Sony Group Corp Q3 FY2023 Earnings Call

We will now begin FY 2023, Q3 consolidated financial results Corporation. I am Okada, the Corporate Communications, I am master of ceremonies. People on the stage are Mr. Hiroki Totoki, President, COO and CFO; Ms. Naomi Matsuoka, Senior Vice President in charge of Corporate Planning and Control, Lead of Group Diversity Equipment and inclusion, support for financial services and entertainment area; Mr. Sadahiko Hayakawa, Senior Vice President in charge of Finance and IR. These 3 people will be explaining the FY '23 Q3 results and full year forecast, followed by Q&A. A total of 70 minutes is allocated. Mr. Totoki, the floor is yours.

Today, after Mr. Matsuoka and Mr. Hayakawa explained the content shown here, I will summarize the entire earnings briefly. Mr. Hayakawa, please go ahead. Matsuoka and Hayakawa will explain.

Consolidated sales for the quarter were ¥3,747.5 billion, a significant increase of 22% compared to the same quarter of the previous fiscal year, a record high on a quarterly basis. And the consolidated operating income increased ¥41.8 billion year-on-year to ¥463.3 billion, the second highest level on a quarterly basis. Net income increased ¥42.4 billion year-on-year to ¥363.9 billion, and adjusted EBITDA increased ¥75.5 billion to ¥605 billion. Nine-month cumulative consolidated operating cash flow, excluding the Financial Services segment was ¥618.5 billion. The full year forecast is for sales to be ¥2.3 billion, a decrease of ¥100 billion from the previous forecast for operating income to be ¥1.180 trillion, an increase of ¥10 billion from the previous forecast. And for net income to be ¥920 billion, an increase of ¥40 billion from the previous forecast. Adjusted EBITDA is expected to be ¥1.770 trillion, a decrease of ¥15 billion from the previous forecast, primarily reflecting the impact of the foreign exchange rate on nonoperating profit and loss. The consolidated operating cash flow forecast, excluding the Financial Services segment, is expected to be ¥1.80 trillion, a decrease of ¥80 billion from the previous forecast, mainly reflecting an increase in working capital in the G&NS segment. Now I will move on to an overview of each business segment. First is the G&NS segment. FY '23 Q3 sales increased a significant 16% year-on-year to ¥1,444.4 billion, primarily due to increased third-party software sales and the impact of foreign exchange rates. Operating income decreased significantly ¥30.1 billion year-on-year to ¥86.1 billion, primarily due to a deterioration in the profitability of PlayStation 5 hardware mainly due to promotions and adjusted OIBDA decreased ¥26.8 billion to ¥113.1 billion. The full year forecast is for sales to be ¥4.15 trillion, a decrease of ¥210 billion from the previous forecast, and operating income and adjusted OIBDA remain unchanged. Inventory-related reserves that were additionally recorded in the current quarter, mainly due to an increase in inventory resulting from the decline in PS5 unit sales in the current quarter, are expected to be recorded as a recovery gain in the fourth quarter due to a decrease in inventory. As a result, there is no impact on our full year operating income forecast, but there is an expected shift in profit of approximately ¥30 billion from the current quarter to the fourth quarter. PS5 hardware unit sales in the quarter were 8.2 million units, which fell short of the target to hit our annual shipments of 25 million units, but was a record high number of quarterly unit sales for PS5 and the cumulative sales have exceeded 50 million units. Due to the impact of the increasing popularity of PS5 and third-party free-to-play hit titles, key user engagement metrics have increased significantly with monthly active users for all our peers in December, reaching a record high of 120 million accounts and total gameplay time for the quarter increasing 13% year-on-year. Based on the results for this quarter, PS5 unit sales for this fiscal year are expected to be around 21 million units. Regarding first-party software, the cumulative sales of Marvel's Spider-Man 2, which was released last October, exceeded 10 million copies as of February 4. And the Marvel's Spider-Man game series has now sold through over 50 million units, including on PC. The game is our second blockbuster hit in 2 years following God of War Ragnarok, which was released in the same period last year and is making a major contribution to profits. Regarding network services, despite the impact of a slight year-on-year decrease in the number of PS subscribers, sales increased 11% year-on-year, mainly due to the impact of a further shift to higher-end services and price revisions. Now I would like to explain our current view on the outlook for this segment next fiscal year. Regarding the PS5 hardware, which will enter its fifth year since launch, partially due to its entering the latter half of the console cycle, we aim to optimize sales with a greater emphasis on balance with profits. So we anticipate a gradual decline in unit sales from next fiscal year onwards. We expect third-party software sales to continue to expand gradually due to the expansion of the PS5 installed base and the high level of user engagement. In Network Services, we expect subscribers to be on par with this fiscal year or slightly less due to the impact of price revision we implemented in this fiscal year, but we expect sales to gradually expand due to a shift to attractive premium services. Regarding first-party software, we aim to continue to focus on producing high-quality works and developing live service games. But while major projects are currently under development, we do not plan to release any new major existing franchise titles next fiscal year, like God of War Ragnarok and Marvel's Spider-Man 2. Although the burden of acquisition-related costs will ease next fiscal year, we expect profits from first-party software to decrease slightly from this fiscal year due to the impact of the decrease in sales. Based on this, operating income for the next fiscal year is currently expected to increase slightly from this fiscal year. However, while this is our baseline, we are reviewing measures for further improvement in profitability in advance of our annual forecast results announcement this May.

Next is the Music segment. FY '23, Q3 sales increased 16% year-on-year to ¥422.1 billion, and operating income increased ¥13.1 billion to ¥76.1 billion, both significant increases. Adjusted OIBDA increased ¥19.9 billion year-on-year to ¥98.5 billion. Streaming revenue for the quarter on a U.S. dollar basis continued to grow, increasing 12% for Recorded Music and 17% for Music Publishing. Profit contribution from Visual Media and Platform was a mid-single-digit percentage of the operating income of the segment. The FY '23 forecast is for sales to increase ¥10 billion from the previous forecast, ¥1.57 trillion operating income to be unchanged and adjusted OIBDA to increase ¥10 billion to ¥360 billion. In recent years, the expansion of the streaming market has greatly expanded the revenue opportunities and asset value of music catalogs that have been released for a certain period of time. During the quarter, the total streams of 5 of our holiday song catalogs by our artists succeeded ¥1 billion in the United States. Mariah Carey's album, Merry Christmas, ranked in the top 10 of SMEs album sales for the quarter 29 years after it was released. In Music Publishing, the use of catalogs synchronized with images, such as background music from movies and advertisements is also an important source of revenue. Today, we have established a strong foundation that we expect will contribute to achieving stable revenue and expanding our market share in the Music business by acquiring the publishing rights to large catalog works led by EMI Music Publishing and the catalogs of industry-leading artists such as Bruce Springsteen and Paul Simon. Moreover, depending on the rights for each catalog, we plan to expand opportunities to use the music and are working to create new revenue, such as in the artist merchandise and event promotion areas. Of the 4 major awards presented at the 66 Grammy awards on February 5, Miley Cyrus won Record of the Year, and Victoria Monet won Best New Artist. Sony Music Group artists and songwriters won awards in multiple other categories, including SZA, who was nominated in 9 categories, the most of any artist this year. Next is the Pictures segment. In the current quarter, sales increased by 10% year-on-year to ¥366.3 billion and operating income increased significantly ¥16.2 billion year-on-year to ¥41.6 billion, mainly due to increases in television and digital streaming licensing revenues and home entertainment sales from motion pictures. Adjusted OIBDA increased ¥16.3 billion year-on-year to ¥54.6 billion. The FY '23 forecast is for sales to increase ¥10 billion from the previous forecast to ¥1.47 trillion and for operating income and adjusted OIBDA, they will remain unchanged. Although the Hollywood strikes have finally ended, delays in script development have caused continued changes in movie release schedules and delays in the delivery of television shows. As a result, we estimate the impact of the strikes on profits in the current fiscal year to be a little less than ¥20 billion. Next fiscal year, in addition to continued delays and releases, it is expected that digital streaming licensing and other revenues will decline due to a decrease in the number of films released this fiscal year. So the negative impact on profits due to the strikes is expected to reach its peak and the amount of such impact on a U.S. dollar basis is expected to be slightly less than twice as much as in the current fiscal year. On the other hand, the paying subscribers of Crunchyroll, which is driving growth in this segment, exceeded ¥13 million as of the end of December last year and have expanded at an average pace of 23% a year since we acquired the business in August 2021. In addition to continuing to provide appealing anime content to core fans, we are focusing on measures to broaden the anime fan base and deepen engagement by collaborating with external partners, such as Amazon expanding the service into growth markets such as Brazil, India, and Southeast Asia. And further expanding in business areas such as theatrical distribution, anime movies, and e-commerce. Amortization costs associated with the acquisition are expected to decrease significantly from next fiscal year onwards, and we expect this to further contribute to profit in this segment. For the next fiscal year, despite the challenging environment, where the impact from the strikes on profitability is expected to increase, we are aiming for a level of operating income that exceeds the current fiscal year as we intend to further grow our Crunchyroll business, develop and produce content all over the world, enhance theatrical distribution by distributing films from third-party studios and maintain a strong focus on cost control. Next is the Entertainment, Technology & Services segment. FY '23 Q3 sales decreased 2% year-on-year to ¥735.7 billion, mainly due to lower sales of televisions, and operating income decreased ¥3.9 billion to ¥77.2 billion, and adjusted OIBDA was ¥103.4 billion, down ¥1.9 billion. The FY '23 forecast is for sales to decrease ¥10 billion from a previous forecast to ¥2.43 trillion for operating income and adjusted OIBDA; they will remain unchanged. In North America, expected growth was not being made. There was no sign of major decline in demand expected and sales were relatively steady. In the Chinese market, while demand for digital cameras fell sharply, demand for digital cameras was higher than expected. And our overall performance was roughly in line with the expectation. Furthermore, as a result of care for production and sales control, the overall inventory level in the segment at the end of December, was significantly reduced to ¥341.3 billion, an 18% decrease year-on-year. Regarding televisions in the fourth quarter, we plan to further reduce the inventory and reduce costs based on results of the year-end selling season. Regarding digital cameras and interchangeable lenses, we aim to continue to expand our businesses, including through the introduction of new products to the market. Next is the Imaging & Sensing Solutions segment. FY '23 sales for the quarter increased significantly, 21% year-on-year to ¥505.2 billion primarily due to an increase in sales of image sensors for mobile. And operating income increased ¥14.9 billion to ¥99.7 billion, both new record highs for the segment. Adjusted OIBDA increased ¥29.0 billion year-on-year to ¥163.7 billion. The FY '23 forecast is unchanged from the previous forecast. We believe that the smartphone product market, which has continued to experience negative growth compared to the last calendar year, has hit the bottom in the current quarter. But the North American market is still showing declines compared to the last calendar year, and there is still uncertainty in the outlook. During this quarter, sales increased significantly year-on-year, primarily due to a recovery of the smartphone product market and the introduction of large-size sensors for high-end products. Nevertheless, we plan to continue to operate our business cautiously for the time being while continuing to monitor product market trends and inventory status. The yield rate of the mobile sensor, which is the most important issue for the current fiscal year, is progressing following the improvement curve assumed in the previous forecast. And the impact on profitability has not changed from the previous forecast. Regarding the sensor business, other than the mobile sensor, the delay in recovery in the sensor market for industry and social infrastructures has become particularly noticeable. So we plan to proceed with positional adjustments and the improved inventory in the fourth quarter. Sales in the segment during the current mid-range plan are expected to grow significantly by an average of 22% year-on-year basis and 8% on a U.S. dollar basis. We have been able to steadily transition our mobile sensors to become larger and more value-added. And we believe that we will be able to continue to grow our business in a period of the next mid-range plan. On the other hand, at a time when sales are not increasing as planned, primarily due to the market environment, we recognize that significant increases in manufacturing costs, mainly due to capital expenditure and production operational losses such as those brought on by deterioration yield issues need to be addressed in order to further improve profitability going forward. Regarding human sensor capital expenditure, in the period next mid-range plan, we plan to leverage production capacity and strategy inventory we have built up ahead of time to optimize the investment. Lastly, there is the Financial Service segment. For the current quarter, mainly due to the impact of market fluctuations on Sony Life. Financial Services revenue increased ¥287.3 billion year-on-year to ¥311.7 billion, and the operating income increased ¥30.2 billion to ¥77.3 billion, both significant increases. Adjusted OIBDA increased ¥30.5 billion year-on-year to ¥84.3 billion. Sony Life's cumulative new policy amount enforced during the 9 months ended December 31, 2023, continue to grow steadily, increasing 22% year-on-year to ¥7.3 trillion. FY '23 Financial Service revenue is expected to increase ¥90 billion from our previous forecast to ¥1.3 trillion. Annual operating income is expected to increase ¥20 billion from the previous forecast to ¥175 billion, reflecting the recording of a gain mainly from the transfer of a portion of the share of Sony Payment Services Inc. by Sony Bank. Adjusted OIBDA is unchanged from the previous forecast. Please note that the forecasting corporate costs associated with profit quality improvement measure at Sony Life going forward excluding the record of the gain mainly from the transfer I just mentioned, we have made no change of our previous forecast. Finally, I would like to speak about the main points regarding the forecast for this fiscal year and outlook for each business in next fiscal year and beyond. Regarding the outlook for the current fiscal year, consolidated operating income for the quarter reached the level approaching the record high level achieved in the third quarter of the fiscal year ended March 31, 2022. And I think we have created good momentum towards completing the current maturing. Looking ahead to the next fiscal year, in the G&NS segment, we expect operating income to slightly increase from the current fiscal year as the gradual growth in third-party software and network services due to the expansion of the PS5 installed base offsets a decrease in profit from first-party software. In the Pictures segment, although the impact of the strike is set to peak next fiscal year, we are aiming for a level of operating income that exceeds the current fiscal year, mainly due to the expected growth of controlled development of a global production and to control costs. In the I&SS segment, we expect moderate sales growth due to a recovery of the smartphone market as well as increasing the size and value added of mobile sensors, which have been promoting to date. Regarding image sensor, capital expenditure during the period of the next mid-range plan, we currently assume that we will be able to keep it to approximately 70% to 80% of the current mid-range plan period by taking forward by existing production facility and strategic inventory. In the Financial Services segment, we were able to obtain approval for the corporate restructuring plan for partial spinoff under the active segmenting industrial competitiveness of Japan. Based on the approval, we are working diligently to prepare for the spinoff and listing of the shares of Sony Financial Group, Inc. in October '25. That's all for my explanation.

Thank you very much. We have had presentations from Totoki, Hayakawa, and Matsuoka starting at 4:25, followed by a Q&A session for the media. From 4:50, we will hold a Q&A session for investors and analysts, with each session lasting 20 minutes. Please wait for the Q&A session to start. We will now take questions from the media. The individuals shown in the slide will be the ones responding to your questions. I would like to begin the Q&A session now. The first question is from Tsutsumi from Nikkei Shimbun Newspaper.

Tsutsumi from Nikkei Shimbun has two questions. The first question is about the strategic investment and capital expenditures of the current midrange plan. You mentioned this in relation to the semiconductor group for the entire fiscal year 2021 through the end of this fiscal year, which spans three years. By the conclusion, what will the total amount of investment be? Additionally, looking ahead to the next mid-range plan, what will the direction and size of strategic investment and capital expenditures be? Will there be an increase in investment, or will strategic investment rise while capital expenditures remain flat? Can you clarify the direction and the size? The second question pertains to the medium-term return on invested capital forecast for each business segment, including entertainment and semiconductors. What applications and uses are expected to drive growth in products and services? Could you please provide more details? These are my two questions.

Thank you for your questions. Your first question is about the current mid-range plan and the strategic investment and capital expenditure from fiscal year '21 through '23. The total capital expenditure will be around ¥1.9 trillion, with M&A and other strategic investments amounting to ¥1.8 trillion. This is our forecast, and the investment is progressing well. In the medium term, we expect this investment to yield results. We plan to provide a detailed explanation regarding the next mid-range plan, including the size and direction of the investment, in the spring of the next fiscal year. The capital expenditures in I&SS will represent 70% to 80% of our total investment, as mentioned in my presentation. The largest portion of the capital expenditure will be in I&SS, which will see a slight increase in investment. For strategic investments, we need to evaluate various opportunities, making it difficult to give exact figures, but we anticipate levels to be similar to this fiscal year or possibly slightly lower. Strategic investments also include returns to our shareholders, which we have to factor into our strategic planning. Looking ahead to next year, we expect gains in the entertainment sector to drive our return on invested capital. We also expect improvements in music, where we've strengthened our business and competitiveness through the acquisition of large catalogs. Moving forward, we aim to further expand based on this catalog base. That concludes my remarks. Thank you.

Next question, Mr. Meyaki from Toyo Kezai. Toyo Securities.

I have two questions. First, regarding the spin-off announced today, I'm curious about its purpose. It seems that by doing this, the entertainment and other areas you are focusing on won't generate cash. How does this spin-off align with your efforts to improve the business? My second question is about your strategy in India. I know that your merger talks with Z were unsuccessful. While you shared some insights about India, are you considering changing your strategy? What will happen to the investment you intended for that merger? How do you plan to utilize those funds?

Thank you for the question about the financial spinoff. We will not be using any cash for this. On our balance sheet, we have recorded assets and liabilities totaling about ¥20 trillion. Streamlining this will make capital allocation for the business easier. On the other hand, the financials can pursue their own growth as they will become a listed company. I believe this will create a win-win situation for both companies. Regarding the merger with Z, the negotiations have been announced but are not currently progressing. However, India presents significant long-term growth potential, making it an attractive market. We will explore various opportunities, and if we find another viable option, we will consider it while also focusing on organic growth and our overall strategy. As for the investment intended for the merger, it will not affect our capital allocation or investment behavior. Currently, we do not have any concrete plans.

Now we can move to the next question. Jarka from Newspeaks.

My name is Jarka from Newspeaks. My first question is about the Gaming business. In recent years, you faced shortages of smart chips due to semiconductor supply issues. Now, producing more sophisticated smartphone chips is becoming challenging as miniaturization becomes harder. In the past, if you waited a couple of years, advancements in technology could help reduce energy consumption at lower prices. You could sell the hardware for around ¥30,000 and pursue that strategy. However, right now, working with 5 or 3 nanometer technology for miniaturized semiconductors is becoming more costly. This strategy seems to be growing more expensive and complicated. At the same time, could you expand your network to explore new ways to develop GPS? Or do you believe you still need to focus on hardware sales despite the pricing challenges? That's my question. My second question concerns cash flow. A few years back, you had a cash flow of ¥4 billion. Currently, due to various reasons, operating cash flow is lagging behind your plans. Operating cash flow is crucial for driving your investments. Are you hesitant to invest as much now, or would you consider reducing inventory as a strategy to increase cash? Do you think the allocation of capital will remain as substantial as before? There are several financing options available to manage cash. Could you provide more context on how you view cash usage and how much you expect to generate and invest?

The first question is about G&NS. There is indeed a structural issue. As you mentioned, the PS5 is currently using a Nano die that operates on a single digit scale. Unlike older generations, the chip shrink benefits from the PS4 were quite challenging to achieve, making cost reduction difficult. To simplify, our sales strategy has shifted away from relying heavily on steep discounts; instead, we aim to ensure our business is profitable while enhancing user engagement alongside unit sales. It’s essential to find a balanced approach to these elements. One significant change from PS4 to PS5 has been our increased focus on network services. We are also committed to maintaining strong relationships with our consumer customers, as user engagement is crucial for sustaining our brand’s image. Our current hardware plans are closely tied to our commercial strategy, including the right pricing for customers. Regardless of pricing, a client device is necessary for an enjoyable gaming experience. The PS portal is one device we are exploring and gathering feedback on, which will help us enhance our services and networks over time. Regarding cash flow, as you accurately noted, we recorded approximately ¥4.2 billion in cash flow a few years ago. This year, our operating cash flow is lower, but working capital has increased significantly. If we break it down over three years, it may appear that our operating income has declined, but we can reduce inventory, manage accounts payable, and improve cash flow. Overall, there hasn’t been a major change. Rating agencies indicate that we have opportunities for financial leverage, should we need it. If necessary, we can explore that option as well.

Next question, Abeta from Nikkan Kogyo Shimbun, please.

Abe from Nikkan Kogyo Shimbun. DNS Camera. I have 2 questions regarding the camera. The first question by situation by market, for China, sales unit sales volume was larger than your forecast. What about other markets, North America, Europe and domestic in Japan? What is the trend of the sales? Second question is the level of inventory. ET&S segment as a total as of the end of December, reduction in the inventory as compared to the same period last year. What about the inventory level of the camera? These are my 2 questions.

Thank you for your questions. First, ET&S segment, and you're talking about camera, and what is the market trend was your question. China has been doing well. For the third quarter, North America and the European market have been moving rather relatively well. The inventory itself, there is no particular problem in the inventory level at a level that we are satisfied with, and we are able to maintain that inventory level.

I think we don't have much time left. I think the next question will be the last question. From Yomiuri Shimbun, Masala from Yomiuri Shimbun.

Sorry, this is a different question. This is about the Nikkei average, and I believe that it is at a record high. Were you expecting this? I'm sure the investors have high expectations for the Sony Group. How do you feel about this?

Thank you for the question. Since the start of this year, we have observed a significant increase. Honestly, I did not anticipate this trend. Therefore, I regret that my forecast did not come to fruition, but I am pleased that the market has high expectations of us. We aim to ensure that we meet those expectations and demonstrate growth and development. Thank you.

We would like to conclude the Q&A session with the media now. The Q&A with investors and analysts will begin at 4:47. We will be starting the question-and-answer session with investors and analysts shortly. Thank you for your patience. I will be facilitating this session. My name is Condo from the IR Group. It's great to see you all. Please note that three respondents will be addressing questions as indicated on the slide. Also, please refer to the information we distributed earlier about using the telephone and other important details. Now, I would like to invite Katsura from SMBC Nikko to start.

My name is Katsura from SMBC Nikko. I'd like to ask two questions. The first question is about the fourth quarter industry inventories. Your plan indicates that you will be reducing inventory levels, but according to Slide 7, it seems you expect a certain amount of inventory. How much do you plan to reduce it? Can you provide any insights into how low the inventory level will go? Also, Slide 7 discusses utilization, so perhaps you can calculate that, but could you also explain how we should interpret those figures after the first quarter of next year? For my second question regarding next year, specifically about Game & Network Services and Pictures, I recall you mentioned you aimed for certain levels in those areas. Can you also provide insights about the perspectives for other segments as well?

Okay. Thank you very much for your question. I&SS fourth quarter inventory to that question, well, in terms of that in a 3 quarters levels is actually quite a small level. So the impact overall is quite limited. In general, I would say it will end up to about being flat. Flat or plus incremental small addition on top of the third quarter. Now you asked also about the inventory level for next financial year. And we are expecting our top-line growth to grow. And so inventory will also grow as fast as the top line, but that should be covered during the business planning process for next financial year, and I hope that is good enough for my answer to your question. Now for FY '24 in general, what I've talked about, yes, I mentioned about Game, Pictures, I&SS. Yes, I mentioned about them for perspective for FY 2024. For Music, market on a streaming single high digit or mid-digit, single to mid-digit was the growth. And we hope to grow faster than that. So finance, well, the base profit level is going to gradually slowly grow. It's going to take some time, right? But the new policy amount is going up, too. So it's not changed since it's going to keep growing in a steady or gradual but because of the adoption of IFRS, we have to do risk hedging because there can be volatility because of the change of the standard. That is the risk. We are going to be investing some costs. Therefore, we believe relatively gradual growth for finance. Pictures, I actually mentioned it already. Flat or plus incremental on top or flat for Picture, like I said. But in any case, we will be giving the next financial guidance during the springtime. So we hope to cover more details at that time. Thank you.

Next question, Okazaki from Nomura Securities.

Okazaki from Nomura Securities. Game, I have questions regarding Game. MAU became a record high level. PS5 cumulative sales are already exceeding. So PS5 alone will not be able to satisfy that. Why has MAU grown to this level? Can you please explain a bit more in detail? MAU use is a metric for user engagement and an important metric. While MAU is increasing, in the fourth quarter, the profit is not as much as expected. MAU increases, but the profit was not as high. What is the background for this?

Thank you for your question. First, with regards to MAU, for one thing, there is seasonality. Third quarter is the holiday season. So there's a seasonality factor. And then free-to-play titles, we had the big hits. So we are enjoying benefits from that. These are the 2 major factors drivers for increasing the MAU. And then the engagement metric. Third quarter, I already explained a bit, special factors were there. And about ¥30 billion of profit will be shifted to the fourth quarter from the third quarter PS5 inventory valuation-related number. In the second half will be leveled. But if you only look at the third quarter, the profit level, as it appears is slightly less than what it actually is.

The next question from Mizuho Securities. Nakane-san.

I have two questions. The first is for Mr. Totoki. It's been four months since you became President. What have you noticed or realized in that time? Looking ahead to the next quarter, there won't be any large first-party titles, but there will be W3C titles. In FY 2025, what measures are you considering? We would appreciate your impressions on this. The second question is regarding shareholder returns. I understand that strategic investments are expected to decrease slightly. While I realize your overall investment approach will not change significantly, do you have any comments on this matter?

Yes. Thank you very much for your question. Actually, I am the chairperson. It's been about 4 months. And I'm trying to demonstrate leadership and trying to have as many meetings as possible with the management team. I also visit studios and everyone is working really hard to fulfill their responsibility, to try to optimize the business. And I understand that. But overall, growth, overall growth, and sustainable profitability or increasing margin, how will that translate to these goals? I don't think people understand that deeply. I think that is the problem of the organization. So as far as I'm concerned, I try to understand what is happening in the company, in the industry and also with the perspective of the analysts, and try to explain in a transparent manner so that people can recognize and notice these issues so that we can have a harmonized approach going forward. That is a very general comment since I became the chairperson. There are concrete points, which I will not go into today. Now about visiting the studios and about Bungie. And I've had meetings with the leaders there, the studios. People who work in the studios have very high motivation. They're very good people, and they're very creative people. They have great creative minds and they also have knowledge about live streaming. However, having said that, when it comes to the business itself, I think there is room for improvement. And that's got to do about how to use the money or about the schedule of development or how to fulfill one's accountability towards development, etc. Those are my frank impressions. So I will continue to engage in dialogue with the people so that we can find the right way to proceed. Now shareholder returns and dividends. As you mentioned, no major change there. We will have to deal with shareholder returns in an honest way. And that is part of the strategic investment and we believe that if the solution is considered to be the optimum solution, then we will go ahead with that solution.

Now let me move to the next question. I'd like to ask Yasui from UBS Securities to ask the next question please.

This is Yasui from UBS Security. I have a couple of questions. Primarily, I want to discuss operating profit. In the gaming and semiconductor sectors, while the top line is growing, the profit levels do not seem to be increasing. Over the past three years, what do you think needs to happen? Is there a specific initiative or strategy you plan to implement to enhance the bottom line as well as the top line?

Thank you. This year, the profit margin for gaming, particularly the operating margin, has not been ideal. This is partly due to the ongoing transition with the expansion of PS5 hardware units. We need to manage the situation with PS4 and earlier generations, as cost reductions during a console cycle are quite challenging. This presents a significant obstacle. For PS consoles, unlike high-spec computers, we aim to maintain affordability while providing a reliable and enjoyable experience. However, the costs associated with building that experience—such as memory and chipsets—are rising. We have to integrate our product plans to keep prices reasonable without relying heavily on discounts to sustain our commercial path. I believe there’s a vital opportunity here. Another possible driver for improvement is the generation of first-party titles. In the past, our goal was to popularize consoles. First-party titles helped achieve that, but there's a kind of synergy involved. Strong first-party content can enhance not only our consoles but also other platforms like computers. Expanding first-party offerings across multiple platforms could boost our operating profit, and I'd like to emphasize that margin improvement is achievable. Transitioning to I&SS, we've seen that R&D and capital investments have been made, but now sales need to reflect those investments. We face a challenge in minimizing operating losses while balancing our investment plans. In the past, mobile sensors have become larger and driven costs, with more cameras and better functionality in smartphones being in demand. Will this continue indefinitely? Probably not at the current levels, but the demand for enhanced functionality is clear. Our task is to figure out how to build this high functionality without excessive redundancy in our processes. Addressing this could lead to improved profit margins. Thank you.

Time is running short. So I'd like to ask the questions to please limit to 1 question per person. Next question, please. Morgan Stanley, MUFG Securities, Ono, please.

Ono from Morgan Stanley. About Game. I have 1 question. Next fiscal year, a slight increase in profit you are expecting. And ¥270 billion this year and in the past, the peak was more than ¥300 billion. So the peak in FY '21 with PS5, it's very difficult to exceed the peak level of 300 in '21. I may be asking a repeat question. But MAU, ¥123 million is to be increased. And further, is it possible to exceed the peak in profit level, especially in the cycle, the fifth year is a peak of the hardware and sixth year is the peak of hardware and seventh year is the peak of the margin. That was a cycle, as I understand this in the past. So sixth year, next year will be the sixth year of the release and the software mainly is if it is third-party, I think it is regrettable. But how should we interpret this? Can you please explain?

PS4 serves as a significant reference for us. Due to the COVID-19 period, it’s difficult to accurately assess the fifth, sixth, and seventh years for PS5, and there may be some debate regarding the profit margins. We aim to increase absolute profit amounts, and while this presents a challenge, it’s something we want to pursue. Compared to PS5, the overall market, including third-party titles, is growing. However, hardware profitability is higher for PS4, and costs will not decrease with the new console. Finding the right balance between margins and promoting PS5 is essential. Additionally, in this fiscal year and the next, we will still bear costs related to past acquisitions, but as these costs decline, it will positively impact profitability. We need to consider this comprehensively. In the era of PS5, I am determined not to give up on reaching new peaks. In our next mid-range plan, we intend to challenge ourselves to surpass the past peaks.

The next person will be the last person to ask the question. Ayada from JP Morgan.

This is Ayada from JPMorgan Securities. On Games, you have been saying ¥123 million of the MAU and you had a great hit with free title. And I understand that these are titles to which you invest. Well, regarding those games, I think new movies have been added or you have a collaboration with Disney, which are different expectations towards growth from the past. From your perspective, these third-party titles, what are your expectations towards those titles? And as an investor, what are your expectations? And the profitability for Games for next fiscal year, you didn't mention about the add-ons. So what's happening there?

Those titles are making a significant contribution, which is accurate. While we can't discuss collaborations with other companies, we see those companies as attractive investment opportunities, representing a positive step for us. We anticipate that this collaboration will provide us with benefits. As for add-on sales for the next fiscal year, the business plan is still being developed, making it difficult to comment at this moment. However, if third-party titles see growth, it would be very advantageous for us, and we aim to leverage that momentum.

Since it's time, we'd like to conclude the consolidated financial results announcement from Sony Group. Thank you very much.