Sony Group Corp Q2 FY2025 Earnings Call

Hello, everyone. Today, I will explain the content shown here. Sales of continuing operations for the quarter increased 5% compared to the same quarter of the previous fiscal year to JPY 3,107.9 billion and operating income increased 10% to JPY 429 billion. Both were record highs for the second quarter. Net income increased 7% to JPY 311.4 billion. The financial results by segment are shown here. As for our full year result forecast, we upwardly revised sales from our previous forecast 3% to JPY 12 trillion, operating income 8% to JPY 1,430 billion, and net income 8% to JPY 150 billion. We expect that the impact of additional U.S. tariffs on the operating income of our continuing operations, to decrease JPY 20 billion from our previous forecast to JPY 50 billion, and we have reflected impact in the forecast for each segment from this quarter. We upwardly revised our forecast for operating cash flow 18% to JPY 1.5 billion. The forecast for each segment are shown here. Now I will turn to an overview of each business. First is the G&NS segment. FY '25 Q2 sales increased 4% year-on-year primarily due to the growth of network service revenue and the software sales. Despite the impact of the increase in sales, operating income decreased 13% year-on-year. This was primarily due to the recording of approximately JPY 49.8 billion in nonrecurring losses resulting from an impairment of intangible and other assets and the correction in the amount of previously capitalized development costs. Excluding these nonrecurring items, operating income would have increased 23%. We upwardly revised our sales forecast 3% from the previous forecast to JPY 4,470 billion. This is primarily due to the impact of foreign exchange rates. Despite the negative impact of the nonrecurring items and the inclusion of a JPY 30 billion tariff impact that we are recording from this quarter, our JPY 500 billion operating income forecast is unchanged from the previous forecast. This is primarily due to the positive impact of foreign exchange rates. Our PlayStation platform continues to demonstrate its strength as the best place to play and best place to publish. User engagement trended well with a number of monthly active users across all of the peers in September, increasing 3% compared to last September to 119 million accounts, and total playtime for the quarter also increased 1% year-on-year. Game software and network service sales are steadily growing. We expect this trend to continue in the second half due to a continued shift to higher tiers in our network service business and the contribution of first-party titles. As for PS5 hardware, we plan to expand the installed base during the year-end sales season while continuing to balance that expansion with the profitability of the entire segment. Although performance varies by title, our live service game overall accounted for more than 40% of our first-party software revenue, similar to the previous quarter and is a recurring source of revenue. Regarding Destiny 2, partially due to the changes in the competitive environment, the level of sales and user engagement have not reached our expectations at the time of the acquisition of Bungie. While we will continue to make improvements, we downwardly revised the business projection for the time being and recorded an impairment loss against a portion of the assets at Bungie. On the other hand, Helldivers 2, which was also released for Xbox in August of this year, is doing extremely well, not only attracting new users on Xbox but also seeing increased engagement from existing users on PS5 and PC. This resulted in a significant increase in sales of the title year-on-year. MLB The Show 25, released in March, also continued to perform well during the quarter. In a single-player AAA title space, following the release of Death Stranding 2: On The Beach in June, we released Ghost of Yotei in October. Ghost of Yotei surpassed 3.3 million units sold globally as of November 2, becoming a major hit like its predecessor. Building on this recent progress, we aim to strengthen our studio business and expand our IP franchises through continuous learning and improvement. Next is the Music segment. FY '25 Q2 sales increased 21% year-on-year, and operating income increased 28%, reaching record highs for the second quarter. This was primarily due to higher Visual Media and Platform revenue, driven primarily by the success of the theatrical release of Demon Slayer: Kimetsu no Yaiba Infinity Castle. It was also due to an increase in streaming revenue. On a U.S. dollar basis, streaming revenue for the quarter increased 12% year-on-year in recorded music and 25% in Music Publishing. We have upwardly revised our full year forecast for sales 6% to JPY 1,980 billion compared to the previous forecast and operating income 7% to JPY 385 billion. During the quarter, SMEJ made great strides, recording its highest ever quarterly sales and operating income and contributing significantly to the growth of this segment. Demon Slayer produced by Aniplex became a global hit due to our collaboration with Toho for distribution in Japan and the strengthening and expanding of distribution overseas by Crunchyroll and Sony Pictures. As of October 13, 77.53 million people worldwide, including in Japan, have seen the movie and the total box office revenue has exceeded JPY 94.8 billion. Kokuho has enjoyed a long run in theaters in Japan and has captivated a large audience, being selected as Japan's entry to the 98th Academy Awards in the Best International Feature Film category. The successes of Demon Slayer and Kokuho are examples of how we can increase the value of IP by discovering appealing IP and combining them with the production capability of talented creators. We look forward to attracting not only fans but also many creators and actors. In recorded music, IRIS OUT and JANE DOE by Kenshi Yonezu, an artist affiliated with SMEJ, have been breaking records on music charts, both in Japan and overseas. Thanks to synergy with the theatrical release of the anime Chainsaw Man, the movie Resi Arc. Outside of Japan, SMG is also achieving very strong results. The global success of artists and songwriters such as Tyler, the Creator and Bad Bunny, has led to a double-digit increase year-on-year of sales and operating income for the quarter. In addition, SMG is further enhancing its relationship with DSPs. It entered into licensing agreements with Spotify during the quarter and in collaboration with several other record labels agreed to support Spotify's efforts to ensure that AI is used in a manner that will benefit artists and songwriters. Next is the Picture segment. FY '25, Q2 sales decreased 3% year-on-year and operating income decreased 25%. This was primarily due to the impact of a decrease in sales from theatrical release, which benefited from hits like it ends with us in the same quarter of the previous fiscal year. Partially offsetting the decrease in operating income was the impact of higher sales at Crunchyroll. There is no change to our full year forecast for sales and operating income. Crunchyroll continues to work to enhance the 360-degree IP experience of anime fans through the theatrical distribution of Demon Slayer, the launch of Crunchyroll Manga service and other efforts. Crunchyroll Manga, which currently digitally distributes hundreds of popular Japanese manga titles, has been positively received by fans and publishers since its launch in October. We expect it will contribute to an increase in fan engagement and growth in subscribers. In Television Productions, new seasons of popular existing series were released this quarter such as Doc, Gen V, and Twisted Metal. In Motion Pictures, productions have begun on the major titles, Spider-Man: Brand New Day and the next Jumanji, which are scheduled to be released next fiscal year. Fans are easily awaiting the two titles, with five years having passed since the previous Spider-Man film, Spider-Man: No Way Home, and seven years have passed since the previous Jumanji film, Jumanji: The Next Level. Next is the ET&S segment. FY '25 Q2 sales decreased 7% year-on-year, primarily due to a decrease in unit sales of TVs. Operating income decreased 13% year-on-year, primarily due to the impact of the decrease in sales, partially offset by reductions in operating expenses. We have slightly increased our full year forecast for sales from the previous forecast to JPY 2,300 trillion, and we have decreased our operating income forecast 11% to JPY 160 billion, reflecting a JPY 20 billion impact from tariffs from this quarter. In the Imaging markets, demand has slowed in two regions: China, where government subsidies that lasted through the first quarter ended June 30, significantly declined, and the U.S., primarily due to the impact of additional tariffs. However, this decrease in demand is essentially in line with our previous forecast, and global demand remains solid, primarily because of Asia. The severe operating environment for TVs and smartphones continues, but we are adapting by proactively reducing operating expenses and have been able to minimize the impact on profitability. At the segment level, there are no major changes to the demand outlook for the year-end sales season and second half of the fiscal year. We plan to continue to control costs and inventory and operate our business cautiously. In our Sports business, which is a growth area, we completed the acquisition of STATSports in October. STATSports excels in active tracking technology, which collects and analyzes real-time data on athletes' physical condition and performance during games. By combining this data with the optical tracking technology of Hawk-Eye and KinaTrax, we aim to provide industry-leading sports data solutions to teams and athletes around the world. We also hope to accelerate the growth of our sports business overall. Last is the I&SS segment. Sales for the quarter increased 15% year-on-year and operating income increased 50%, both reaching record quarterly highs for the segment. This was primarily due to higher unit prices resulting from larger-sized sensors for mobile devices and increased sales volume of sensors for consumer cameras. We upwardly revised our full-year forecast for sales 2% to JPY 1,990 billion and operating income 11% to JPY 310 billion, primarily due to the impact of foreign exchange rates. Based on the trends in the final product market and the demand forecast from our customers to date, we have decided not to include any impact from tariffs in this forecast for this segment. The smartphone market continued to show signs of gradual recovery on a global basis. Sales of mobile sensors during the quarter increased significantly year-on-year due to higher unit prices resulting from larger sensors being used in new products by our major customer and a higher shipment volume than our previous forecast. In addition, the growth of the market for cameras that use new video shooting styles such as handhelds contributed to the growth in sales. Our customers might have brought forward the purchase of components during the first half of the fiscal year due to the additional tariffs and other factors. Therefore, we have kept our fiscal year sales forecast unchanged from the previous forecast when the impact of foreign exchange rate is excluded. We expect sales for the fiscal year to increase an already significant 11% from the previous fiscal year. During the third quarter ending December 31, 2025, we plan to carefully assess the possibility of another upward revision. The higher sales of image sensors and our fixed cost management through an accelerated review of low-profit business and the shift of resources and costs to priority areas are contributing significantly to profit growth this fiscal year. During this mid-range plan period, we intend to continue to focus on improving the efficiency of business operations and product development. In the next mid-range plan period, we aim to build on those efforts by continuing to work on improving the profitability of the business by considering measures that balance business expansion with improved efficiency of capital expenditure. To summarize, excluding nonrecurring items, the G&NS, music, and I&SS segments all achieved record high operating income during the quarter, and we believe that our business momentum is strong. Looking ahead to the second half of the fiscal year, given the uncertain business environment, we intend to continue to operate our business cautiously while striving to steadily achieve results. The upwardly revised operating income forecast for this fiscal year presented today projects an average annual growth rate of operating income of 18% compared to the final year of our fourth mid-range plan and a cumulative operating income margin for the fifth mid-range plan to date of 11.3%. This demonstrates that we are making steady progress towards achieving the targets of our fifth midrange plan. As for shareholder return, we established today a share repurchase facility of a maximum of JPY 100 billion to be executed by May 2026. And we successfully completed the partial spinoff of the financial service business on October 1. We would like to reiterate our sincere gratitude to our shareholders and investors. This concludes my remarks.

To answer your questions, we have on the podium Lin Tao, CFO and Corporate Executive Officer; Hirotoshi Korenaga, Senior Vice President in Charge of Accounting; Naoya Horii, Senior Vice President in charge of Corporate Planning and Control, Disc Manufacturing Business, and Storage Media Business. The first question is from NHK, Mr. Taruno or Ms. Taruno, please.

I have two questions. You have just explained the results this time in and out of Japan, what about the market conditions as you see it, including the consumer behaviors and activities? That's my first question. And the second is that Demon Slayer or Kokuho have become such a big hit. There's a music and pictures related content business. How are you going to grow these content-related businesses? And what kind of initiatives are you going to continue?

Thank you for your questions. First, regarding the market conditions and business sentiment in and out of Japan, there seems to be some recent stability in Japan and the U.S. However, as we operate globally, we pay particular attention to the U.S. economy. Towards the latter half of the year, signs indicate a slowdown in the U.S. economy. The inflation rate is rising, and the ratio of job applicants is declining, and due to the closure of government services, we lack much data. Overall, there appears to be a lack of transparency or certainty. Therefore, we are approaching the latter half of this year with caution and conservatism in our business operations. As for your second question, thanks to your support, Demon Slayer and Kokuho have become major hits both in Japan and abroad, contributing positively to our business. Moving forward, we will continue to adapt these titles for films and motion pictures and partner with distributors in Japan to grow this sector. Not only with Demon Slayer, but we also achieved significant box office revenue in Hollywood, which culturally empowers us. The success of Japanese content in Hollywood benefits not just Sony but content publishers across Japan as well. In addition to deploying IPs, we aim to expand through 360-degree utilization in licensing and merchandising. Thank you very much.

We will take the next question, Yoshida-san from Nikkei.

This is Yoshida from Nikkei. I do have two questions. The first one is as follows: the live service in the game business and the development status of Marathon and whether you wish to launch it this year, have you made any changes to the plan? That's the first question. And then also looking at the actual performance of add-on service from July and in September and you recorded the underperformance for the first time in 13 quarters. And then this might have been attributable to the delay in the live service or new title releases? That's the first question. And second question, so you said that the Demon Slayer has really culturally significant impact. And what is the reason in your view that these titles are exceeding your expectations in terms of performance?

Thank you for your question. Regarding the development of Marathon, we are still making progress. Between October 22 and 28, we conducted a technical test involving 80,000 participants. The focus was on gameplay and retention, which are our key performance indicators. We are currently analyzing the results against these KPIs and will make adjustments as necessary. We are committed to launching the game on schedule and anticipate doing so within this year, which is reflected in our forecast. Concerning add-on sales compared to last fiscal year, there has been a decline, as you pointed out. However, the performance of add-ons or full games really depends on the popularity of the titles among gamers. We do not consider this to indicate a slowdown. As we prepare for the year-end sales season, we are launching new titles and expect performance to improve. Regarding your second question, the upside of Demon Slayer and why it has exceeded expectations relates to the unpredictable nature of the content business. The previous title performed well during the pandemic, and while we had high confidence in its launch, its final results surpassed expectations, likely due to outstanding performance in international markets. In Hollywood, we saw significant revenue growth, which was unprecedented, allowing us to deliver unexpected results.

Let's go to the next question from Toyo Keizai, Umegak-san.

I have two questions. The first question is about the Music segment. 25 million, I think, was the upward revision that you made in operating income. I wonder how much of the contribution was from the Demon Slayer. I understood that it was already reflected in the forecast. But in the visual media platform, it was like a JPY 200 billion revenue. So what kind of contribution did this upside impact to make? Now the next is on Pictures. The JPY 250 billion was the operating income. I believe that in the first half, you had a little bit of a difficulty. The TV production, I understand is kind of going down. You mentioned about the sequels, but I'm wondering how the sequels will be contributing. Those are the two questions.

Thank you for your questions. In the Music segment, we made an upward revision of JPY 25 billion, which was influenced by contributions from Demon Slayer, Kokuho, and streaming music. Together, Kokuho and Demon Slayer accounted for approximately 50% of this increase. Regarding the Pictures segment, our full-year forecast reflects that the nature of this segment typically sees launches in the latter half of the year rather than the first half, leading to seasonal impacts. We are observing a depressed business environment in TV and movie production, so our focus will be on controlling costs while ensuring the success of our projects. Crunchyroll is a key driver for growth in the Pictures segment, as both subscriber numbers and sales have increased compared to last year. Crunchyroll will concentrate on this to expand the business further.

Let us proceed to the next question from Yomiuri Newspaper, Nakayama-san please.

My name is Nakayama of Yomiuri Newspaper. I have two questions, if I may. One A very detailed question. As you have just said, in the Music, the operating income, half of the upside comes from Demon Slayer and Kokuho. If you could give me a breakdown between Demon Slayer and Kokuho, I would appreciate it. Second, about the impact of tariffs, JPY 50 billion, and last time you talked about the utilization of the strategic inventory. What would be the background of this JPY 20 billion worth of decline?

Now about the breakdown for each individual title, may I refrain from making comments on the breakdown of each title. And about the tariff impact, Horii will answer.

Thank you for your question. As you rightly pointed out, the impact of the tariff used to be JPY 70 billion, now it's JPY 50 billion. So it's a JPY 20 billion worth of decline. In the I&SS segment, the impact of the tariff in the previous time we incorporated that to a certain extent in the I&SS segment. But if you look at the final product market and the orders received from the customers, we look at these factors. And then this time, in this particular segment, we don't see any further need of incorporating the impact of the tariff in this. So we excluded that. The JPY 20 billion decline comes mainly from the I&SS segment.

Narisawa-san from Mainichi Newspaper.

This is a question about the Games segment. The PlayStation 5 is celebrating its sixth anniversary since 2020, and its performance this year has been quite good as you're aiming to expand the installed base. Can you discuss the future strategy?

Thank you very much. This year marks the sixth since our launch, and the PS5 continues to grow in its installed base. Our perspective, especially when comparing it to traditional console life cycles and the PS4's life cycle, is that it seems to be extending. The PS4, launched in 2013, has maintained many active users for over a decade, and they continue to enjoy the console. From this viewpoint, we believe that the PS5 is still in the middle of its journey, and we are actively planning to expand it further. Regarding the year-end sales season, we are focused on enhancing customer lifetime value while also considering profitability, with the goal of increasing the installed base. However, we cannot provide any comments about future launches or successors at this time. That's all we have.

So this concludes the Q&A session for the media app. And the Q&A session for the investors and analysts will commence at 4:40 p.m.

Thank you for your patience. We will now take questions from investors and analysts. I am Kondo from the IR group and I will be your moderator. Thank you. The same three speakers from the media session will respond to your questions. We will now begin the Q&A session. SMBC Nikko, Katsura-san, please proceed.

This is Katsura from SMBC Nikko. I would like to ask about G&NS and then I&SS. The first question is about G&NS. Apart from the JPY 14.9 billion impairment, the operating income for the second quarter is 15.3%, compared to 15.8% in Q1. You are achieving this high level of profit with your major titles, which could be a threshold. Can you discuss how you view this performance and what factors are contributing to it? Additionally, with NAND flash prices increasing, there may be a negative impact on PS5 hardware profitability. What are your plans for the remainder of the year and the next fiscal year? Regarding I&SS, you mentioned aiming for a balance between business expansion and profitability improvement. In North America, the smartphone market appears strong. However, there have been significant geopolitical changes recently. What midterm plans do you have, and do you have any updates? Those are the two questions.

Thank you. I would like to begin with questions about Game. The profitability in Q2 was primarily driven by Forex and network service, along with reduced M&A expenses, which enabled us to achieve a relatively high rate of profitability. The sustainability of this performance is in question. The network service generates a higher profit, and if our first-party software performs well, we should be able to sustain a high level of profitability. Regarding memory prices and their potential effect on hardware profitability, we have already secured all the necessary parts for this fiscal year. However, we are closely monitoring the market fluctuations. Increases in supplies and parts prices will affect hardware profits. For the next fiscal year and beyond, we have already reached an 80 million installed base for PS5. Assuming this grows next year, our focus will be on monetizing the existing installed base rather than adding additional hardware profitability. That will be our priority. The second question will be addressed by Horii-san.

Thank you very much for your question. First, regarding the first half of the question, the business expansion for the next year and enhancement of the investment efficiency, we have been able to manage these quite well this year. Especially on the expenses side, we have been able to restrain expenses to generate sales growth versus previous year. Yes, we want to maintain this and further improve into the next year. As for our response to the geopolitical risks, continuously with regards to production in the U.S., we want to ensure the quality so that we can produce in a stable way; however, trying to do that in-house would be really difficult to achieve. We will continue to explore all options with different partners or making joint investments to address U.S. production issues. Thank you.

Next, from Nomura Securities, Okazaki-san.

This time, the impairment loss for Bungie's intangible assets was reflected in that. In the balance sheet, how many assets do you still have? And what is the risk of the impairment loss? The second question has to do with the PlayStation 5. In Q1 and Q2, I think you sold more than in the previous year. But towards the end of the year, you said you're going to expand? Well, are you aiming to have an upward revision or is the sales going to be more than previous year?

First, regarding the impairment loss for Bungie, it affects the intangible and tangible assets targeted for impairment, but goodwill will not be affected. Destiny 2's performance did not meet our expectations at the time of the Bungie acquisition, making it challenging to provide specific details about the remaining asset balance. We still have some intangible assets, and there is a risk of impairment for Marathon and Destiny 2 if their performances do not meet our expectations. However, we do not foresee this impacting the entire Game segment at this time. As for your second question about the installed base, we have seen growth in Q1 and Q2 compared to the previous year. We aim for a target of 150 million units this year and believe we can achieve that number.

From JPMorgan, Ayada-san, please.

My name is Ayada from JPMorgan. I have a question about Games and I&SS. One question each. For Games, as has been discussed earlier, network service sales in dollar terms increased by 35% in the second quarter. What will be the breakdown if possible? I would like to know. Two years ago, there was a price increase; maybe there's an effect from that. And then the shift towards higher-priced products or the number of paying subscribers increased. I think these are possible items, what would be the breakdown in terms of priority? And I&SS, in the first half, it seems that some customers brought forward the purchase of the components. But in the third quarter, the input of wafers from 155 to 160, there seems to be a shift. So I guess this backdrop towards the U.S. and the Chinese market, what would be your take on the market conditions? I am sure there is an upside, so please explain the risks and upside both.

The network service and the factors contributing to the increase in sales, as you rightly said, price comes at the top of the list, the price increase. Impact still lingers and then the number of subscribers or users increased compared to the previous year and the product mix. Tier 2 and Tier 3, higher-tier users, what we have more and more people go into the higher tiers. I think those are the contributing factors for the increased sales. But, there is some factor contributed to the increase in the operating income. That is to say acquisition of the contents efficient way of acquisition, looking at the data, contributed to the operating income improvements. And I&SS, please. Thank you for your question. As you mentioned, in the first half, the shipment of sensors was higher than we anticipated. We are maintaining our full-year forecast as is. There is some uncertainty in the supply chain due to U.S. tariffs and changes in production, which makes things less clear. Some of our shipments go directly to the final markets, while others are still in the supply chain, and we need to monitor this. In the third quarter, we will continue to import wafers at full capacity. If conditions improve, we might see an increase in sales. Starting next fiscal year, we might also consider building up strategic inventory. We take various factors into account when looking at input volumes. Regarding our customers, while I can't discuss specific situations, there are fluctuations depending on the customer. The smartphone market is gradually recovering, which is our current understanding. At this time, North America appears to offer more opportunities and potential.

So we will take the next question. Ezawa-san from Citigroup Securities.

This is Ezawa from Citigroup Securities. We have one big question for Game. There was a mention of treating R&D capital as an expense. Can you talk a little bit more about that? And is this related to some sort of impairment or are there any specific titles related to this? Furthermore, also the development asset capitalization. And as you run your business, will you foresee this will happen more often? That is one big question. The next question is also related to the development asset. If you look at the supplementary presentation and when you look at the depreciation by segment, it appears that there's no apparent increase. However, the depreciation of the development is not really included, I believe, and the capitalization of development for the Game is, what will be the scale of the asset for the gaming development.

Thank you for your questions. The capitalization and correction are not linked to the nature of the business. Korenaga-san will provide more details about the revision.

Thank you for the question. This value is not an impairment of asset. In the past, and there was the network development, which was treated as the intangible asset and then part of it should not have been capitalized and we found out. That's why for the past years and then for this fiscal year, we made the correction in one go. Specifically, the network-related asset and R&D are capitalized, but console and hardware R&D are treated as expenses. This treatment was mistakenly done in the past, which we made a correction retroactively. That's all.

Through operational improvements, we will prevent the recurrence. We believe that this will not happen again. The next one is the Game capitalization and then the depreciation or monetization. The depreciation that we gave itself, and we do this in accordance with the rules. So it's not that all the games are capitalized. We will work closely with the auditing firm. So at the stage of the development, we will be able to finalize the value of the asset mailer in the process. So in terms of value, it's not really that high on an annual basis, and we believe the tens of billions in tens of billions of yen, that level. As for the depreciation expenses, when we launched the content, we started to depreciate and that is the nature of the business. Thank you.

So we have very little time left. The next person will be the final one to ask questions. From Goldman Sachs Securities, please welcome Munakata-san.

This is Munakata from Goldman Sachs Securities. I have a question regarding G&NS. For the full year, the operating profit was about JPY 500 billion, excluding the tariff impact, which wasn't part of the forecast. Considering these factors, I think profitability has improved. The current platform seems to be focusing on hardware and other services, where prices are increasing. Looking at competitor trends, what do you see as potential areas for profitability improvement after next year? Will game content and similar items be subject to price revisions?

Thank you for the question. For the Game business next year, we need to concentrate on the year-end season and aim to expand the installed base to reach 90 million units by the start of next year. The potential for growth includes first-party content from Insomniac studio, with the launch of Wolverine, which will serve as significant content. Additionally, Marathon, which is a live service game, could be launched this year or next year, potentially leading to increased revenue and profitability. However, we must be cautious about the current market situation. The components and supply chain are unpredictable, so we need to carefully assess profitability and find a balance. As we plan our strategy for next year, we will need to factor this in. Regarding pricing, I have no specific comments at this time. We appreciate your attention, and we will now conclude Sony Group Corporation's consolidated financial results presentation. Thank you.