Sony Group Corp Q4 FY2022 Earnings Call

The time has come to begin the announcement of Consolidated Financial Results of Sony Group Corporation. I'll be serving as Master of Ceremonies. First, Mr. Totoki, President and COO and CFO will explain to you the FY22 consolidated results and FY'23 consolidated results forecast, followed by Q&A. We are scheduled to have a total of 70 minutes now. Mr. Totoki, please.

Today, I will explain the following, consolidated sales for FY'22 were ¥11,539.8 billion, and consolidated operating income was ¥1,208.2 billion, both reaching record heights. Income before income taxes was ¥1,180.3 billion and net income attributable to Sony Group Corporation stockholders was ¥937.1 billion. Consolidated operating cash flow excluding the financial services segment was ¥415.5 billion, primarily due to an increase in working capital. Results for FY'22 by segment are shown on this slide. The cash flow results by segment are shown here. Next, I will explain the full year consolidated results forecast for FY'23. We have decided to disclose the actual results and forecast for adjusted EBITDA on a consolidated basis, which is a group KPI for the current mid-range plan and adjusted OIBDA by segment, which is a metric that adds back a portion of depreciation and amortization expenses to adjusted operating income. For FY'23, we forecast sales of ¥11,500 billion, operating income of ¥1,170 billion and adjusted EBITDA of ¥1,750 billion. The consolidated operating cash flow forecast excluding the financial services segment is expected to increase significantly year on year to ¥1,250 billion mainly as a result of a decrease in working capital. The FY'23 results forecast by segment is shown here. Now, I will move to an overview of each business segment. First is the Game and Network Services segment. FY'22 sales were ¥3,644.6 billion, mainly due to the impact of foreign exchange rates and increased sales of PlayStation 5 hardware. Operating income was ¥250 billion, primarily due to an increase in software development expenses, and the recording of acquisition-related expenses, despite the impact of increased sales of first-party software and improved profitability of hardware. For FY'23, we forecast sales to be ¥3,900 billion, operating income to be ¥270 billion, and adjusted OIBDA forecast to be ¥365 billion. Expenses related to acquisition since FY'22, including Bungie, Inc., that will impact operating income for the current fiscal year are expected to increase approximately 20% year-on-year to be ¥65 billion. Last quarter PS5 hardware selling reached 6.3 million units, a record high for PS console for the fourth quarter, and 19.1 million units for the full fiscal year of FY'22. Distribution inventories have also renormalized, and we are now able to deliver PS5 to customers without waiting almost all over the world. In addition, the positive impact of increased PS5 selling has begun to appear in engagement metrics, with data-based third-party software sales exceeding the same month of the previous fiscal year in February and March. Moreover, the number of monthly active users for PS as a whole increased 2.3 million accounts year-on-year in March. Since it takes about one to two months from the time hardware is shipped until the effects of improved engagement become apparent. We will pay close attention to the engagement metrics for this quarter and reflect the results in our future forecast, as appropriate. We aim to continuously accelerate penetration of PS5 and aim for PS5 selling units for the current fiscal year to be 25 million units, the highest ever for any PS console in history. As for our software, we are continuing to strengthen and expand our first-party titles. God of War, Ragnarok, which we released in November last year, won the most awards in six categories at the 2023 BAFTA Games Award and with this huge hit sales of first-party software for the full fiscal year of FY'22, including Bungie grew significantly, with dollar-based sales increasing by 41% year-on-year. We also plan to release a major title Marvel: Spider Man 2 this fiscal year. We aim to continue creating new IP, rolling out catalog titles for PC and strengthening live game service development. Next is the Music segment. FY'22 sales were ¥1,380.6 billion, mainly due to the impact of foreign exchange rates and an increase in streaming revenue. Operating income was ¥263.1 billion. In addition to recording the highest day of operating income for this segment, operating income was the highest of all six business segments. In FY'22, the profit contribution of visual media and platform was in the mid-teens percent of the operating income of this segment. For FY'23, sales forecast is ¥1,410 billion, operating income ¥265 billion and adjusted OIBDA to be ¥325 billion. Streaming revenue in the fourth quarter increased 23% year-on-year for recorded music, and 29% for music publishing, 8% and 13% increase on a dollar basis. Recorded music and music publishing we aim to continue to grow faster and maintain a higher growth rate and profit margin with free, influential artists discover and nurture new talent, expand our lineup through partnerships and grow business in emerging markets. Additionally, we have improved our ability to continuously create hits in recorded music with an average of 43 songs ranked in the Spotify weekly global top-100 in FY'22, significantly increasing our market share year-on-year. Miley Cyrus released Flowers in January, and it has become a huge hit, recording the highest number of streams in a week on Spotify. Next, Pictures, primarily due to the foreign exchange impacts. FY'22 sales were ¥1,369.4 billion, operating income was ¥119.3 billion compared to the previous fiscal year in which there was a ¥70 billion gain from the transfer of business. For FY'23, sales forecast is ¥1,520 billion, operating income ¥120 billion, adjusted OIBDA to be ¥165 billion. Sales are expected to increase mainly due to an increase in the number of theatrical releases and growth in our businesses in India. Despite higher sales in media networks, operating income is expected to increase only slightly, primarily due to increased marketing costs and from the lower sales from having fewer tentpole films. To maximize IP value over the long term as an independent studio, our business structure could steadily generate operating income of the segment of about ¥100 billion. In the U.S., since March, other studios and major video distribution service providers have been releasing large-scale movies, and theaters are expected to be revitalized. In TV productions, with increased demand for low-budget products, we are strengthening our production capabilities by establishing SPT non-fiction, led by Industrial Media, which was acquired in April last year, which has the nine production companies. On March 4, Crunchyroll Anime Awards were held in Japan, and about 18 million votes were cast from fans in more than 200 countries and regions. In 2021, 48% of the ¥2.7 trillion global Japanese anime market was outside of Japan, and anime is growing into a global form of entertainment. Amidst this growth, the number of paying subscribers to Crunchyroll, the world's leading anime DTC platform, surpassed 10.7 million as of the end of March. Gross potential comes from the high growth of our business in emerging markets and we are deepening engagement with fan communities, such as the overseas distribution of anime movies and through merchandise sales. The business performance of Crunchyroll has grown significantly through media network sales and is contributing to the profits despite the amortization of costs with acquisition. Next is the ET&S segment. FY'22 sales were ¥2,476 billion, mainly due to the impact of foreign exchange, despite a decrease in TV sales. Operating income was ¥179.5 billion, primarily due to the impact of decreased TV sales. For FY'23, we expect sales to be ¥2,380 billion, operating income ¥180 billion, adjusted OIBDA to be ¥280 billion in FY'22. Despite the severe business environment, we achieved profit almost in line with the initial plan for the entire segment through operations and controlling costs. For the annual fiscal year, inventory further narrowed down and generally planned mainly in TV, finishing at a level almost on par with the end of FY'21. In FY'23, risks such as a more severe economic slowdown are expected, so we have lowered our sales forecasts. As for operating income, we expect to maintain the level of the previous fiscal year by reducing fixed costs in TV and smartphones. Demand continues to be trending well for digital cameras, primarily with the introduction of competitive products. We plan to maximize profit opportunities. And already strengthened the business structure; we are promoting access management to promote growth and maintain profitability of the existing business. Next is the I&SS segment. FY'22 sales were ¥1,402.2 billion, mainly due to the impact of foreign exchange, and an increase in sales of image sensors for mobile devices. Despite increased expenses, operating income was ¥212.2 billion, mainly due to the favorable impact of foreign exchange and increased sales. For FY'23, we forecast sales to be ¥1,600 billion, operating income to be ¥200 billion, and adjusted OIBDA to be ¥445 billion. The smartphone product market in the fourth quarter, mainly in China, has deteriorated slightly from the forecast at the time of our previous earnings, and we anticipate that the demand for sensors this fiscal year will start at a lower level than anticipated. Based on the recognition that the business environment for the current fiscal year will be extremely unstable, we have factored into the operating income forecast for this fiscal year that continued bump in demand in the first half of the fiscal year and the risk of increased costs from the mass production of new products. On the other hand, even in such a severe environment, our company is driving the trend toward larger-sized mobile sensors, higher image quality and performance, and flagship models of Chinese manufacturers equipped with large format one-inch sensors are continuously being released to the market. Our image sensor business has significantly outperformed our competitors, and our global market share on a value basis has grown significantly from 44% in FY'21 to 51% in FY'22. By launching sophisticated, highly differentiated technologies, we aim to further solidify our leading position and high value-added products. By doing so, we aim to steadily build a business foundation that will accelerate growth again as the market for final products recovers, which is expected in FY'24 and beyond. Next is the Financial Services Segment. In FY'22, Financial Services revenues were ¥1,454.5 billion due to a decrease in net gains and losses on investments in the separate accounts at Sony Life Insurance. Operating income was ¥223.9 billion, primarily due to the recording of gains on the sales of real estate at Sony Life and the impact of recovery of funds associated with the authorized withdrawal. From this fiscal year, we applied the new accounting standard IFRS 17, which pertains to insurance contracts. We plan to show the detailed impact on results associated with the change at the next earnings announcement. Financial Services revenue is expected to decrease significantly primarily due to the impact of the surrender benefit of insurance premium income no longer being recorded as revenue, whereas the entire amount was recorded as revenue in the past. Concerning this impact, Financial Services revenue for FY'23 is expected to be ¥870 billion. The operating income forecast is ¥180 billion and adjusted OIBDA is forecasted to be ¥205 billion. Lastly, I will explain the progress of the fourth midrange plan. Three-year cumulative adjusted EBITDA, which is the fourth midrange plans KPI, has progressed significantly beyond the initial plan, mainly in the music and picture segments and is currently expected to be ¥5 trillion or 16% higher than the target of ¥4.3 trillion. As you can see, we continue to see steady growth every fiscal year since FY'20. Regarding capital allocation, we have lowered our forecast for operating cash flow for the cumulative three years. Their primary source of capital to ¥2.5 trillion from the original plan of ¥3.1 trillion, mainly to reflect an increase in working capital in the G&NS and I&SS segments. Capital expenditure is expected to increase with the initial plan to ¥1.9 trillion with ¥0.4 trillion mainly allocated to image sensor capital expenditure and server investments and corporate R&D and G&NS. In terms of strategic investments, since we decided to increase working capital and capital expenditures, and in consideration of the current M&A market environment, we decided to reduce the amount from the initial plan of ¥2 trillion to ¥1.8 trillion. To grow over the mid to long term, we will continue to invest. However, in the short term, we aim to carefully assess the valuations and timing of investments given the recent changes in the market environment. We plan to compensate for the decrease in operating cash flow due to the increase in working capital, mainly through short-term borrowing and to maintain a total occasion of ¥4 trillion. We have positioned this fiscal year as the year to steadily achieve the targets of the current midrange plan while emphasizing the management of immediate risks at a time when the business environment is unstable. In the next midrange plan, we aim to achieve a balance between strongly emphasizing mid to long-term business growth and profit growth during the period of the plan. We aim to prepare for this during this fiscal year and show the content at the beginning of the next fiscal year. Together with the Sony Group's management team and the employees around the world, we aim to create a positive spiral of growing our business, attracting talented people, increasing corporate value and giving back to society. That is all for my explanation.

It was a presentation by Mr. Totoki. After this, from 4:20, we have Q&A from the media, from 4:45, Q&A from investors and analysts. We allocate about 20 minutes each for Q&A sessions. Thank you for waiting. We will now begin the Q&A session with the media. So those people who respond will be Mr. Hiroki Totoki, President, COO and CFO; Ms. Naomi Matsuoka, Senior Vice President; Mr. Sadahiko Hayakawa, Senior Vice President will begin the Q&A session.

I have two questions. The first relates to short-term and medium-term growth. This fiscal year, we expect the return on invested capital for each business to decline due to increases in inventory and other factors. When do you anticipate seeing an increase in return on invested capital again? There may be variations among each business, particularly for games and entertainment. Could you provide insight into the future expectations and the factors that will drive improvement in return on invested capital? That's my first question. My second question focuses on medium to long-term growth, particularly concerning mobility and the Metaverse. What are the potential risks, hurdles, and challenges you foresee in this area, including the competitive landscape? What is your outlook on these issues? Additionally, in the short term, it appears you will be financing through borrowing. Excluding Financial Services and net debt, is this a temporary measure, or is Totoki expected to become President? Are there plans to modify the rules governing discipline and increase reliance on debt borrowing? What is the direction moving forward?

Thank you for your questions. Well, then, first, your first question, ROIC, mainly about entertainment, that's your question. With regards to ROIC, FY22, as you know, especially in gaming, PS5 inventory has increased. Working capital increased as a result, which resulted in deterioration of ROIC. That is a major point. Basically, PS5 hardware sales increased, which resulted in a decrease in inventory. So this will be working positively for ROIC, especially acquisition-related expenses in FY22 and FY23, ¥50 billion to ¥60 billion of expense. The impact will be much less in FY24 and onwards, which will also be a factor to increase ROIC. And then for Music, M&A and catalog acquisition had an impact upon deterioration of ROIC. But in the medium to long term, M&A is sure to contribute to growth. The catalog has indeed been strengthening our position in the industry. Therefore, for ROIC, you look at the medium-term perspective, and I believe that it is going to come to the optimum level. As for the Pictures recovery from COVID-19 and reopening of the economy. The theatrical release will increase, and production will also increase. Production expense increases. ROIC will go down, but then with the theatrical release, profit will be generated and ROIC will go down again. So we'll be growing in the medium term. And then mobility and the Metaverse, what possible risks are there and what are the hurdles was your question. With regards to mobility, we are in the midst of development. So at this point in time, we are not at a stage where we should be discussing risks or concerns. But opportunities are huge. The industry is transforming. It is a time of transformation. So we will take advantage of this time and with a joint venture with Honda Motors, we are going to show results. And then with regards to the Metaverse, the expectation is higher than anyone is expecting. But in the medium to long term, with the evolution and development of technology, at some point in the future, the market will blossom. And more than anything else, we are a company centering on entertainment. The 3D CG technology related to the Metaverse is our strength. So in line with the growth of the market, in a timely fashion, we are going to maximize our technology. And then net debt. Excluding Financial Services, the net debt situation. The debt equity balance is basically the balance with the rating. So on that point, I'd like to invite Mr. Hayakawa to make some supplementary comments.

Thank you for your question. As of the end of March, the consolidated net debt, excluding Financial Services, was ¥590 billion. As Totoki-san explained, the short-term increase in PlayStation 5 production has led to a rise in working capital. Our aim is to widely penetrate the market with PS5, which is why we are increasing working capital. As mentioned, we are utilizing short-term borrowing for financing. For this fiscal year, we estimate operating cash flow to be ¥1.25 trillion. Starting from the third quarter of this fiscal year, we plan to convert inventory into cash and manage our cash flow effectively. Regarding fiscal discipline, our approach remains steady. We have a robust financial foundation, reflected in a capital-to-shareholder ratio of 50.3%. While upholding fiscal discipline, we are committed to making investments aimed at growth. We strive to balance growth investments, fiscal discipline, and efficient management of our balance sheet to establish a sound financial policy.

So we would like to invite the next question please.

So I have two questions. First question is due to the macroeconomic situation change. So for the EP&S, I think you have referred, so in European countries, there has been a slowdown in the economy. And therefore, due to the reason, there are lots of companies providing a conservative forecast. How is this incorporated in FY23 forecasts? This is my first question. The second question is that outside from the financial results, there have been changes in the top management of the financial company. Could you make a comment on this?

Thank you very much for the question. For the first question, talking about the macroeconomic condition being changed, looking at the whole, the business environment has been affected due to financial restraint. Additionally, there have been disruptions in the global economy due to the Ukraine issue, and those conditions have not changed from last year. Therefore, I don't have any optimistic forecast. However, in advanced countries and especially in European countries, I believe there will be a slowdown. For emerging countries like China, due to the reopening from the pandemic, there is a forecast for recovery. However, my gut feeling is that there is uncertainty. That is the current global condition. From our business perspective, the U.S. economic condition is going to have a direct impact. Therefore, we are focusing on that U.S. economy. As for the change of CEO, our intention for this change is that Mr. Endo is going to assume the CEO position starting from next year because he has worked in the Finance Ministry and has contributed to the smooth operation of the monetary market, possessing great knowledge. We expect him to utilize his know-how for corporate governance, sustainability, and in consideration of the global economic condition. Since FY 2020, he has served as a senior adviser, providing us guidance.

Let us move on to the next question, from Nakajima-san from Kerotusan.

This is Nakajima from Kerotusan. Can you hear me? I have two questions. Regarding PlayStation 5, this fiscal year, 25 million is the target, which is the highest ever. Compared to PS1 and PS2, is it the highest ever compared to those units? If that is the case, smartphone games are recently very popular, and the hardware costs have been going up. With such a severe environment, is PS5 really popular? What is your take on that? And for smartphone games being very popular, what do you foresee for the existence of game consoles in FY23? On a profit basis, this part is going to decrease for software. So you talked about the increase in software development costs. Would you be able to share that information with us?

Thank you very much for the question. Regarding the PlayStation 5, for this fiscal year, the target for PS5 is 25 million units. The reason is that compared to the past PS generations, if we can achieve 25 million units in a single fiscal year, it will be the highest level ever. We believe this is possible as we see existing PS4 customers and new customers switching to PS5. We have analyzed the market and put together this forecast based on data and believe that we can achieve this target. Regarding the second question, regardless of the times, having some kind of hardware is necessary. The computing power will be at hand or it could be in the cloud. In the future, that change could happen. But in any case, some kind of a client will be necessary to enjoy different games. With the evolution of technologies and the hardware that matches the times, we will provide that hardware and create value. On the revenue side, despite the increases, we expect the profits to go down. One of the reasons is that game development costs are rising. Acquisition-related costs are also increasing this term. The game development costs are going up due to the strengthening of first-party software development and the launch of live services. We are intentionally enhancing this segment, which is why expenses are increasing. That's all.

Now we'd like to move on to the next question, Asaka-san from Nikkei Business please.

Asaka from Nikkei Business. Can you hear me? About the decrease of operating cash flow. Earlier, you mentioned that the working capital has increased. Can you elaborate more specifically on the factors that resulted in the increase in working capital? Secondly, is this impact temporary? Or will this continue into this fiscal year?

Thank you. On that question, first, FY22 operating cash flow was at a low level. And the reason for that is because it is expected to improve next year. For details, I'd like to ask Hayakawa to explain.

Thank you for your question. Your question about operating cash flow. FY23 result is expected at ¥415.5 billion, an increase in working capital mainly from the game business due to increased inventory. PlayStation 5 production faced constraints in the past. However, the constraint is now removed. With increased production, it resulted in increased working capital. Secondly, film production costs and cash outflow have increased due to production. Under COVID-19, film production was limited. The cash flow during the pandemic was not present. Normalization occurred in the last fiscal year, resulting in increases in working capital. As Mr. Totoki mentioned earlier, we expect operating cash flow for this fiscal year to reach ¥1.25 trillion.

Due to time constraints, we would like to invite the last question. I believe we have no more questions. Therefore, we will conclude this Q&A session. Thank you very much. Excuse me, please wait. Nishida-san from Freelance, are you able to join us? We would like to conclude this Q&A session now. We will have a Q&A session with the investors and analysts shortly. Please hold on for a moment. Thank you. Thank you for your patience. We will now begin the Q&A session with investors and analysts. I will be your moderator; I’m Sinchi from the IR Group. The participants are those three individuals. Please follow the previously sent instructions. Now, let's start the Q&A session. From BofA Securities, Hirakawa, please proceed.

Thank you very much. This is Hirakawa from BofA Securities. For the sensors and games, according to the presentation, I&SS has risen to 53%. Therefore, I think this kind of change to the large scale has contributed to the improvement to 51%. Are you going to improve more? Additionally, talking about the development roadmap with partners. The second question is about gaming, where there has been an increase of cost for the games and M&A costs, with a 20% increase resulting in a ¥10 billion increase. What was the increase in game development costs? Those are my two questions.

Thank you very much for the question. For the first, for the I&SS market share, as I mentioned in my presentation, for smartphone cameras and sensors, the large scale sensors have driven growth. For Chinese OEM, we are seeing a significant interest in sensors. In the midterm, we are able to increase our market share further. Regarding the second point, the increase in Game & Network Services, Naomi is going to explain.

So talking about the development costs for the games, we expect an increase due to HR costs, development costs, and the increase in M&A costs as well. For the current year, we are consolidating Bungie Inc., which contributes to a ¥12.3 billion increase. For the full year, the current total is projected at ¥65 billion. As we expect more sales of PS5, this will also result in an increase in those costs.

Thank you very much. Moving on to the next question. From JPMorgan Securities, Ayada-san please.

Thank you. This is JPMorgan. I also have two questions. First question regarding games. This term, the operating profit is expected to increase by ¥20 billion. On Page 15, there are several items listed. Can you elaborate a little more on them? Mainly there are three points; the hardware loss is going to improve. Right now the Yen is at ¥130 to the dollar. Is it based on that or are memory and parts costs going to go down? What factors will drive the improvements? For the software, the first-party software is going to decrease according to your forecast. How about third-party software and others? For SG&A, you talked about that just now. What is the difference in this term and last term for games? Secondly, for image sensors, for the fourth quarter and first quarter, if you compare the wafer introduction was slowed down. From your perspective, the smartphone market situation, depending on regions or North America, depending on models and channels, what periods do you foresee recoveries?

Thank you for your question. Regarding the first part about games, this term we expect profits to increase by ¥20 billion. The breakdown includes factors like foreign exchange conditions and material costs relating to hardware, which we believe will lead to improved profits. Software will have a slight increase but will mainly remain flat, and we don't anticipate a significant decrease in add-ons. We're cautious about third-party software and will evaluate performance from the first quarter. In terms of SG&A, we will experience changes due to the inclusion of software development costs, especially for live services we intend to develop and provide, with some costs being capitalized. As for the smartphone market situation, particularly in China, we are not optimistic. Logistical inventory levels showed a slight decline in February but increased again in March. We're concerned about high inventory levels of mid-to-low camera sensors from competitors, which could cause prices to drop quickly. In North America and Asia, the market for high-end smartphones has also weakened slightly compared to the fourth quarter. Therefore, we do not have an optimistic view for FY23 overall in the smartphone market. However, I personally believe we will see a recovery in FY24. That’s all.

Thank you very much, Mr. Ayada. Then next we move on to the next question. From SMBC Nikko Securities, Katsura-san, please.

Thank you. Katsura from SMBC Nikko Securities. Two questions. The first question regarding cash flow, excluding financial services, you said ¥1.25 trillion operating cash flow. Can you please explain the investment cash flow as well? The semiconductor CapEx plan and you are exiting break as compared to last year. If there are key points about the cash flow, please include those details. My second question, related to the operating cash flow, inventory in Q3-Q4, you maintained a high level. This year, how will you control inventory procurement materials and forecast? What level of inventory do you have in mind?

Thank you very much for your questions. Now about cash flow, Hayakawa will respond.

Thank you. About the investment cash flow, last fiscal year, our operating cash flow was ¥400 billion. Cash outflow has increased, and the investment cash flow increased by a bit more than ¥300 billion. Strategic investments with the acquisition of Bungie Inc. increased the total, along with higher CapEx. For this fiscal year, while exploring opportunities for strategic investments aimed at future growth, in view of the current market environment, we are being more cautious and conservative. That is all from me.

About CapEx, as explained, I&SS CapEx is reflected. Inventory control varies by each business segment. For games, we expect to see increasing inventory leading up to the year-end sales. Following this, it will normalize. For EP&S, last fiscal year, there were concerns, but that we are able to control inventory very well. For this fiscal year, likewise, we are going to have a conservative sales plan, and the appropriate level of inventory will be maintained and controlled continuously. I&SS strategic inventory will begin to reduce from the second quarter onwards, and the amount of inventory will see an increase as sales rise. By the end of FY23, levels will be higher compared to the end of FY22. However, on a forward basis, the turnover month will be appropriate. We are calculating this to ensure it is at a profit level. We aim to bring it to the appropriate level. That's all from me. Thank you.

Thank you very much. We would like to move on to the next question from Citigroup, Ezawa, please.

From Citigroup, Ezawa. I have two questions. The first one is about OIBDA. You're going to start disclosure. Therefore, this is in comparison to EBITDA. What is the difference? Why are you going to start disclosing OIBDA rather than focusing solely on EBITDA? Will there be differences or a larger gap between the two? Please explain the logic. The second question is about semiconductors. Is there a specific reason behind the changes of operating income despite the increase in sales?

Thank you very much for the question. For the first one, OIBDA disclosure is something we are implementing. In comparison to EBITDA, OIBDA does not include outside sales for outdoor segments. Therefore, looking at the segments, OIBDA can provide more clarity as it is similar to EBITDA. The gap between the two will not increase in the future. For the time being, through the three-year business plan, we will focus on consolidated EBITDA as an important KPI. We believe it is essential to explain each segment, which is why we decided to disclose OIBDA. In addition, this will enhance communication externally. Regarding I&SS, despite the increase in sales, profitability is slightly lower due to the mass production of new products requiring more costs.

Yes, thank you. We only have a short time left. The next question will be the last one. Mizuho Securities, Nakane, please.

This is Nakane from Mizuho Securities. Thank you very much. I have two questions. I'd like to understand the assumptions you're using this term. Regarding I&SS, at the end of the fiscal year, the production capacity assumptions and inventories are going to increase. What are the operational movements after Q2? And Totoki-san, you mentioned earlier that you are targeting higher mid- to low inventories. I assume you still have some inventory left. What are you reflecting for the remaining inventory regarding risks of valuation? Should we be concerned about that? Second, regarding H&S, the JV is improving, and R&D costs are increasing. The JV in audio and video, cameras, mobiles, and others. If we look at these categories, will the JV move into profitability from red? What might drive an improvement or deterioration?

Thank you very much for the questions. Regarding I&SS, at the end of the fiscal year, the production capacity assumptions for FY22 indicate an average capacity of 133,000 units per month in Q4, and it is expected to rise to 160,000 units per month moving forward. In FY23, Q1 is expected to see 130,000 units produced, then tapering to 127,000 units. We will continue to focus on the high-end portion. As for the mid- to low inventory valuation reduction risk, we do not believe we will reach a point where reductions are necessary. The general-purpose items should sell stably. Therefore, we don't think there will be significant issues. However, we do recognize the risk for ASPs within mid-to-low products, which may build up. We expect that risk to become more severe in this term. Regarding our divisions, for digital cameras, we expect FY23 revenue to rise, but profits might decrease slightly. For TVs, revenue could decline significantly, but profitability should improve as we faced challenges last year. We are taking a conservative sales approach in various categories. Additionally, for the mobile segment, while revenues may decline, profitability likely will improve as we narrow our focus and reduce fixed costs.

Thank you very much, Mr. Nakane. With this, we would like to end the financial result announcement for the Sony Group. Thank you very much.