Earnings Call Transcript - SONY Q3 2022

Unknown Executive, Master of Ceremony

Ladies and gentlemen, thank you for joining us today despite short notice. We would like to start the press conference for the announcement of changes to Sony Group's management structure. My name is Ishii, from the corporate communication department. Nice to meet you. Now I would like to introduce those who are on the stage: Mr. Kenichiro Yoshida, currently Director, Representative Corporate Executive Officer, Chairman, President and Chief Executive Officer, who will assume Director, Representative Corporate Executive Officer, Chairman and CEO as of April 1 this year. And Mr. Hiroki Totoki, Director, Representative Corporate Executive Officer, Executive Deputy President and Chief Financial Officer, will become Director, Representative Corporate Executive Officer, President, Chief Operating Officer and Chief Financial Officer. The speeches will be made in the order of Mr. Yoshida, followed by Mr. Totoki, and we will take questions afterwards. After the Q&A session, we will have about 5 minutes for a photo session. Overall, we plan to have about 40 minutes for this first conference followed by the briefing on the Q3 results. Mr. Yoshida, please take the podium.

Kenichiro Yoshida, CEO

Thank you all for coming today despite the short notice. I would like to explain the executive changes announced today. Effective April 1, Hiroki Totoki, currently Executive Deputy President and CFO, will be appointed President, COO and CFO. I will become Chairman and CEO. These changes are intended to strengthen the group management structure. From April onwards, we will discuss the further evolution and growth of Sony under this new management structure. First, I'd like to touch on the background of these management changes. Sony is engaged in diverse businesses based on our purpose to fill the world with emotion through the power of creativity and technology. Furthermore, in April 2021, we transitioned our organization to a new group architecture and established Sony Group Corporation, which is aligned with all our businesses in an equitable manner. Our approach to business management is one where the vectors of each business are connected by the social significance of creating and delivering Kando but also emphasizes the autonomy of individual businesses, organizations, and employees. On the other hand, in order to enhance the group's overall value and long-term perspectives, it's vital to thoroughly implement capital allocation, collaboration between businesses, and business portfolio management. To do this, I concluded that we should strengthen our management structure; and I proposed to the nominating committee and the Board of Directors to promote Mr. Totoki, who has a deep understanding of each business operation, to President and appoint him as COO. This proposal was approved today. He will continue as CFO because the CFO needs to have a deep understanding of the business, and we believe that this role closely relates to the duties of the COO. For approximately five years since I became CEO in April 2018, he has been a driving force in implementing growth strategies for the group, particularly from a financial perspective in his role as CFO. His greatest contribution has been in supporting our investment for growth, primarily in two major areas: one is content IP. While we have made acquisitions in the direct-to-consumer domain such as the anime distribution company Crunchyroll, we have focused particularly on strengthening our content IP. This started from the acquisition of EMI music publishing in May 2018 just after I was appointed CEO. He led this acquisition, including the negotiation of terms. The other is semiconductors. I regard CMOS image sensors as creation semiconductors that generate Kando. He supported our investment in this area while managing risks through in-depth discussions with the business side regarding demand, the competitive environment, and the development road maps. His other contributions included setting the JPY 2 trillion framework for strategic investment in the current mid-range plan. This investment framework established by him has led to an improvement in the growth mindset of the entire group. Furthermore, there is also the repurchase of our shares which we have positioned as a part of our strategic investment. While constantly taking investment opportunities and financial conditions into account, he has supported the repurchase of approximately JPY 500 billion of Sony shares since fiscal 2018. I have worked with Mr. Totoki since 2005, when I became President of Sony. I have also learned quite a lot from him regarding strategic perspectives encompassing the broader external environment. Furthermore, he has the experience of planning and founding Sony Bank himself and operating it as a representative director. He has accumulated a wide range of experience, including directly leading a large organization as the Head of Sony Mobile for more than three years starting in 2014. Going forward, I'm confident that he will make an even greater contribution to enhancing our corporate values as President, COO, and CFO. As part of efforts to strengthen our management structure, we have all decided to appoint Toshimoto Mitomo as Executive Deputy President and CSO. Mr. Mitomo possesses extensive experience in the intellectual property field, technological expertise, and strategic perspectives. Most recently, he has overseen areas, including new business development and corporate venture capital; and is leading discussions across the group in areas such as virtual production and the metaverse. At Sony, we operate our business in the Kando value chain of creating and delivering Kando, and he helps an important role in expanding and deepening the scope of this business. I look forward to Mr. Mitomo, in collaboration with Hiroaki Kitano, who was appointed CTO last year, to further contribute to Sony's evolution as a creative entertainment company with a solid foundation of technologies. Sony's purpose is to fill the world with emotion, and its corporate direction of getting closer to people will remain unchanged. Our approximately 110,000 employees who share this purpose are a driving force behind the Sony Group's diverse businesses. The management team will work together as one along with our employees to create value from long-term perspectives based on our purpose. That is all from me. Thank you.

Unknown Executive, Master of Ceremony

Next, I would like to invite Mr. Totoki.

Hiroki Totoki, CFO

I am Hiroki Totoki; and will be assuming the role of President, COO, and CFO of Sony Group. Thank you for your attendance. I'm grateful to Mr. Yoshida and the Board of Directors for their trust in recommending and appointing me; at the same time, I feel a great sense of responsibility. To introduce myself: I joined Sony in 1987. After working in finance, including an overseas assignment in London, I left Sony in 2002 to take on the role of Representative Director of Sony Bank, a company that I led in establishing. While it was on a small scale, the experience of launching and managing a new business with a spirit of start-up formed the foundations of my current value perspectives in management. Then in 2005, I moved to our ISP business So-net, where I took on a wide range of roles, including CFO, under Mr. Yoshida's leadership. In December 2013, I returned to Sony. Following roles, including CEO of Sony Mobile and Corporate Executive Officer and CSO of Sony, I was appointed to my current position of CFO in 2018 when Mr. Yoshida became CEO of Sony. Since then, as a member of the management team led by Mr. Yoshida, I have dedicated myself to enhancing the corporate value of the Sony Group. This fiscal year is the second year of our current fourth mid-range plan. Thanks to the efforts of management at each of our businesses and from every employee, we are forecasting strong results this fiscal year, including record sales and more than JPY 1 trillion in operating income. On the other hand, looking at our current business environment, there is increasing instability due to factors such as the uncertain global economic outlook, geopolitical risks, energy issues, and the natural environment. In addition, I feel an acute sense of urgency that there is a fine line between whether we can channel the rapid evolution of technology with AI, as a leading example, into further business growth or whether our business will be disrupted by it. As the business environment and technology continue to undergo great change, I believe the key to increasing the resilience of the overall Sony Group is evolving our diversity. Diversity in our business and talent is part of Sony's DNA, but we must further evolve this diversity. Our goal is to bring together people with various attributes, experience, and expertise from inside and outside the company to co-create the future by unleashing their ideas and creativity and to continue to grow both as individuals and as a company. By leveraging the Sony Group's diversity and continuing to evolve and grow, I would like to create a positive spiral that begins with Sony being chosen by customers, which then energizes our employees, enables us to attract more new talent, increases our corporate value, and ultimately enables us to give back to society. Working together with Mr. Yoshida, the Sony Group's management team, and our employees around the world, I intend to continue my efforts to further evolve and grow our business based upon our purpose. I look forward to your continued support.

Unknown Executive, Master of Ceremony

We would now like to open the floor for questions. We have about 25 minutes allotted for this Q&A session. To streamline the process, we will take all questions at once. We invite questions from investors and analysts. If you have a question, please raise your hand, and our staff will bring you a microphone. Let's start with the person on the far right, second row from the front.

Shimai Kenta, Analyst

Shimai from NHK. I'll have a question to Mr. Totoki, the new CEO. In your soft introduction, you were talking about Sony Bank and the venture spirit. As you will be continuing your position as CFO and you become COO this time, in your position as the President, what business would you like to develop? And what is your wish for your new position?

Hiroki Totoki, CFO

Thank you for the question. The management and the group business will continue. With the current mid-range plan, we have some actions planned. We aim to thoroughly put those actions into place, and basically we would like to strengthen all aspects of our business. That's my basic thinking.

Unknown Executive, Master of Ceremony

Next question, please, person in the middle row, the third row from the front, on the right side.

Unknown Attendee, Freelance Journalist

Honda. I have two questions for Mr. Yoshida. As Mr. Yoshida has presented, it is great to have the support of a person who is quite knowledgeable about finance. At the same time, I recognize that the CFO has certain unique authority. Do you think there are any conflicts or problems when a CEO is also a CFO? It appears to me that this is rather sudden that this announcement was made. So why now?

Kenichiro Yoshida, CEO

Let me answer your question. About the first question, whether the double-hatting of a CEO and CFO will be a problem, well, this is COO, Mr. Totoki's position. He is going to be a group COO, not the CEO, COO, and so it will be a little different from giving direct instruction to the frontline. This COO position understands the operations very well. To double-hat as a CFO, when we consider the group structure of our company, I think this is reasonable and efficient. In this group, in each part, we will confirm the standing of each part of the business to lead the way for further growth. I think it makes sense. The second question was why now. Sony is currently practicing this mid-range business plan or the plan, and we are right in the middle of the fourth mid-range plan. We have business-planning people, but the actual management itself is being done with a long-term perspective. At the moment we look at the external landscape, the changes are accelerating. As Mr. Totoki also mentioned, technology is changing rapidly, and there are heightened geopolitical risks. We need to strengthen capital allocation, business-to-business collaboration, and portfolio management.

Unknown Executive, Master of Ceremony

I would like to move on to the next question and the second row from the front on this side.

Unknown Attendee, Freelance Journalist

My name is Nakagaki from TV TOKYO. I have a question for Yoshida-san. These management changes will lead to a two-top structure, Yoshida-san and Totoki-san, and both of you will form the financial sectors, so what's going to be the impact?

Kenichiro Yoshida, CEO

The two-top structure of the management's purpose is just to strengthen our management structure and architecture. We assign a new COO, and capital allocation, business portfolio management, and business structure management are the key functions. That's the purpose. And as for the CFO experience, that is quite right. I myself have been serving for So-net, the Internet provider, as president for nine years. I think a variety of experience is quite important for us to serve the company. He has also worked for founding Sony Bank and has been president of Sony Mobile, so I believe he can leverage his experience.

Unknown Executive, Master of Ceremony

Now next question, the person in the middle, second row from the line from the top, from the front.

Unknown Attendee, Analyst

The presidents, each president, had a slogan, a mission. Hirai-san focused on manufacturing and Kando. Yoshida-san aims to become closer to people. Totoki-san, what kind of slogan do you have in mind?

Hiroki Totoki, CFO

Thank you for your question. I am focusing on growth, both in business and company. If growth stagnates in various ways, one tends to fall into a negative spiral. Therefore, I am concentrating on growth and realizing that growth. As I said in my speech, we aim to be chosen by customers and energize our people; a positive spiral must be created. So in short, it is growth.

Unknown Executive, Master of Ceremony

Next question, please; the person in the middle row second from the front, to the left side.

Unknown Attendee, Analyst

Furukawa from Nikkei. I would like to ask about the necessity of COO. There was a discussion in the Board about the necessity of the COO. In the past, in Mr. Idei's era, there was the CEO and COO as separate. And there was a split between the CEO and COO under Mr. Howard Stringer. Whether they functioned or not is another question, but I think it may be a difficult question to answer. Do you believe that having the CEO and COO would be better separated in terms of functions?

Kenichiro Yoshida, CEO

Well, Sony's management is not so much one-top management. I am part of that management team. That's what we have been demonstrating as the management of a business. With that, as I mentioned, external landscape, major changes are happening, geopolitical risks, and also acceleration of technology. These positions are independent, but while respecting independence, we work together on business-to-business collaboration and business portfolio improvement. The management team needs a deep understanding of the external environment. Of course, Mr. Totoki has a deep understanding of the external landscape. With the titles of COO and CFO, he can elevate his understanding to a higher level.

Unknown Executive, Master of Ceremony

Next question, please. I would like to take questions in the middle row and second from the front.

Unknown Attendee, Freelance Journalist

My name is Nishida, and I have a question regarding the CEO's and CEO's roles. In terms of strengthening the product portfolio, that is well understood, but could you be a bit more specific about what each of you wants to do? What leadership will Yoshida-san and Totoki-san provide for Sony Group?

Kenichiro Yoshida, CEO

Totoki-san will make another comment. As for the details, that's subject to discussions from now on. We have six segments of businesses that we must maintain and let grow, but regarding the discipline of corporate management, we should regularly check whether those portfolios and segments are optimum. That should be the role of the Board of Directors and management.

Hiroki Totoki, CFO

I would like to add some additional comments regarding business portfolio. It should not be static; it should be dynamic. A diversified business means different harvesting cycles, so we need cyclical revisiting and reviews of those business portfolios for updates. As Yoshida-san mentioned, strengthening the management structure is crucial for us to carry on, and we have to raise our management capabilities, and I plan to play my role to do that.

Unknown Executive, Master of Ceremony

Next question. Now the person third line from the front.

Unknown Attendee, Analyst

Nishigori from Nikkan Kogyo Shimbun. I have two questions for Totoki-san. Sony Group, what kind of company would you like to steer the company into? What is your vision for the company? And Mr. Totoki, personally, what is a credo or belief that you think is important?

Hiroki Totoki, CFO

Thank you very much for your questions. What kind of company I would like to make Sony into is essentially a company that continues to define our purpose and expand the Kando value chain. We have been sending that message internally and externally. We must make this more concrete. An ideal situation would be for everyone to know what we have to do without needing an explanation. That is the ideal situation, so we will bring this into reality. Regarding my belief or credo: it’s not something grand, but from before, the key to management is courage and patience. Many say this. When one is engaged in the management of a company, identifying risks and making judgments requires the courage to make decisions. At times, you may be faced with headwinds and contradictions, but you must persevere and have patience. I always remind myself of the importance of this.

Unknown Executive, Master of Ceremony

Let's move on to the next question, so the person in the middle, second row from the front.

Unknown Attendee, Analyst

Sasaki from Toyo Keizai. Under the new management structure, Yoshida-san is going to be the CFO. Totoki-san, I believe you have performed well as CFO. What are the concrete actions? Were there any other choices or options?

Kenichiro Yoshida, CEO

So this change to Sony Group's management structure started with discussions with the nominating committee in July last year. At that time, I discussed Mr. Totoki's strengths. His most significant strength is the strong willingness for growth. I believe this is a key attribute for the management of a company. Company growth should result in the growth of the employees as well. That's my view, and I strongly believe Mr. Totoki is suitable as the new leader of the Sony Group.

Unknown Executive, Master of Ceremony

Let's go to the next question, on this row and with the white shirt.

Unknown Attendee, Analyst

My name is Sasaka from Nikkei Business. I have two questions. Mr. Totoki, how will your experience as CFO positively affect your new position? And as CEO, Mr. Yoshida, what will you do in that role?

Kenichiro Yoshida, CEO

Thank you. The first question will be answered by Totoki-san. As for what I'm going to do as CEO, there are numerous tasks for me to tackle. Ultimately, I have to take ultimate responsibility for the Sony Group.

Hiroki Totoki, CFO

As for the CFO role, depending on the company, the roles might differ even though they may carry the same name. The CFO in the Sony Group has a wide range of roles and is quite deeply involved in strategy and management. This has been true since Mr. Yoshida served as CFO. These experiences should serve positively as President because we can have an overall view and interpret our financial figures, leveraging those ideas through interaction with investors and analysts.

Unknown Executive, Master of Ceremony

Let's move on to the next question. If there are no further questions, we'll return to this room, located in the front center.

Unknown Attendee, Analyst

Soma from Nikkei ESG. I have a question to Mr. Totoki. Mr. Yoshida, after he became President, has been saying that his purpose is to fill the world with emotion through the power of creativity and technology. What will be your priority areas after you become President?

Hiroki Totoki, CFO

Thank you for your question. As Yoshida-san has clearly defined the purpose and disseminated it to the group, we must ensure that this purpose takes root throughout the organization. This purpose reflects the Kando value chain in which we create Kando and deliver Kando. We need to make this even stronger and broader in scope.

Unknown Executive, Master of Ceremony

Now we are running out of time, so we would like to take one last question. From JPMorgan Security, Mr. Ayada.

Junya Ayada, Analyst

My name is Ayada from JPMorgan. I have a question about this management change, directed to Mr. Yoshida or Mr. Totoki. Regarding the group executive officers, what did you tell them or what are you planning to tell them? Additionally, to the employees, what messages would you like to convey?

Kenichiro Yoshida, CEO

Thank you for your question. A message has already been issued. As I mentioned in my speech, there is a change in the external environment and things we need to tackle internally. I have already conveyed to our employees, similar to what I mentioned in my speech, the company’s purpose and the commitment to getting closer to people; that will not change. Together, we will attain further growth. That was my message.

Hiroki Totoki, CFO

From myself too, I basically delivered the contents of my speech with more detail to our employees and also to key team members. I spoke to them individually and asked for their cooperation as I assume this new position. We received lots of feedback through emails and messaging, and I look forward to reading through all the messages.

Unknown Executive, Master of Ceremony

Thank you very much. It is time, so this concludes the question-and-answer session. Next, there will be a photo session for the... Ladies and gentlemen, let us start Sony Group companies and the consolidated financial results announcement. My name is Siji from the IR group of the financial department. I'm happy to serve as the emcee. Let me introduce those who are on the podium: Hiroki Totoki, Executive Deputy President and CFO; and Ms. Naomi Matsuoka, Senior Vice President in charge of corporate planning, control, support for financial business and entertainment areas; Sadahiko Hayakawa, Senior Vice President in charge of finance and IR. These three are on the podium. First, Totoki-san will have the floor to talk about Q3 FY 2022 consolidated financial results, and then we will move to questions and answers. We will first entertain questions from investors and analysts, then to separate sessions for media. In total, we are planning for 45 minutes. For the related documents, we have posted them on the IR website. Please refer to that. So Totoki-san, you have the floor.

Hiroki Totoki, CFO

Today, I will explain the following: Consolidated sales for the quarter increased by 13%, compared to the same quarter of the previous fiscal year, to JPY 3.4129 trillion. Consolidated operating income decreased by JPY 36.4 billion to JPY 428.7 billion. This operating income result was close to the record high reached in the same quarter of the previous fiscal year, which benefited from the recording of a JPY 70.2 billion gain on the transfer of a business in the Pictures segment. Income before income taxes decreased by JPY 63 billion year-on-year to JPY 398.6 billion. Net income attributable to Sony Group Corporation stockholders decreased by JPY 19.4 billion to JPY 326.8 billion. The results of that quarter by segment are shown here. Next, I will explain the fiscal year consolidated results forecasts. The consolidated sales forecast is JPY 11.500 trillion, a decrease of JPY 100 billion from the previous forecast. We have upwardly revised our forecast for operating income by JPY 20 billion to JPY 1.180 trillion. On the other hand, the forecast for consolidated operating cash flow excluding the financial services segment has decreased by JPY 270 billion from the previous forecast, to JPY 550 billion, primarily reflecting a significant increase in working capital. Now I will explain our inventory situation, which is a primary cause of the increase in working capital. Inventories at the end of the current quarter were JPY 1.4645 trillion, an increase of JPY 48.1 billion from the end of the previous quarter. In the G&NS segment, the increase in inventories of PlayStation 5, for which production and sales expanded significantly during the quarter; and PlayStation VR2, which is scheduled to be released this month, are notable. The primary reason for the increase in working capital was our decision to raise the level of inventory to ensure that we achieve our sales plan for the fourth quarter and to maximize penetration of PS5 considering the continued risks related to the supply chain and logistics for PS5. In the ET&S segment, although inventory reduction progressed to a certain level from the end of the previous quarter, we recognize that it is still slightly higher than the appropriate level. We plan to accelerate further reduction toward the end of the fiscal year. In the I&SS segment, we are continuing to manage strategic inventory, paying close attention to inventory quality and carefully balancing inventory risks while maximizing the use of existing capacity and optimizing the timing of capital investment. The forecast for each segment is as shown here. Now let's move on to an overview of each business. First is the G&NS segment. FY '22 Q3 sales increased a significant 53% year-on-year to JPY 1.2465 trillion, mainly due to increased hardware sales and the impact of foreign exchange rates. Operating income increased a significant JPY 23.4 billion year-on-year to JPY 116.2 billion mainly due to the impact of the increased sales of first-party software despite an increase in costs. The forecast for FY '22 sales is unchanged from the previous forecast. We have upwardly revised our operating income forecast to JPY 240 billion, an increase of JPY 15 billion from the previous forecast. Expenses associated with acquisitions for the current fiscal year are expected to be approximately JPY 57 billion. 7.1 million units of PS5 hardware were sold during the quarter, and the cumulative number of units sold by the end of December exceeded 32 million. Based on this result, we have set our sales forecast for the fiscal year at 90 million units. By optimizing our operations, we are exerting every effort to sell as many units as possible to meet the strong demand. Due to the penetration of PS5, the percentage of PS5 users among monthly active users in December increased to about 30%. Engagement metrics for users who transitioned from PS4 to PS5, such as the PS Plus subscription rate, gameplay time, and average spending amount are significantly higher than when playing on PS4. We will continue to focus on accelerating the transition of PS4 users to PS5. Additionally, nearly 30% of PS5's MAUs are users who never used PS4, so with the spread of PS5, the acquisition of new users is progressing. Although total gameplay time of all PlayStation users during the quarter was down 3% year-on-year, it was up 6% compared to the prior quarter and up 14% in December compared to the prior month. We believe that user engagement is on a recovery trend due to the penetration of PS5 and the contribution of hit titles. In terms of software for PlayStation, the new title God of War Ragnarök recorded sales of more than 11 million copies in the first 10 weeks after its release on November 9, marking it the fastest-selling first-party title ever. Looking ahead to next fiscal year, we have strong titles planned to be released for both first and third parties, including Marvel's Spider-Man 2. The sales contribution of PC software is steadily increasing, thanks to the rollout of our popular IP to PCs such as Marvel's Spider-Man: Miles Morales, which went on sale in November. As with Bungie, preorders are steadily increasing for the Destiny 2: Lightfall expansion, which is scheduled to be released this month. On the 22nd of this month, PS VR2 will be released worldwide. By maximizing next-generation sensing functionality and the performance of PS5, we aim to provide a virtual reality experience like never before. In anticipation of the launch, we are preparing a lineup of more than 30 titles, including Horizon Call of the Mountain, the latest title in our IP, and Gran Turismo 7, which will be upgradable to PS VR2 for free. We are seeing steady results from the various measures we have taken in terms of both hardware and software, and we believe that we have created positive momentum to reaccelerate growth in a game business centered on the expansion of the penetration of PS5. Next is the Music segment. FY '22 Q3 sales increased by 23% year-on-year to JPY 367.7 billion (sic) mainly due to the impact of the foreign exchange rate and the increase in streaming sales. Operating income was JPY 63 billion, an increase of JPY 7.8 billion year-on-year. The contribution to operating income from Visual Media and Platform accounted for approximately 10% of the operating income of the segment for the quarter. There is no change from the previous fiscal year forecast. Streaming sales in the quarter continued to grow steadily, with a year-on-year increase of 33% in Recorded Music and 60% in Music Publishing, 7% and 28%, respectively, on a U.S. dollar basis. In Recorded Music, following the first half of the fiscal year, during which we had many new albums, hits from artists such as Harry Styles and Beyoncé continued to generate hits, with an average of 38 songs in Spotify's top 100 weekly global music rankings in the coming quarters. Among them, the singer-songwriter SZA's album SOS, released on December 9, became a big hit, remaining at #1 in the Billboard 200 for seven consecutive weeks after its release. In Music Publishing, our affiliated songwriters participated in all of the top 5 most streamed albums on Spotify in calendar year 2022. We believe this further solidified Sony's position as an industry leader. Next is the Pictures segment. FY '22 Q3 sales were JPY 331.5 billion, a significant decrease of 28% compared to the same quarter of the previous fiscal year which benefited from the blockbuster release of Spider-Man: No Way Home and the U.S. television show Seinfeld. Operating income fell significantly by JPY 123.9 billion to JPY 25.4 billion primarily due to the recording of the gain from a transition of a G&NS games business in the same quarter of the previous fiscal year and the impact of decreased sales. The FY '22 forecasts in sales are JPY 1.400 trillion, a decrease of JPY 40 billion from the previous year. There is no change from the previous forecast in operating income. Due to the fewer films being released, mainly resulting from production delays caused by the COVID-19 situation, box office revenue in the U.S. calendar year was about 60% of the calendar year 2019. Next fiscal year, Sony plans to release highly appealing films, including the sequel to the Academy-award-winning animation film Spider-Man: Into the Spider-Verse, and a new film in the Sony Pictures Universe of Marvel Characters, following on from Venom. Following on from Uncharted, which recorded box office revenue of more than USD 400 million worldwide, we've had more than 10 projects under development to adapt video games into films, including Gran Turismo and God of War. The live-action television drama adaptation of The Last of Us, which began airing on HBO Max on January 15, became a big hit, attracting 22 million viewers in the first episode since its release. Furthermore, we plan to release the first PC game software using this IP. In this way, we plan to further enhance and strengthen the value of appealing IP through multifaceted exploitation into collaboration across platforms. Next is the Entertainment, Technology & Services segment. FY '22 Q3 sales increased 10% year-on-year to JPY 752.8 billion due to foreign exchange rates and increased sales of digital cameras. Operating income increased by JPY 1.1 billion year-on-year to JPY 81.1 billion, primarily due to the benefit of increased sales of digital cameras despite decreased sales of televisions. The FY '22 forecast for sales is JPY 2.480 trillion, a decrease of JPY 30 billion from the previous forecast. There is no change in the previous forecast for operating income. By responding swiftly to market changes and minimizing the impact of the economic slowdown and deterioration of the market environment in certain categories such as TVs, we secured a profit for the entire segment during the quarter that was on par with the same quarter of the previous year. Regarding interchangeable lens cameras, although pent-up demand due to product shortages in the previous fiscal year is abating, there has been no noticeable negative impact from the economic slowdown, so far, and sales are relatively stable. We have been able to control the supply chain disruption caused by the resurgence of COVID-19 in China since the end of last year so that it does not affect sales. We are closely monitoring the situation after the Chinese New Year and are taking necessary actions. We anticipate that the business environment will become even more severe over the next fiscal year. Therefore, we will revise our sales plan for the fourth quarter in a more conservative manner and proceed with business operations with top priorities being the prevention of any negative impact from being carried over into the next fiscal year and accelerating our efforts to further strengthen our business structure. Next is the I&SS segment. FY '22 Q3 sales increased a significant 28% year-on-year to JPY 417.2 billion, mainly due to the impact of foreign exchange rates and an increase in sales of image sensors for mobile products. Operating income was JPY 84.9 billion, a significant increase of JPY 20.2 billion year-on-year, mainly due to a positive impact of foreign exchange rates despite an increase in costs. Both sales and operating income for the current quarter were record highs for this segment. The FY '22 sales forecast has been decreased by JPY 20 billion from the previous forecast to JPY 1.420 trillion. There's no change from the previous forecast for operating income. The smartphone market continues to be sluggish, centered on mid-range and low-end products in China. Recently, this trend has become partially evident in high-end products as well, but that is well within the expectations of our previous forecast. At present, we assume that the smartphone market will recover moderately, starting from the second half of this fiscal year ending on March 31, 2024. We are proceeding with careful verification and assessment in preparation for formulating a business plan for the next fiscal year. On the other hand, sales of our large-format high-definition sensors for flagship models have grown significantly from the previous fiscal year, leading to significant growth in sales for the segment. We believe that growth in the trend towards larger-size, higher-image-quality, higher-performance mobile sensors is a major achievement this quarter. Taking this into account, we will continue to consider medium- to long-term investments and increased production capacity to further expand our image sensor market share. In the automotive sensor business, we expect to double sales in the current fiscal year compared to the previous fiscal year and to continue to grow at a high level next fiscal year as well. Last is the financial services segment. FY '22 Q3 financial service revenue decreased significantly by 24% year-on-year to JPY 359 billion, mainly due to the deterioration in net gains and losses on investments in the separate accounts at Sony Life Insurance. Operating income increased significantly by JPY 19.1 billion year-on-year to JPY 54.3 billion, primarily due to a reversal of policy reserves at Sony Life resulting from the rise in interest rates during the quarter. Sony Life's new policy amount in force increased 57% year-on-year due to growth in the corporate business and strong sales mainly of the new individual variable annuity product Sovani. There is no change in the previous forecast. Next fiscal year will be the fiscal year of the fourth mid-term range plan, and it will be a crucial fiscal year during which we will establish the next mid-range plan. I believe that the most important theme in the next mid-range plan is Sony Group's strategy for further growth beyond the current tough economic cycle. In our next fiscal year, we anticipate that we will need to operate our business in the face of headwinds. While each business will focus on responding quickly and decisively to the changes it faces, we will steadily lay the foundation for the future. We plan to further evolve the diversity of our businesses and human resources, which are our strengths; enhance the resilience of our business portfolio; and take on the challenge of creating new value in growth markets. That concludes my remarks.

Unknown Executive, Master of Ceremony

Mr. Totoki. Now we'll move on to the Q&A session. As we mentioned earlier, we will first have a Q&A for investors and analysts. Around a quarter past 5, we will take questions from the media. If you have questions in the room, please raise your hand and wait for the microphone to be brought to you. Now, online participant, BofA Securities, Hirakawa-san.

Mikio Hirakawa, Analyst

Hirakawa from BofA Securities. About PS5, I have a question. PS5, with 7.1 million units sold, has seen significant sales increases. The market consensus is about 7.5 million. If you can produce more, would you have sold more? Or was the demand about this level? In 3Q, your sales exceeded PS4, so what is the current situation of PS5?

Unknown Executive, Master of Ceremony

Thank you for your question. I would like to respond to your question. Sales of 7.1 million units is not a bad figure at all. However, production and distribution issues continue, so products are not being delivered to customers sufficiently. We need to streamline operations so that the units will be delivered to customers as promptly as possible. Therefore, we are not concerned about the momentum of demand. Rather, we need to solidify operations and deliver as many units as possible as quickly as possible. And once again from online, Morgan Stanley MUFJ, Ono-san.

Masahiro Ono, Analyst

Congratulations, Totoki-san, for assuming a new position. I have a question concerning games. Three months ago, you mentioned some areas of focus. The games KPI are now gaining momentum, especially MAU. That's quite positive. PlayStation is recovering in the quarter, but regarding the user compositions, you noted the focus on the transition from PS4 to PS5. Is this a gradual increase or more dependent on new titles to boost PS5 demand?

Unknown Executive, Master of Ceremony

As for PS5 and PS Plus, the paid member increase should be one of the main factors. As for the next quarter, that is almost as planned. Regarding PS5, the sales increase and promotional effect should contribute to the sales. There are some players who have been away from gaming, which may contribute to the current user level. This may also indicate a time lag between membership growth and its reflection in sales and revenue. We will continue to monitor the business, solidifying software deliveries to enhance engagement with users in gaming. Then I would like to move on to the next question. Please raise your hand if you have a question. The person in the middle of this row.

Satoshi Sakae, Analyst

Sakae from Daiwa Securities. I have a question about the finance area and financial services area. For the third quarter, was the new contract result as expected? How will interest transitions affect performance? Also, regarding the MCEV, what was the result? Additionally, regarding the plan for changing the accounting system, what is your view on how this may affect performance?

Unknown Executive, Master of Ceremony

Now I would like to invite Ms. Matsuoka to answer questions related to financial services.

Naomi Matsuoka, SVP

Thank you very much for the questions. Regarding new contract values, the situation for the third quarter is positive. As mentioned in Mr. Totoki's speech, the Sovani product is performing quite well. New contracts are increasing, and therefore new contract values are also rising. That trend is expected to last for some time. Also, on the interest rate shifts, we do have hedges in place, so we don't expect any significant impact. Any impact will likely be slight, but we do have to examine different spreads based on interest rate shifts. Particularly the bank spread is certain to be affected, which will serve to increase profitability. Regarding IFRS 17, there will be another occasion for us to explain in more detail about IFRS, so please wait for that occasion.

Unknown Executive, Master of Ceremony

We would like to move on to the next question. Anyone? Next, online participant Mizuho Securities' Nakane-san.

Yasuo Nakane, Analyst

Nakane from Mizuho Securities. Congratulations on the good results. I have a question regarding games. Recently, the macro trend in the U.S., Europe, and China has differed. Based on the December results and forecasts for March and the next fiscal year onwards, what regional differences in trends have you observed, if any?

Unknown Executive, Master of Ceremony

Thank you for your question. Regarding the gaming and network sectors globally, the economy is decelerating, leading to regional differences, but at this point in time, there are no significant differences affecting our business. However, our PS5 market share compared to competitors in Europe and the United States is satisfactory. While there may have been some narrowing in the gap during the summer, our market share has recently expanded significantly. Thus, there is not much impact from the macro economy; however, this could change, so we will monitor the situation closely from the fourth quarter onwards. Next, online participant, Ayada-san of JPMorgan Security.

Junya Ayada, Analyst

My name is Ayada of JPMorgan. I&SS, I have a question. Based on your documents, for the Q3 sales in North America, production was constrained. Regarding the Q4 wafer input, it seems to be at the same level as the previous fiscal year, but capacity appears smaller compared to last year's figures. What are your perspectives for the North American market and production situations?

Unknown Executive, Master of Ceremony

Thank you very much. Regarding customer production changes, we have seen quite minor impacts. As for Q4, we have not yet identified the exact cause for the situations arising and need to continue monitoring. As for capacity and wafer input, up to Q4, the operating utilization rate is 90% for image sensor production related to industrial use in the Kumamoto plant. Now it is time, so we would like to take one last question. From SMBC Securities, Mr. Katsura.

Ryosuke Katsura, Analyst

I am Katsura, and congratulations, Mr. Totoki. I have one question about the market landscape and how you interpret the market situation. It's dynamic, and your competitors and other peers say it's tougher than three months ago. Your semiconductor business is doing quite well. Based on this, what is your plan for the next year? Also, I believe that the ET&S forecast is quite tough. How will you address this?

Hiroki Totoki, CFO

Thank you for the question. Regarding the overall economic landscape, I believe that compared to last year's end, in particular for the European and U.S. economies, there is an optimistic view that they may be making a soft landing, as indicated by the IMF's upwardly revised forecast. The equity markets give a sense that the momentum may be recovering in advance of the overall market recovery. Generally, this has been the trend; however, there may always be a delay in real economic changes as they follow the financial markets. At the beginning of the fourth quarter and into the early next fiscal year, we need to be cautious and prepared for any shifts. As far as our business is concerned, currently, demand for smartphones, especially in the mid-to-low-end segments, is declining. The TV demand is also weak. I mentioned this situation, and it is something we anticipated to a certain extent, so we are prepared. From the fourth quarter to the first part of next fiscal year, we are keen on effective risk control to ensure we do not fall behind no matter the movement we see.

Unknown Executive, Master of Ceremony

Now it's time, and we request to conclude the Q&A session for investors and analysts. Now we would like to start the... Now we would like to open the floor for questions from the media. If you have any questions, please raise your hand.

Unknown Attendee, Freelance Journalist

Yamazaki is my name. I have a question related to the semiconductor business, specifically about the new plant you are considering building in Kumamoto. What is the current status of that project?

Unknown Executive, Master of Ceremony

Thank you for your question. It's not something we have made an announcement on yet, so this is based on speculation. I would like to refrain from making any responses, but generally speaking, the growth in the image sensor market in the mid- to long-term is driving our considerations for expanding production capacity. This is not limited to a specific location; broadly, we are considering that. If anything is decided, we will inform you immediately. So, in the center, two rows from the front and the second from the left.

Unknown Attendee, Analyst

My name is Tsutsumi from Nihon Keizai Shimbun. One question related to entertainment, Music, and Pictures. What is your strength as a conglomerate centered around the entertainment business? The macroeconomic situation has improved, and that should be a driving force for you to maintain good performance for next fiscal year. How do you plan to leverage your corporate strengths in this environment? How will you address any conglomerate discount issues that may arise?

Hiroki Totoki, CFO

Thank you for your question. Regarding the strength of being a conglomerate, we have diversified businesses, and they are not closely related. All sectors do not prosper simultaneously, so that is one strength we have through multiple businesses. This is the same concept of portfolio management. Regarding the conglomerate discount, many opinions exist. As I mentioned in the presentations regarding entertainment, we have the transmedia approach across three businesses, creating visible synergy effects in financial figures. We can expect good circulation and benign cycles of bottom-up effects. In addition to this, Sony is a technology company. Leveraging our technologies in the entertainment business is crucial. The metaverse represents some of our ongoing efforts in this direction, showcasing our innovative digital experiences.

Unknown Executive, Master of Ceremony

Please raise your hand if you have a question. In the middle, the second row from the front.

Unknown Attendee, Analyst

Nishida, I am a freelance journalist. About the inventory level at the moment for games and electronics. Considering the market, I believe you may have to be conservative in planning your inventory level. How do you analyze your inventory level from that perspective? For gaming, you have a high level of inventory, and we judge that it can be mobilized. What is your view on the inventory?

Unknown Executive, Master of Ceremony

Thank you for the question. I would like to share additional information about the inventory level. For the game and network service this third quarter, the production sales are increasing. That is why inventory is building up significantly. Even if there's demand, we were unable to deliver products smoothly for a long time, so we increased production capacity significantly. We are currently delivering these products. Regarding the game and entertainment service, we are not worried about the inventory level. The inventory level, when we consider sales momentum and also the PS4s, is now in the fourth year. In the past with simulations, even if the inventory's monetary value may rise, compared to the PS4, the product unit price is much higher.

Hiroki Totoki, CFO

In terms of the Entertainment Technology & Services segment, I mentioned that inventory levels at the end of the second quarter were quite high. We worked on reducing the inventory, and we've achieved that to a certain extent. However, it remains slightly above our target, so we aim to continue reducing inventory by the end of this quarter. For I&SS, we've decided on a policy to maintain a high inventory level as part of capital investment. This can, however, delay the timing of capital expenditures.

Unknown Executive, Master of Ceremony

Next, we have Takenaka-san from Reuters participating online.

Unknown Attendee, Analyst

Takenaka from Reuters. Regarding the game segment. Totoki-san's early comment: I would like to confirm. This fiscal year, PS5's sales target has been increased to 19 million. Is that correct?

Unknown Executive, Master of Ceremony

Yes, 19 million units is correct. It was previously 18 million; we raised it to 19 million, so we have increased the target. And time is running short. We'd like to entertain one last question. In this row, on the right, the fifth from the front.

Unknown Attendee, Analyst

My name is Imaida, of Diamond. Totoki-san talked about the high image sensor business, and you are going to enhance production capacity. Will it extend to other applications aside from mobile products?

Unknown Executive, Master of Ceremony

Thank you for your questions. That includes products beyond mobiles, but mobile image sensor products are a significant driving force behind most of the growth. However, we have other segments as well. This concludes the session. Thank you for your participation.