Sony Group Corp Q1 FY2023 Earnings Call

Good afternoon, ladies and gentlemen. It is now time to start Sony Group's Q1 FY 2023 Consolidated Financial Results Presentation Meeting. I am Okada from 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 DE&I promotion, also supporting Financial Service and Entertainment segment, Naomi Matsuoka; and Senior Vice President in charge of Finance and IR, Sadahiko Hayakawa. These three will present the Q1 FY 2023 consolidated financial results and the outlook for the entire FY 2023. We will have a question-and-answer session and plan for a 70-minute session. Thank you. The first speaker is Mr. Totoki.

So the speakers today are Matsuoka and Hayakawa. I would like to make summarizing comments toward the end. So, first speaker, Hayakawa-san, and Matsuoka and Hayakawa will present the consolidated results. Starting from FY '23 Q1, Sony has adopted a new accounting standard, IFRS 17, pertaining to insurance contracts, recalculating the annual results for the same quarter of the previous fiscal year. The previous fiscal year's results we will show today are 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% year-on-year to JPY 2,963.7 billion. Consolidated operating income decreased JPY 111.8 billion year-on-year to JPY 253.0 billion, primarily due to a JPY 84.7 billion decrease in operating income of the Financial Services segment. This decrease in operating income on the Financial Services segment was primarily due to the impact of the recalculation of previous weaker years' results, as a result of applying the new standard, and the absence of a gain on the sales of real estate recorded in the same quarter of the previous fiscal year. Adjusted EBITDA decreased JPY 90.6 billion year-on-year to JPY 406.2 billion. Income before income taxes decreased JPY 73.2 billion year-on-year to JPY 276 billion. Net income attributable to Sony Group Corporation shareholders decreased JPY 43.5 billion to JPY 217.5 billion. Result per segment for the quarter is shown on this slide.

Next, I will explain the full-year consolidated results forecast for FY '23. The forecast for the full year is JPY 12.2 trillion for sales, an increase of JPY 700 billion from the previous forecast. JPY 1.170 trillion for the operating income, no change from the previous forecast. JPY 1.750 trillion for adjusted EBITDA, no change from the previous forecast. The forecast for consolidated operating cash flow, excluding the Financial Services segment, is unchanged from the previous forecast.

Now I will move on to an overview of each business segment. First is the Games & Network Services segment. FY '23 Q1 sales increased a significant 28% year-on-year to JPY 771.9 billion, primarily due to an increase in sales of third-party software and PlayStation 5 hardware and the impact of foreign exchange rates. Operating income decreased JPY 3.6 billion year-on-year to JPY 49.2 billion, primarily due to an increase in expenses, including the acquisition-related expenses of JPY 16.6 billion. Despite the positive impact of higher third-party software sales, adjusted OIBDA increased JPY 5.7 billion year-on-year to JPY 75.9 billion. FY '23 sales are expected to be JPY 4.170 trillion, an increase from the previous forecast of JPY 270 billion. Operating income is expected to be JPY 270 billion, with no change from the previous forecast. Adjusted OIBDA is expected to be JPY 375 billion, an increase of JPY 10 billion from the previous forecast. Although we upwardly revised the sales forecast for third-party software, which is performing well, we have also incorporated the deterioration in the profitability of PS5 hardware, mainly due to changes in promotions by geographic region and the sales channel mix. Total gameplay time during the quarter was only 2% higher year-on-year, and we see the year-on-year growth in software sales has been driven mainly by a considerable increase in spending per play hour by the expanding PS5 user base. PS5 hardware sales were 3.3 million 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 million units. However, due to the promotion beginning in July, we are seeing an improvement in the momentum of sales. We have positioned the accelerated penetration of PS5 hardware as one of our highest priorities this fiscal year and will work steadily to implement necessary measures to achieve the hardware sales target of 25 million units. Towards the end of the calendar year, major first-party titles like Marvel Spider-Man 2 are scheduled to be released. We expect that the entire gaming industry and the PS platform will be greatly energized. Next is the Music segment. FY '23 Q1 sales increased by a significant 16% year-on-year to JPY 358.2 billion, primarily due to the increase in streaming sales and impact from foreign exchange rates. Operating income increased a significant JPY 12.4 billion year-on-year to JPY 73.4 billion, primarily due to increased sales and the recording of a remeasurement gain related to a consolidated subsidiary. Adjusted OIBDA increased by JPY 8.2 billion year-on-year to JPY 82.9 billion. Profit contribution from the visual media platform was just under 10% of the operating income of this segment. FY '23 sales are expected to be JPY 1.490 trillion, an increase of JPY 80 billion from the previous forecast. Operating income is expected to be JPY 280 billion, an increase of JPY 15 billion from the previous forecast. Adjusted OIBDA is expected to be JPY 335 billion, an increase of JPY 10 billion from the previous forecast. 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 continue to deliver hits at a high level. During the quarter, 38 of our songs on average ranked in the Spotify Weekly Global Top 100 songs. 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. Creating continuous hits in the short term leads to an enhancement of future catalog and increases in sales and market share in the mid to long term. We have doubled the number of creative personnel at Sony Music Entertainment in the last 5 years, and the number of artists producing songs for streaming worldwide has increased by 35%. As a result, our current market share in the U.S. over the past 4 years has risen from 21% to 27%. Sales and operating income for Sony Music Group, including Music Publishing overseas, have shown significant CAGRs of 17% and 24%, respectively. In addition to continuous investment in artists and labels, we aim to achieve stable growth that outperforms the market by expanding our business into 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 million streams, becoming the fastest song to reach this total in history, according to Billboard Japan. It held the #1 spot for 16 consecutive weeks in the total domestic song chart. This momentum is spreading overseas, and the song has become a global hit, reaching #7 on Billboard's Global Hits chart. With the 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 '23 Q1 sales decreased 6% year-on-year to JPY 320.4 billion, mainly due to a decrease in deliveries in television productions and the impact of fewer releases of tent-pole films in the previous fiscal year within Motion Pictures. Operating income decreased a significant JPY 34.7 billion year-on-year to JPY 16 billion, primarily due to the decrease in sales and increased marketing expenses in Motion Pictures. Adjusted OIBDA decreased JPY 33.4 billion year-on-year to JPY 28.5 billion. FY '23 sales are expected to be JPY 1.470 trillion, down JPY 50 billion from the previous forecast. There is no change to the forecast for operating income and adjusted OIBDA. Spider-Man: Across the Spider-Verse, which was released theatrically in June, has become a huge hit with box office revenue exceeding USD 680 million worldwide as of August 7, making it our highest-grossing animated film ever. Regarding Crunchyroll, the number of paying subscribers surpassed 12 million in July, driven by exclusive distribution of the television animation, Demon Slayer: Kimetsu No Yaiba Swordsmith Village Arc, which started in April. Our anime business is steadily growing in a multifaceted way with overseas distribution of the anime film, Suzume no Tojimari, and strong sales of the mobile game, Street Fighter: Duel. Although it is unclear when the strikes in Hollywood will end, we aim to work with a coalition of motion picture and television producers to negotiate a resolution with the unions as soon as possible so that we can restart normal production activities. Next is the ET&S segment. FY '23 Q1 sales increased 4% year-on-year to JPY 571.8 billion, primarily due to foreign exchange rates, despite a decline in smartphone and television sales. Operating income was JPY 55.6 billion, an increase of JPY 2.1 billion year-on-year, primarily due to cost reductions in televisions despite decreased smartphone sales. Adjusted OIBDA increased JPY 3.9 billion year-on-year to JPY 80.9 billion. FY '23 sales are expected to be JPY 2.430 trillion, an increase of JPY 50 billion from the previous forecast. There are no changes to the forecast for operating income and adjusted OIBDA. In each category, we are running our operations to respond to changes in the market environment. We were able to secure stable profits across the entire segment. Inventory levels have improved significantly year-on-year, mainly for television due to thorough management from production to sales, and we are managing them at the profit level. As the 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 harvesting income in the additional camera space by keeping up with recent strong demand. We have introduced appealing new products that you see here and are focusing on securing stable profits by continuing to enhance our product appeal. Next is the I&SS segment. FY '23 Q1 sales significantly increased 23% year-on-year to JPY 292.7 billion, mainly due to high sales of image sensors for mobile products and the impact of foreign exchange rates. Operating income decreased JPY 9 billion year-on-year to JPY 12.7 billion, primarily due to an increase in expenses such as depreciation and amortization despite the positive impact of foreign exchange rates and increased sales. Adjusted OIBDA increased JPY 2.7 billion year-on-year to JPY 70 billion. For FY '23, sales are expected to be JPY 1.560 trillion, down JPY 40 billion from the previous forecast. Operating income and adjusted OIBDA are expected to decrease by JPY 20 billion from the previous forecasts to JPY 180 billion and JPY 425 billion, 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. We previously 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. With respect to the increase in costs associated with launching mass production of new products for smartphones, we have reflected the latest production situation and 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 also in middle-range phones. There's no change in our view that the trend toward larger mobile image sensors will drive overall growth of the sensor market, which we project will grow at an average annual rate of around 9% until FY 2030. We plan to continue implementing measures from a mid- to long-term perspective as well, such as strengthen technology development capabilities and securing production capacity so we can steadily capture growth opportunities when the market conditions recover. Last is the 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 adopting the new standards, focusing on important points. For details, please refer to Page 15 of the handout. Under the new standard, Financial services revenue decreased primarily because the portion of insurance premium revenue amounting to surrender value, which used to be recorded as revenue, is no longer recorded. In addition, under the new standard, the amount of liability increased or decreased depending on market fluctuations due to insurance contract liabilities being re-evaluated based upon the latest financial variables, such as end-of-quarter interest rates. The increase or decrease of such liabilities related to minimum guarantees 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 JPY 889.1 billion, mainly due to non-recognition of surrender value. Operating income increased by JPY 94.2 billion from the previous standard to JPY 318.1 billion due to a significant decrease in insurance policy liabilities after recalculation, primarily due to a rise in ultra-long-term interest rates in the previous fiscal year and the recognition of profit due to that decrease. Now I will explain this segment's performance in the current quarter on a year-on-year recalculated basis. Financial Services revenue increased significantly by 215% year-on-year to JPY 681.4 billion, 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 both inside and outside Japan. There is no difference between the new and previous standards regarding how market fluctuations impact gains and losses in separate accounts. Operating income decreased significantly by JPY 84.7 billion year-on-year to JPY 54.5 billion, primarily due to the control of market fluctuation impact 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 by JPY 84.2 billion year-on-year to JPY 61.4 billion. The forecast for FY '23 Financial Services revenue is JPY 1.320 trillion, an increase of JPY 450 billion from the previous forecast, reflecting the result of the current quarter. There are no changes to the forecast for operating income and adjusted OIBDA. As has always been the case, the forecast does not reflect the impact of market fluctuations from the second quarter onwards. Additionally, we expect insurance service revenue results of Sony Life to continue to grow stably in line with the expansion of policies in force. Finally, I would like to summarize everything. Business areas such as entertainment and image sensors, which we have positioned as growth areas, are seeing opportunities for growth over the mid- to long-term. We aim to grow through the unique competitiveness that each business has in its area. 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 businesses of ET&S, I&SS, and G&NS, we are responding primarily to the stagnation of the Chinese economy, the slowdown of the economies in Europe and the United States, and geopolitical risks. In the Pictures business, we plan to focus on various issues such as the strikes in Hollywood. We have reincorporated 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, while looking forward to the potential market recovery from the next fiscal year as an opportunity and preparing for our next stage of growth.

Thank you very much. Totoki, Matsuoka, and Hayakawa have made their presentations. Now at 16:25, we would like to entertain questions from the media. At 16:50, we will entertain questions from investors and analysts. Each session consists of about 20 minutes. Some participants have pre-submitted questions, so please link your phone to the registered phone number to ask questions. For details about asking questions, please refer to our invitation letter. Please wait a few minutes before we resume the session. Thank you.

I hope you can hear me. I'm Furuka of Nikkei newspaper. I have two parts of questions. The first question is about your financial results. As Mr. Totoki explained, the situation seems to be leveling off with games and semiconductors, but what is your vision for growth? Which areas and segments do you see as likely to grow more? Do you have a vision for this growth scenario? That's my first part of the question. My second question is about the situation regarding the strikes. To what extent might new film releases be delayed due to the U.S. strikes of actors and others? Additionally, how do you think generative AI might adversely impact music and films? Might some of the content assets be undermined by AI?

Thank you very much for your question. Regarding your first question about the growth scenario in the next fiscal year, we are focusing on the mid-term business plan that incorporates intergroup collaboration involving Content IP, DTC technology investments, and some diversified business segments. As a result, over the last three years, we have achieved a cumulative capital investment in equipment imaging of JPY 1.9 trillion and JPY 1.8 trillion for that strategic investment. Gradually, we have made progress. For the mid- to long-term, we have planted seeds for future growth potential. That’s the first point. Regarding collaboration within our group companies and segments, PlayStation game IP will be utilized in various major production projects, like the HBO drama series, which became a big hit in February 2022. Following the successes of 'Uncharted' released in theaters, numerous projects are ongoing. Therefore, there is a strong momentum with the collaboration of our entertainment businesses. For the next mid-term plan, we expect significant growth across the entertainment segments. As for the I&SS segment, while there may be some stagnation this fiscal year, revenue sales are increasing, and we need to secure profitability in our growth scenario. This is a priority moving forward. Regarding your second part of the question about the strike-related issues, it's not just linked to the strikes but also to generative AI, which has an adverse impact on various production areas, including film and television. Generative AI can help in production activities but also threatens content assets by potentially violating copyright. We have to protect intellectual property, the rights of artists, and associated content. Related issues require solutions that involve stakeholders—not only Sony but the entire industry needs to discuss how to address these challenges together.

Thank you very much for your question. Let’s move on to the next question.

Can you hear me? I have two questions. First, regarding your points about the three entertainment segments together, you mentioned that the income exceeds 54%. It’s still quite high. Concerning the next MLP, what percentage would you like to reach for the total income from those three segments? As for the China slowdown, you have specifically mentioned in I&SS. What about the impact on other segments due to weak consumer spending in China?

Thank you very much for your question. To answer your first question, we do not have a specific target percentage for the combined operating income of the three entertainment segments. However, I believe that with the growth we expect from our strategy in entertainment and I&SS, the share of profit from these segments will increase. Regarding your second question about the overall impact of the Chinese economy slowdown on other segments, the consumer spending weakness will definitely affect our ET&S segment, particularly in TVs and smartphones. However, for FY '23, our plans were made conservatively, and management has been performing well overall.

Now we will move on to the next question.

I'm Abe from Industry Delhi. Can you hear me? I have a question related to the ET&S segment. The sales units increased, which relative profit increased. By regions, can you explain the year-on-year basis growth rate? What’s your outlook on the Chinese market going forward? Do you expect strong demand to continue?

Thank you for your question. For the ET&S segment, the digital camera business has increased in the number of units sold, and the sales in China and Asia have been very robust. In Europe and the U.S., competition is getting more severe, resulting in some slight declines in market share. We are making additional investments in sales promotions and expecting our market share to increase. However, we should not be overly optimistic, as we must prepare for a potential slowdown in the market. We will also invest in new products and control production effectively.

Next question, Kyodo Tsushinsha, Endo-san, please.

Endo from Kyodo Tsushinsha, I hope you can hear me. I have one question about the camera. Are sales increasing post-COVID-19 due to increased consumer activities? Is this new demand linked to the pandemic reaction?

Thank you for the question. There is indeed some pent-up demand following the COVID-19 pandemic. After a downturn, demand has come back strongly, and consumers are willing to spend on travel, which positively impacts digital camera sales.

We would like to move on to the next question.

I have two questions. First, regarding the game business, the increase of third-party applications. Do you think this trend will continue? Are there any required efforts for promotion? Second, regarding Pictures, does the overseas market fluctuation impact drama streaming?

Thank you for your questions. Regarding Game & Network Services, we experienced strong new title releases from third-party partners in the first quarter, and we are very pleased with this trend. While our first-party titles have seen a dip, overall, we anticipate strong performance in both categories and will continue to foster these relationships.

Regarding your question on PS Plus and disclosure conditions, we ceased disclosing subscriber numbers due to a renewal in June FY '22, which has altered how we report figures. Post-renewal, we have noted a significant subscriber shift towards more attractive titles, which we aim to continue promoting within our business.

Regarding your query about streaming market fluctuations: there are many tent-pole films currently released in overseas theatrical markets. However, due to the ongoing strikes, major studios have delayed productions, which could indirectly affect advertising and box office performance.

Time is running short, so the next will be the last question.

Kutsumi from Nikkei. PS5 sales were lower than the forecast. What were the reasons for this, and do you attribute it to sluggish consumer spending or alternatives in gaming hardware?

PS5 sales were 3.3 million units, slightly below expectations, but that's still a 38% year-on-year increase. Demand remains strong, but promotions were more limited to ensure profitability. Starting from July, we have initiated more comprehensive promotions. We are observing encouraging sales trends, and we aim to achieve our fiscal year target.

Thank you very much. This concludes today's Q1 FY 2023 consolidated financial results presentation. On behalf of Sony Group Corporation, I would like to thank you again for your participation.