said is right. 3rd party software, The good sales in the Q1 is reflected in there. In the Q2 and afterwards, the sales plan was adjusted upward. So that is one impact.

Operator

And the other one is foreign exchange rates that we have revised it to the weaker yen situation. So that would push up this sales. On the other hand, what about operating income? The 3rd party software sales are going up and then of course, the profit will be pushed up by that. But first party titles, their sales launch was delayed or postponed.

Operator

And there's some postponement from this fiscal term to the next term. So that was taken into account in that adjustment. Another factor is promotion and other activities. There's no major change is to the promotion plan. However, some part of that because there was original channel mix that is direct sales versus the so called the other sales channels and that kind of sales.

Operator

So that the sales channel mix Compared to original forecast, rather than direct sales, I think the other ones going through the retail shops And then the dealers, I think that proportion is likely to increase more. So we have to pay margin for that. So that margin has been taken into account in the changed sales channel mix. But overall, That part means this how to calculate and estimate this expense there, we are quite conservative. But the 15,000,000 units is 25,000,000.

Operator

It is something that we have set as a target And we would like to really achieve that target. And our intention is taking into account in this revised plan. Another factor, The second part of your question about INAS related question. Of course, there is some Production cost increase that was impacted. And in China, the smartphone momentum is being changed.

Operator

But these are two factors which have to be considered and taken into account. That is to say, as of April, we announced the outlook and that's a change. The production expense compared to the original plan has increased slightly. So that increased production cost was taken into account. But now I think we have considered fully all the potential increase.

Operator

And in China, As of April, compared to the April outlook, the current outlook in the smartphone market recovery is more likely to be delayed. So that was also taken into account. So these are the factors which was again added to revise this current plan. Thank you. Thank you.

Speaker 1

Thank you, Onno san. So we would like to move to the next question. Hirakawa san from Bofa Securities, please. Thank you very much. My name is Hirakawa from Bofa.

Speaker 1

I have Two questions. The first is about semiconductor. And previously, for the The announcement from January to March, so at the end of this quarter, That will be higher than year on year. But the market condition is worse than your April forecast. So is there any change about your strategy?

Speaker 1

And the well, the reason for the March FY 2023, why you are quite optimistic. And for pictures, because of negotiation, it's not easy for you To reveal your strategy about the pictures. And so strike, how to deal with strikes of writers and the actors, How do you incorporate the impact into your financial results at this moment? Thank you very much for your question. And first is I and SS.

Speaker 1

The first quarter at the end of Q1, the inventory level And about it, if I may explain, that as a result of sales Expansion that has increased. And also, there is some downside of the downward revision of sales during the Q1. And for the future outlook, logic and sensor strategic inventory will declined towards the end of the year. But inventory amount itself, the sales has have been expanding. So FY 2023 at the end of FY 2023, compared to the end of FY 20 20 2, it is expected to increase.

Speaker 1

There is no change in this forecast. But I should say that basically, as a result of sales expansion, This is increased as a result of sales increase. And so it is does not mean that we have excessive inventory. And we have to pay a close attention to quality of inventory. But to a certain extent, we'll keep Inventory, the control and we have to effectively utilize the equipment and have appropriate timing for the investment.

Speaker 1

And what is the reason we are optimistic about FY 2024? We do not think that we make wrong assumption about it. And the issue is that pertains to the manufacturing cost or excessive the inventory of our competitors' inventory in China. So as a result, decline of ASP. So that has adversely impacts the profitability.

Speaker 1

And as for the business, the volume itself, Our forecast is not quite incorrect. And so that is the reason we are quite optimistic about FY 2024. And your second question about the pictures. About this fiscal year, under our assumption, We have actually incorporated our assumption into the forecast. And for the details, very difficult for me to share the details with you.

Speaker 1

But in terms of profitability, The impact on this fiscal year's business is relatively limited because business turnover is long for the motion pictures industry. And therefore, that is the reason that we forecast this way. Thank you very much for your answers.

Speaker 2

Thank you, Hirakawa san. Moving on, JPMorgan Securities, Ayada san, please. Thank you. Ayada from JPMorgan. I have two questions, if I may.

Speaker 2

The first question about game. Earlier, full year profit increased or was explained, the first quarter Profit change, can you elaborate on the Q1? Compared to last year, JPY 3,600,000,000 decrease and excluding FX impact, about JPY 6,000,000,000 decrease. In your explanation, you talked about Banji expense is negative JPY 16,600,000,000 and positive side, software increased add on point about JPY 80,000,000,000 So the software increase and there's contribution to profit. The change of the sales channel was explained as well.

Speaker 2

On the other hand, the profitability of software seems to be deteriorating. In the current quarter, the sales of software is large, but mainly older titles are sold. So the content of the software sales, can you explain that? That's my first question. My second question, I and SS, full year Downward revision, JPY 20,000,000,000 and the breakdown of this downward revision with FX about JPY 50,000,000,000 positive, I believe.

Speaker 2

So negative side, JPY 70,000,000 around JPY 70,000,000,000 impact is there. On the negative side, the breakdown, the sales forecast is revised downside. And this is about half of the total, about JPY 30,000,000,000 to JPY 40,000,000,000. And then the increase in the expenses Of mass production launch, about JPY 30,000,000,000 to JPY 40,000,000,000. So the magnitude of the increase in expenses, can you please elaborate?

Speaker 2

These are my two questions. Thank you very much for your questions. Your first question, 1st quarter profit increase or decrease and the breakdown for that. Profitability itself basically is not changing so much according to our analysis. 1st quarter, the factor for the Q1, first M and A related expenses, Acquisition related expense and then Banji acquisition, and this is on a full consolidated basis now.

Speaker 2

So the cost related to full consolidation of Banji. In the Q1, the breakdown, I have not explained on a fully and about on the fiscal year about JPY 68,000,000,000 M and A related expense and expenses for full consolidation. Combined, we are looking at that number for your reference. And then your second question, iNSS. As you pointed out, the impact of the reduced revenue and the expenses related to launch of the mass production of new product, these are negative factors.

Speaker 2

And the positive factor is exchange rate, as you pointed out. The breakdown, We are not disclosing the breakdown. So it's very difficult for me to explain. But I would say, image sense for mobile decrease in revenue And industrial, social, infrastructure, image sensor decrease in revenue. So not only for the mobile, But sensor image sensor itself is impacted by reduced revenue.

Speaker 2

That it can be a hint for you to understand. That's all. Thank you.

Operator

Thank you very much. We have a short meeting time. So Just one question per person from now on, please. From Citigroup, Ezawa san, please. Thank you very much.

Operator

I'm Itau of Citigroup Securities. I have a question about semiconductor related question. That is to say, the inventory is to be lowered, reduced. And then the production expense, I think related to this production yield, but I think that will be improved, I understand, in the future. And demand is likely to go up.

Operator

There are 3 factors affecting The Q2 and later on, those are the important factors. If any, they separate this the Q2 and the second half. I think the semiconductor is likely to improve monthly, but still the figure is still so low or despite this fact, maybe the improvement or recovery might be delayed slightly. So during the second half, would that happen mostly? So could you please tell us the factors and background factors for your forecast and analysis.

Operator

Thank you for your question about INSS. Of course, during the second quarter And the second half, can you split the 2 analysis? As to the Q2, there's a seasonality influence. In other words, the demand is weak in Q2. So there is emphasis on this second half.

Operator

So that the second half I think is emphasized mostly. That's how to read it. Thank you, Eizawa san.

Speaker 1

So from Mizuho Securities, Nakane san please. Nakane from Mizuho Securities. I have one question For the game, PS5, the now, the sales is a bit weak. But in the U. S.

Speaker 1

And Asia and Europe, What is the situation? And can you just share with promotion? JPY 25,000,000 is the target of unit sales, According to Totoki san, and so current exchange rate assumed to continue, there is some the gap of Full exchange rate. So I believe that for that portion, there is a deterioration of profit. If the exchange rate It stays this way or far the depreciation of yen installed base is important.

Speaker 1

So you put more emphasis on installed base than the This is on installed base than the current profitability or PS5, when you think about future profitability, if there is a major change Foreign exchange rate, you have a plan to change this. Now 135 yen against Thank you very much for your question. For PS5, Game and Network Service segment, PS5. And currently, that It's a bit weak. And what is the situation by regions?

Speaker 1

Easier question. And by regions? Currently, in Japan, the sales is strong and the same holds true for Asia. And about North America, the response to the promotion is quite favorable. And United Kingdom, it's a bit weak, but Europe as a whole has been performing quite well.

Speaker 1

And that seems to be the current response. And our target of 25,000,000 units. And so in light of the impact of foreign exchange rates, even we sacrifice profitability, Whether we will put emphasis on installed base, that seems to be the heart of your question. And currently, of course, expansion of installed base is important. So we will continue to make efforts, But we do not make any extreme measures in order to achieve this.

Speaker 1

So it's the strength of demand And of course, a certain level profitability and expansion of installed basis. So those three factors must be well balanced. So the extreme promotion as a result of extreme the promotion, even we acquired the Subscribers are very difficult to follow that trend. Therefore, we would like to use data driven, the method approach to make it appropriate level. Thank you, Nakane san.

Speaker 2

Next person will be the last person, SMBC Nikko Securities, Katsura san, please. Katsura from SMBC Nikko Securities. Can you hear me? Yes, we can. Thank you.

Speaker 2

I would like to ask a question on the consolidated operating cash flow excluding Financial Services segment. Full year, JPY 1,250,000,000 remains unchanged, significant improvement as compared to last fiscal year. 1st quarter cash flow is negative, but as compared to last year, slight improvement And going forward, how are you going to look at this? Can you please explain? That's the background.

Speaker 2

Inventory, ET and S, the inventory level is controlled, as you have explained. 1st quarter G and S and It's slightly heavy inventory. Other factors, full year operating cash flow is maintained. And as compared to 3 months ago, what are the plus and what are the minus negative factors. Thank you.

Speaker 2

Excluding financial services, consolidated cash flow. Hayakasa, please. I I would like to respond to your question. First, the Q1 operating cash flow is minus JPY 80,700,000,000. Year on year, you have made a comparison, but as compared to year on year, positive by JPY 90,000,000,000.

Speaker 2

In Q1, then it is negative. The key point, the PlayStation 5 inventory and I and SS 1st quarter and second quarter inventory has built up slightly. So based upon these, Cash flow level has come down, but this is up the working capital, especially placed Station 5 towards the Q3 sell in sell through, which results in cash returning. That is an assumption. So ultimately, This fiscal year, excluding financial services, JPY 1,250,000,000,000 is our forecast, which remains unchanged.

Speaker 2

Basically, for the cash flow, working capital, especially game, PlayStation 5 and the I and S inventory, In the Q1, these will have impact. That's our analysis. Thank you. Thank you very much.

Operator

So this concludes this today's Q FY 2023 consolidated financial results presentation. On behalf of Sony Group Corporation, I would like to again thank you all very much for your participation.

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Earnings Conference Call
Sony Group Q1 2024
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