Sony Group Corp Q4 FY2023 Earnings Call

The time has come to begin FY 2023 Financial Results announcement of Sony Group Corporation. I am from Corporate Communications. I'll be serving as master of ceremonies today. Let me introduce the people on the stage. First, Hiroki Totoki, President, COO and CFO; Naomi Matsuoka, Senior Vice President, Executive Officer in charge of Corporate Planning and Control, lead of group DE and high promotion and support for finance and entertainment area; Hayakawa Sadahiko, Senior Vice President, Executive Officer in charge of Finance and IR. These three will be explaining the results of FY '23 and forecast for FY '24 and fifth mid-range plan. After that, we are going to have Q&A. A total of 80 minutes is allocated. Now Mr. Totoki, the floor is yours.

Today, I will explain this content. Matsuoka and Hayakawa will talk about our results for FY '23 and our result forecast for FY '24. And I will talk about the fifth midrange plan, which started this fiscal year. Hayakawa-san, please go ahead.

Thank you. Fiscal year 2023 consolidated sales reached JPY13,020.8 billion, setting a new record. Consolidated operating income was JPY1,208.8 billion. Net income was JPY970.6 billion, and consolidated adjusted EBITDA was JPY1,880 million. Additionally, the operating income of JPY229.4 billion recorded in the previous quarter marked the highest ever for a fourth quarter. Due to the planned partial spinoff of our Financial Services business in October 2025, we are also reporting figures excluding that segment. On a consolidated basis, excluding the Financial Services segment, sales amounted to JPY11,265 billion, operating income was JPY1,335.3 billion, and operating cash flow reached JPY1,177.8 billion. The performance by segment for FY 2023 is available on this slide. Next, I will outline our consolidated results forecast for the entire FY 2024. We are forecasting full-year sales of JPY2,310 billion, operating income of JPY1,275 billion, and net income of JPY925 billion. On a consolidated basis, excluding the Financial Services segment, we expect sales of JPY11,400 billion and a 9% year-on-year increase in operating income. The forecast for consolidated operating cash flow, excluding the Financial Services segment, is JPY1,400 billion, which indicates a significant year-on-year increase of 19%. The full-year forecast by segment is detailed here. Now, I will proceed to provide an overview of each business. First, the G&NS segment. For FY 2023, sales rose significantly by 17% year-on-year to JPY4,267.7 billion, primarily driven by increased third-party software sales and favorable foreign exchange rates. Operating income increased to JPY290.2 billion year-on-year, owing to the higher sales figures. The operating income for the previous quarter was JPY106 billion, a new record for the fourth quarter in this segment. The FY 2024 forecast aims for sales of JPY4,200 billion with operating income of JPY310 billion. We expect acquisition-related expenses for this fiscal year to be around JPY52 billion, down by JPY17 billion year-on-year. In the previous quarter, PlayStation 5 sales totaled 4.5 million units, bringing total sales for FY 2023 to 20.8 million units. As of the end of March, cumulative PS5 sales reached 59.2 million units, nearing the 60 million cumulative sales of the PlayStation 4, which experienced total price cuts of USD 100 during the same period since its launch. For this fiscal year, we anticipate PS5 sales to be approximately 18 million units. Regarding software, the live service game Hell Divested 2, released in February, has surpassed expectations with cumulative sales of 12 million copies across both PS5 and PC within 12 weeks of its release, exceeding the record set by God of War: Ragnarok during the same timeframe in 2022. This game has become our largest title to date and made significant contributions to sales and profits in the last quarter. Following this success, we are excited about the upcoming releases of live service games, including expansion content for Destiny 2: The Final Shape, expected on June 4, and Concord, scheduled for release this year after its acquisition in 2023. Thanks to the growth of PS5, alongside the success of Hell Divested 2 and various third-party free-to-play titles, the number of monthly active users on PS in March remained strong at 180 million accounts, a 9% year-on-year increase. Total playtime on PS in March grew by 15% year-on-year, reaching the second highest level in history for the entire fourth quarter of FY 2023, just behind FY 2020's fourth quarter, which saw a significant spike due to stay-at-home measures from the pandemic. Analyzing the console cycle, we believe that the PlayStation business model has shifted significantly since the PS4 launch. The previous model focused on maximizing software sales for each console generation. However, during the PS4 era and especially with the PS5, we have seen an increase in playtime as the user community has expanded across generations. This change allowed us to achieve considerable profit growth during the PS4 generation due to rapid digitalization and the expansion of network services. While it may be challenging to see the same trend in the PS5 generation due to factors like acquisition-related expenses and the impact of remote consumption, we have consistently achieved stable profit growth since the PS5 launch. As we enter the latter half of the console cycle, we anticipate that new PS5 unit sales will gradually decline. Nevertheless, by continuously maintaining and expanding our active user base and engagement, while effectively managing business costs, we are confident that we will steadily enhance sales and profits on the PS platform in the future. Alongside the solid earnings foundation on the PS platform, we aim to boost sales of first-party software, which we have been actively developing in recent years, ensuring the achievement of a new profit record in this segment during the fifth mid-range plan. Next is the Music segment. FY '23 sales increased a significant 17% year-on-year to JPY1,690 billion, mainly due to increased streaming sales and the impact of foreign exchange rates. Operating income increased JPY38.6 billion from the previous fiscal year to JPY301.7 billion, mainly due to increased sales, setting a new record for this segment for the fourth consecutive year and being the highest among our six business segments as was the case last fiscal year. The FY '23 profit contribution from visual media and platform accounted for approximately 10% of the segment's operating income. The FY '24 forecast for sales is JPY1,690 billion and operating income is JPY315 billion. Streaming revenue in the previous quarter continued to grow on a U.S. dollar basis with both Recorded Music and Music Publishing, each increasing 11% year-on-year. In terms of Recorded Music, an average of 31 songs were ranked in the top 100 on Spotify's weekly global song rankings for the whole of FY '23. Moreover, Beyonce's new album, Cowboy Carter, released on March 29, has become a hit, ranking #1 in the U.S. album chart immediately upon its release. Streaming revenue in Music Publishing has grown significantly with a CAGR of 38% over the 4 years since FY '20, thanks to an expansion of opportunity to monetize our music catalog, which has been available for a certain period of time. We have been strengthening our music catalog since making EMI Music Publishing a wholly owned subsidiary in 2018, and the number of songs we managed at the end of March was approximately 6.24 million, an increase of 1.7x over the past 10 years. We also maintained the top global market share in Music Publishing. The value of music catalogs as IP assets is expanding significantly, and we intend to further expand the monetization opportunities of these IP assets, primarily by maximizing synergies between the entertainment businesses. Next is the Pictures segment. Although there was a decrease in the number of television program deliveries, FY '23, sales increased 9% year-on-year to JPY1,493.1 billion due to an increase in the number of theatrical releases and the impact of foreign exchange rates. Operating income was JPY177 billion, essentially flat year-on-year. This was primarily due to an increase in marketing costs resulting from the increased number of releases, offset by the impact of the increase in sales. Our FY '24 forecast for sales is JPY1,480 billion and operating income is JPY120 billion. The negative impact on the profitability of the Hollywood strikes in FY '23 is estimated to have been approximately JPY118 billion caused by changes in the film release schedules and delaying the delivery of the television programs. We believe the negative impact of the strikes and on profitability will peak in FY '24, and we have incorporated approximately JPY34 billion as the impact into the full year forecast. Regarding Crunchyroll, we are expecting it to contribute even more to the operating income of the entire segment due to the sales growth, primarily from an increase in the global plan subscribers and overseas distribution of anime products as well as reduced amortization expenses associated with the acquisition. In Motion Pictures, we have plans to release major titles in FY '24, such as the sequel to the popular Bad Boys franchise, Bad Boy Ride or Die as well as new titles from the Sony Pictures universe of Marvel characters, Venom: The Last Stand and Kraven the Hunter. Next, the IT&S segment. FY '23 sales were essentially flat year-on-year. This was mainly due to a decrease in the unit sales of televisions, offset by an impact from the foreign exchange rates. Operating income increased JPY7.9 billion year-on-year to JPY187.4 billion, mainly due to the favorable impact of foreign exchange rates and the benefit of the cost reductions despite the impact of lower sales in televisions. Our FY '24 forecast for sales is JPY2,370 billion and operating income is JPY190 billion. In FY '23, the digital cameras and interchangeable lenses showed an increase in operating income, thanks to enhanced product appeals, and televisions and mobile communication reduced costs, enabling the entire segment to achieve a level of operating income that exceeded FY '22 results and our projection at the beginning of FY '23. Moreover, full year operating cash flow was JPY322.8 billion, the largest amount in our 5-year business segment, excluding the Financial Services segment due to improved profitability and significant inventory reductions mainly in television. The market for interchangeable lens and mirrorless cameras, which is the main source of our sales and profit for this segment, showed a strong growth in the previous quarter, mainly in China and Japan and has continued to remain strong since April. We expect this market growth to gradually decelerate from the second half of this fiscal year onward, but we believe this will remain stable going forward. Next, the I&SS segment. FY '23 sales increased a significant 14% year-on-year to JPY1,602.7 billion, mainly due to increased sales of image sensors for mobile products and the impact of foreign exchange rates. Despite the impact of increased sales, operating income decreased JPY18.7 billion year-on-year to JPY103.5 billion, primarily due to an increase in expenses, including depreciation and amortization expenses. Our FY '24 forecast for sales is JPY1,840 billion and operating income is JPY270 billion, which would be a record high for this segment. In the current smartphone product market, while unit sales in the previous quarter in China slightly exceeded the same period of the previous year, stagnation continues in the U.S. and in other parts of Asia, and we believe the global recovery will be very slow. In this market environment, our mobile services business is expected to continue to grow due to larger die size sensors and higher added value and an expanded market share, and we plan to achieve year-on-year sales growth in FY '24 of 10% or more for the third year in a row. In addition to the trend of increasing the die size of the wire angle camera sensors, smartphone manufacturers are working to improve the image quality and performance of the actual wide-angle and telephoto camera sensors, and we believe this will be the growth driver for the mobile sensor market over the next few years. To accommodate these trends towards larger die sizes and higher added value, we are focusing our sensor development on improving pixel performance and characteristics. We are developing high-performance sensors while focusing on the number of manufacturing processes and productivity as well as improving production yields through pixel design. These efforts are expected to contribute to future investment and efficiency and cost improvements. In addition, regarding improving the yield of mobile sensors, which has been a top priority since the previous fiscal year, we have been making progress at a pace that slightly exceeds our plan. As a result, we expect to be able to reduce the impact on profitability for this fiscal year by approximately JPY18 billion, almost half of the previous fiscal year. Last is the Financial Services segment. The Financial Service revenue for FY '23 was JPY1,770 billion, almost double year-on-year, mainly due to the impact of market fluctuations in Sony Inc. Operating income decreased a significant JPY144.5 billion year-on-year to JPY173.6 billion. This was primarily due to a decrease in the net gains related to market fluctuations for variable insurance and other products of Sony Life as well as recording gains on the stable sales of real estate at Sony Life and the recovery related to authorized withdrawal in the previous fiscal year. These negative factors were primarily offset by the recording of the gain from the transfer of a portion of the shares of Sony Payment Services Inc. The FY '24 forecast for the Financial Services revenues is JPY900 billion, and operating income is JPY145 billion, a decrease of JPY28.6 billion from the previous fiscal year, which included the recording of the gain from the transfer I previously mentioned. Please note that this forecast does not account for the impact of market fluctuations in Sony Life. Now I would like to explain the fluctuations in operating income that have been particularly notable since the adoption of IFRS 17. This is the trend of the breakdown of Sony Life's quarterly operating income while insurance services results, which are the base profit for the business, have generally remained stable. Investment gains and losses have fluctuated greatly due to the changes in market conditions. The majority of the investment gains and losses consist of realized valuation gains and losses. We are considering measures to curb these fluctuations in gains and losses, including the transfer of the previously controlled insurance contracts to external parties through reinsurance transactions. This concludes our explanation of our financial results for FY '23 and the results forecast for FY '24. Next, Totoki, will explain our midrange plan.

Now I'd like to talk about our midrange plan. First, let me give a brief overview of our fourth midrange plan. Under the theme of our fourth midrange plan, Sony's evolution, we have been working to evolve our corporate architecture and the business portfolio to drive growth for the entire group. In April 2021, we transitioned from a large headquarters housing support functions for our Electronics business to Sony Corporation being a scale-down group headquarters. By doing so, we established a structure to promote the growth of the group in an equidistant relationship with each business. Regarding our business portfolio, we are making concrete preparations for a partial spin-off of the Financial Services business in October 2025 with the aim of achieving further growth in both the Financial Services business and our other businesses. Additionally, by concentrating capital allocation on the growth areas of the three entertainment businesses and the I&SS business, we were able to significantly increase the combined sales of these four business segments, creating a more growth-oriented business portfolio. Thanks to these efforts, the KPI we set as a growth indicator for the fourth midrange plan period, 3-year cumulative consolidated adjusted EBITDA was JPY5.1 trillion, 19% higher than our initial target and 42% higher than the amount generated during the third midrange plan period. In addition, our ability to generate profits is steadily improving: the average annual growth rate of consolidated operating income, excluding the Financial Services segment, was 9.0% from FY 2020 to FY 2023. Now I'd like to talk about our fifth midrange plan. We are presenting the plan excluding the Financial Services segment; and the head of that business will provide an explanation of the midrange plan of the Financial Services segment at the business segment meeting scheduled for May 31. The themes of the fifth midrange plan are Beyond the Boundaries and maximum synergies across the group, with the intention of continuing to implement the proactive initiatives we have been implementing to further realize synergies and achieve more growth for the entire group. During this midrange plan, no changes are planned to our strategy of working to increase corporate value through continuous growth. While further strengthening our efforts to realize group synergies, we plan to focus on implementing measures to achieve mid- to long-term growth in entertainment and image sensor businesses. At the same time, we expect the business environment to remain uncertain and volatile during the period of this midrange plan and beyond. In order to further increase our resilience to such environmental changes, we aim to strengthen our earnings base through the ongoing evolution of our business portfolio and to improve investment efficiency and business profitability. Consequently, for the period of this midrange plan, we have placed greater emphasis on profit-based growth KPIs and we have set up KPIs for the entire group: the growth rate of consolidated operating income and the operating income margin. Specifically, we aim to increase consolidated operating income during this midrange plan, primarily in G&NS and I&SS and achieve an average annual growth rate of 10% or more and a 3-year cumulative consolidated operating income margin of 10% or more. In addition, we have positioned as an important indicator the sales growth of the game software and network services businesses in G&NS, the Music, the Pictures and the image sensor businesses. We also plan to regularly report progress on the consolidated operating cash flow, which is the source of capital allocation. I will now discuss the main focus measures for each business under the fifth midrange plan. Further details will be provided by each business leader at the business segment meeting on May 30 and 31. In the G&NS segment, under the theme of console and beyond, we aim to drive profit growth of the Sony Group by expanding the console base of PlayStation consoles, providing richer gaming experiences and growing our business through the two-pronged approach of expanding into PCs and enhancing the first-party software titles originating from our in-house studios into which we have invested. In the Music segment, we continue to aim to grow faster than the market by strengthening our efforts in emerging markets, increasing monetization opportunities for our music catalog and incorporating adjacent businesses such as merchandising. We also plan to accelerate the global expansion of Japanese anime and artists. In the Pictures segment, which is a core collaboration between the three entertainment businesses, we aim to maximize the value of the IP assets held by the Sony Group. Furthermore, we aim to achieve profitable growth with Crunchyroll, a DTC service that deeply engages with anime fans and anime creators as a growth driver. In the ET&S segment, we plan to continue controlling risks in businesses facing challenging environments, such as televisions, while steadily growing our highly reputable and technologically differentiated imaging and sound businesses and accelerating expansion into the growth access businesses. Through this, we aim to continue to strengthen the overall business portfolio of the entire segment and generate cash that supports the Sony Group. In the I&SS segment, we intend to maintain our growth rate, primarily in mobile sensors and focus especially on increasing profitability, improving investment efficiency and reinforcing development and manufacturing during the period of the fifth MRP. We also plan to proceed with the launch of new growth businesses that will follow from mobile sensors, such as automotive sensors, while maintaining financial discipline and a long-term proactive approach. Next, I'd like to explain the capital allocation during the term of the first midrange plan. 3-year cumulative consolidated operating cash flow, the main source of allocation, is expected to be JPY4.5 trillion, significantly exceeding the results of the fourth midrange plan due to profit growth during the fifth midrange plan as well as the recovery of working capital that increased during the previous midrange plan. With regard to capital expenditures, we expect to spend JPY1.7 trillion, a decrease of JPY0.2 trillion from the previous MRP, taking into account that investment for image sensors is expected to decrease from the previous MRP period. Regarding strategic investments, we plan to allocate JPY1.8 trillion to business growth investments and flexible share repurchases. We will continue to work toward mid- and long-term growth of our business through such means as acquisition of IP and M&A, but we intend to emphasize investment efficiency and be more selective in the strategic arena. The biggest change for capital allocation strategy under the previous midrange plan is that we plan to allocate any increase in free cash flow during the period of this midrange plan primarily to shareholder returns. With regard to shareholder returns, we plan to place emphasis on the total payout ratio, which we expect to gradually increase throughout the period of the fifth midrange plan aiming for approximately 40% in FY 2026, the final fiscal year of the plan. To this end, we set aside JPY250 billion for share buybacks for this fiscal year, the first year of the MRP, which exceeds the amount we acquired in the previous fiscal year. Regarding dividends, our policy is to continue to increase dividends steadily while accelerating the pace of dividend increases. In addition, with the aim of further expanding the investor base that holds our shares, at the Board Directors meeting held today, it was decided to implement a stock split with a record date of September 30, 2024, and an effective date of October 1, 2024. These are the main points of our fifth midrange plan. At the corporate strategy meeting scheduled for May 23, CEO Yoshida and I will explain the direction of our group's businesses in the longer term. That's all for the explanation.

The presentation was delivered by Totoki, Matsuoka, and Hayakawa. Following this, there will be a Q&A session with the media starting at 4:35 and a Q&A session with investors and analysts beginning at 5:00. We plan to allocate approximately 20 minutes for each Q&A session. Thank you for your patience. We will now take questions from the media. The three individuals mentioned in the presentation will be answering your questions. The first question will come from.

Can you hear me?

Yes, we can.

I have two questions, if I may. Earlier, you talked about strengthening the shareholder returns, including that, enhancing enterprise value. I'd like to hear the view of Totoki-san. Enterprise value will be regarded as cash flow generation and discounted value in the future. As compared to the previous midrange plan, we'll be reducing investment and increasing returns to shareholders compared to the previous midrange plan. How are you going to enhance enterprise value, if there's any change or differences in the thinking? Please explain. Secondly, acquisition according to the media report. I'm sure that there's a limit as to what you can share with us, but is it true that you are making proposals and strengthening your entertainment business in the midrange plan, is there any consistency? Can you please comment on that, please?

Thank you for your questions. Regarding our approach to enterprise value, I mentioned earlier our capital allocation strategy. Capital expenditures will be slightly lower this time. Additionally, with the return of working capital during the fifth midrange plan period, we expect to see improved cash flow compared to the previous three years. We intend to use this to return value to shareholders, which is central to our strategy. Enhancing enterprise value must be sustainable. Throughout the fourth midrange plan, we have been making investments to foster future growth, laying the groundwork for what's to come. In the fifth midrange plan, we will begin to reap the benefits of these investments to enhance our enterprise value moving forward. That's the rationale behind the midrange plan. As for reported activities, we have made no announcements regarding specific deals, so I will refrain from commenting on any individual transaction. However, we have a wealth of information at our disposal, and I would like to comprehensively share our strategic thinking, particularly regarding capital allocation across Game, Music, and Pictures. We aim to generate synergy from our IP, which is a distinctive strength of Sony Group and central to our growth strategy. Sony Pictures plays a pivotal role in generating that synergy and has a crucial position as part of our overall strategy. Therefore, if there are any favorable opportunities in this area, we anticipate appropriate returns on investment. In our fourth midrange plan, the capital allocation over the past three years, excluding share buybacks, amounted to JPY1.3 trillion, with three-quarters directed towards the three entertainment segments. Music received the largest share, followed closely by Games and Pictures, which were about equal in investment. The primary purpose of these investments has been IP acquisition. Our basic policy will continue over the next three years, and I hope that message is clear. For the fifth midrange plan, we are looking at strategic investments and flexible share buybacks totaling JPY1.8 trillion. Over this three-year period, we will make strategic investments without focusing on any one segment, which encapsulates our overarching strategy. I hope you can appreciate our fundamental approach. That concludes my explanation.

The next 3 years will see the continuation of our basic policy. As previously mentioned, the strategic investment for the fifth midrange plan, which includes a flexible share buyback, is JPY1.8 trillion. Over the 3-year period, we will be making strategic investments and implementing a flexible share buyback without concentrating on any specific segment. I hope you understand our fundamental approach. That wraps up my explanation.

Can you hear me?

Yes, we can hear you.

And I do have two questions. The first one is as follows, and in , the restructuring reduction, and how much impact on the impact on FY '23 or '24? And then also, as per today's announcement, you made an announcement about some people changes and does that include all the restructuring activities? And then also, JPY1.2 trillion of strategic improvement you mentioned, can you give us a breakdown by segment?

Thank you for your questions. First, regarding the structural reform, in FY '23 we recorded structural reform expenses in the hundreds of millions with double-digit growth, and this will continue into FY '24. Overall, we expect to maintain similar levels of costs and expenses. However, we anticipate improvements in FY '25, where the effects of cost reduction will become more pronounced. Concerning the personnel changes we've announced, these are not directly related to the structural reform. Additionally, regarding the strategic investment, while we have a general understanding, we do not yet have a detailed breakdown by segment. We will make a decision on that when the time is right. Reflecting on the past three years, that breakdown will aid in visualizing the strategic investments anticipated over the next three years. That's all.

We'd like to take the next question from please.

I'm Tanaka from Asahi Newspaper. Can you hear me?

Yes. Please go ahead.

The first question is about the foreign exchange rate. The ForEx impact for the entire group, in total, for the sales and the income, what was the upward impact, the positive impact? And the weakening of the yen is accelerating. So how are you viewing this current trend, Mr. Totoki? And the second question is about the image sensor; it's performing well, and I'd like to ask you the reason the smartphone market is shrinking, and especially FY 2023, the sales units are quite low, but the image sensor, Sony was doing well. So what's the reason for that?

Thank you for your questions. First, on the ForEx impact, the details will be explained by Hayakawa. But regarding the weakening of the yen, my view is the following. When it comes to the ForEx, there is no control over that, so we will have to adapt to the situation. But if there is a rapid change that is going to be unfavorable in managing business, that is my view. Hayakawa, please.

Regarding the ForEx in the previous year's performance, the impact by that FY '23, the performance by segment material is showing the ForEx impact. So please take a look at that. Basically, last fiscal year, versus the dollar, the weakening of the yen was seen. And also the dollar was weaker versus the euro. So on a consolidated basis, in income, JPY140 billion, positive impact from ForEx came to us. That's all from my side. Thank you.

Next, on the I&SS business related question. As you rightly pointed out regarding FY 2023, the smartphone market itself was not very strong. And in FY '24 and beyond, we believe that it will be recovering slowly. Our sensor business is performing well, not because of the sales units of smartphones but because the main camera and large die sized such cameras. Regarding the wide-angle cameras, it has become larger in size. But at the same time, the wide-angle, ultra-wide angle as well as the telephoto cameras will become larger in size. And as a result, our sensor demand will become stronger. That's all.

We'd like to move on to the next question. Bloomberg, , please.

Furuka from Bloomberg. Can you hear me.

Yes, we can.

Thank you. It may be challenging to comment on this. However, in addition to discussing Music and our partnership with Integra regarding share acquisitions, what are the facts surrounding these deals? What are your thoughts on the necessity for such agreements? Additionally, I've noticed that the yen is depreciating. Will overseas mergers and acquisitions become more challenging, or are there opportunities to postpone them? How does the weaker yen influence M&A deals, and are there concerns regarding this? Those are my questions.

Thank you for your questions. Regarding the media report, it does not reflect our announcements, so I will not comment further. Concerning the weaker yen, there will be an impact on overseas M&A. Are there potential delays or postponements in considering M&A? For overseas M&A, we approach it with caution. Returns are also in foreign currency, making it manageable for us. However, we do establish hurdle rates in each currency. We evaluate acquisitions based on these hurdle rates to decide our course of action. That's all. Thank you.

And with limited time remaining, we have one more question.

This is Hiroka from NewsPicks, and I hope you can hear me. And I have a question about the image sensor business.

In addition to this, in the fifth midrange plan, we expect the free cash flow to improve, which will become a positive factor. Regarding the OLED factory buyback, while it could potentially become a new growth driver after imaging sensors, this business is still small in scale, and I do not anticipate it making a significant contribution, similar to what imaging sensors provide. However, I believe there will be opportunities to pursue new challenges and enter new devices. Therefore, we aim to embrace these challenges from a mid- to long-term perspective.

And now the time has come, we would like to conclude the Q&A session for the members of the media. The Q&A session for investors and analysts will start at 5:00 p.m. Thank you very much for waiting. We now begin the Q&A with investors and analysts. I will be serving as a moderator from the IR division. These are the three presenters who will be answering your questions, the same as the presenters from the media session. From JPMorgan, Ayada-san.

I'm Ayada from JPMorgan. I have two questions regarding the midrange plan. First, concerning the gaming segment, Mr. Totoki, you mentioned that for the next three years, the primary focus will be on software and network services. What kind of growth do you anticipate in these areas over the next three years? For instance, in software, there will be a key title launched this year, but earlier releases like Concord and other live services have been introduced. Do you expect to see growth in this area, both this fiscal year and beyond? Are you particularly focused on AAA titles? Also, regarding network services, it's unclear how many members to expect. What are your expectations for the next fiscal year in that regard? My second question pertains to CapEx and the depreciation period being set at five years. On the other hand, when discussing strategic investments such as studio acquisitions, what is your anticipated timeline for returns? You mentioned that returns on studio acquisitions could be realized within the next three years in the previous period. Do you anticipate a three- or five-year timeline for returns from these investments, and will this be a consideration as you proceed with the investments?

Thanks for your questions. First, regarding software and network services, we should differentiate between first-party and third-party software. For third-party software, we anticipate our growth will align with market growth. This is central to our strategy. For first-party software, we expect to launch major titles and live services in fiscal years 2025 and 2026, leading to higher revenue in those years compared to the current fiscal year 2024. This expectation is built into our plan. Regarding network services and monthly active user growth, we believe our growth will be directly proportional to that. Without an increase in monthly active users, our segment won't expand, but we are seeing a gradual increase in users. Last year, we raised prices, and we expect to see positive effects from that. Overall, while software growth in the market is one aspect, we believe our growth will be stronger in terms of value. Next, concerning our investments and returns, we are focused on acquiring studios to enhance our first-party software lineup. We are investing in this area and progressing in development. Initially, we expected solid returns, but whether we achieve those expected returns has yet to be confirmed. Our past track record showed a relatively high internal rate of return on studio acquisitions. However, the returns haven’t met our original expectations due to delays in releases. The quality of our titles may not have reached user expectations either, which necessitates improvements. We've faced more delays than anticipated, and these factors must be considered. Over the next three years, effectively building out our portfolio will be critical. That's all.

We'd like to move on to the next question. BofA Securities. Hirakawa-san, please.

Hirakawa from BofA Securities has two questions. First, regarding games, the per user base is expected to grow, and you're aiming for record highs in the upcoming midrange plan. The active user base stands at 118 million, which is an increase from 59 million. However, there are challenges with PS4 and PS5 as well as third-party constraints. Why will the sources of profit differ in this cycle compared to the last one to achieve record profits? What will be your focus? My second question pertains to I&SS. I see that the larger size has a positive impact, and I understand you've increased your market share in China since 2020. However, I'd like to know if your share expansion in the semiconductor market has plateaued in China or if you have further room to grow. Could you clarify this?

Thank you for your questions. In my presentation, I discussed the growth during the PS4 and PS5 generations. I explained this in various ways. When comparing the PS4 to previous consoles, the profit generation method was based on expanding the network service during the PS4 era. For the PS5, we are building on that expanded base. The initial launch was strong, and we expect to maintain momentum from that starting point. A challenge in forecasting has been the impact of COVID-19 and whether it will provide a lasting boost to the gaming market or if it is just temporary. Additionally, specific live service titles have been helpful, but identifying the underlying trends has been challenging. Our current focus is on what we call platform health, which includes metrics like monthly active users and playtime. We analyze these data points to ensure platform health and sustainable growth, which is at the center of our strategy. Thus far, cumulative sales units have reached 59 million, with a substantial number of users still on the PS4. We are confident in managing the transition between console generations, ensuring a steady increase in monthly active users moving forward. Regarding I&SS and specific customers in China, selling requires a license, which limits our ability to compete freely. This complicates competitor analysis, as we do not operate in an open market. Instead, our strategy is to work on increasing our market share in areas where we have the opportunity to compete effectively.

Let's move on to Nakane-san of Mizuho Securities.

This is Nakane from Mizuho Securities, and I have two questions about the game. The first is regarding Bungee, the new title set to be released this year, which is crucial. When do you anticipate reaching breakeven in sales and profit? Additionally, what costs do you expect to incur over the next three years, including this fiscal year, considering your costs peaked last year? My second question pertains to the new structural organization for the game under Nishino-san and Atana-san. What strengths do they bring, and what key changes can we expect from their predecessors? I know they will address their resolutions in the next meeting, but what are your expectations from Totoki-san's perspective? Regarding sustainable growth and margin expansion, there have been productive discussions on this topic. What changes in personnel have led to these developments? I would appreciate your insights on this.

Regarding Bungee, there is no profit expected in FY '23. We are working on new intellectual property and content, which we believe will become a significant title, so careful evaluation is essential. For FY '24, we do not anticipate any profit contribution at this time. However, our development and operational abilities are expected to make a meaningful impact. With a title set to release in July, we will monitor its performance closely. We expect to recover the acquisition cost, currently JPY52 billion based on exchange rates, which will decrease gradually. In the first half of FY '23, costs will continue, and we anticipate a decline of 20% to 30% each year. The JPY52 billion acquisition cost of Bungee falls within the G&NS organization. The two leaders I selected have strong backgrounds in both platform and studio businesses, along with relevant skills and insights. Under the new organization, we now have two leaders at the helm, allowing us to grow significantly in size and scope. The PS3 business strategy will continue to evolve. Timely and detailed decision-making is critical, which is why having two leaders is beneficial. I have great confidence in their potential to drive the next generation of our business. I previously made some difficult remarks, but I believe that my personal involvement in SIE has given me valuable insights and connected me with talented individuals in the organization. They are highly motivated to achieve record profits. However, given the current circumstances, I don't believe delivering record profits is feasible at this time.

Since the time is running out, we will take only one question by each questioner from now on. Now Ezawa-san from Citigroup.

I'm Ezawa from Citigroup. So I will ask one question. Semiconductor, ROIC 10%, that's the plan for the new fiscal year. So from the profit plan-wise, the invested capital will increase to about JPY2 trillion. That is my understanding. So that's the plan for this fiscal year, but for the midrange plan, for the next midrange plan period, the capital invested may continue to be on the level of JPY100 billion increase on a yearly basis. Would that be the case?

Thank you for your question. The CapEx, I already explained that earlier. So about 17% level of the fourth midrange plan will continue. As for the increase of the invested capital, basically, we have grown the sales significantly, which means that the business scale will grow as well. Accordingly, the capital invested will also increase naturally. The invested capital, the absolute value increasing is not the focus, but rather whether it is leading to the appropriate increase of the business as well as the margin increase that will be the key focus. That will be more important. Of course, when we reach peak, then we will have to get a return from the invested capital. So that's what we have demonstrated in the game business. I believe that capital investment will become slower. So we will maintain the soundness of the financial status and maintain our competitiveness as we invest our capital to grow our business. That's all.

Next will be the last person to ask a question. SMBC Nikko Securities, Katsura-san, please.

Katsura from SMBC Nikko Securities. I have a question regarding capital allocation and the total payout ratio in the final year, which you are setting at 40%. What is the reasoning behind this decision? Can you share the actual numbers from the past three years and explain the rationale for targeting a 40% total payout ratio?

Final year, the midrange plan, the 40% total payout ratio; as I talked about capital allocation later and explained at this point. For the next 3 years, operating cash flow will be increased, which will be the source for capital allocation. The CapEx will not increase as much. And for strategic investment, we'll be active in making strategic investment. We will come to face where we'll be able to see results from the investment made in the past. Hence, we'll be making a return to the investors, including over the next 3 years. Hayakawa-san, could you please explain, and give some supplementary comments.

Thank you for being here, Katsura-san. The total payout ratio in our previous midrange plan for FY '21 was 19%, and it remained at 19% for FY '22. In FY '23, we initiated a buyback worth JPY200 billion, which included 32%. Totoki mentioned that we expect operating cash flow to increase over the next three years, and we will also be assessing the efficiency of our investments. Our aim is to achieve balanced capital allocation and enhance returns to our shareholders. Consequently, we plan to reach a payout ratio of 40% by FY '26. That outlines our plan and the rationale behind it.

With this, we'd like to conclude Sony Group Corporation's financial results announcement. Thank you very much for joining us today.