Earnings Call Transcript - SONY Q1 2024

Unidentified Company Representative, Emcee

It's time. We'd now like to start the Sony Group Corporation Consolidated Earnings Announcement Meeting. I'm Okada from PR. I'll be serving as emcee. I'd like to introduce the presenters. President, COO and CFO, Hiroki Totoki; Senior Vice President, In Charge of Corporate Planning and Control, Lead of Group DEI, Support for Finance Business and Entertainment Area, Naomi Matsuoka; Senior Vice President, In Charge of Finance and IR, Sadahiko Hayakawa; Sony Financial Group, Inc., Senior Managing Director and CFO, Kazuhiro Yamada. These four will be making presentations about the results of the first quarter fiscal '24 and forecast for the full-year. And afterwards, we'll have Q&A. Total session time expected to be about 70 minutes. Mr. Totoki, please.

Hiroki Totoki, President, COO and CFO

First, I would like to briefly discuss the recent changes in the financial market environment. We are extremely concerned about the sudden fluctuations in exchange rates and the possibility of an economic downturn, particularly in the United States. The result, the forecast we are presenting today does not incorporate any of the recent rapid market changes. I believe that your interest in foreign exchange, the assumed rate is evaluated at a rate very similar to today's rate. With that, we evaluate our performance. However, we will closely monitor the impact on the real economy and our business going forward and aim to take any necessary actions swiftly and provide an update if any significant changes occur. Now we will explain this content. Starting from this time, Mr. Yamada from Sony Financial Group will provide an explanation of the Financial Services segment in addition to Ms. Matsuoka and Mr. Hayakawa. I will then give a summary at the end. Now Hirakawa-san, please?

Sadahiko Hayakawa, Senior Vice President, In Charge of Finance and IR

Consolidated sales, including the Financial Services segment for the quarter increased significantly 12% compared to the same quarter of the previous fiscal year to 2.574 billion yen, and operating income increased significantly 50.6 billion yen to 249.1 billion yen. Consolidated sales increased 2% year-on-year to 3.116 trillion yen. Operating income rose 26.1 billion yen to 279.1 billion yen, and net income increased 14.1 billion yen to 231.6 billion yen. The results by segment for this quarter are shown on this slide. Next, I will explain our consolidated results forecast for FY '24. The consolidated sales forecast excluding Financial Services has been upwardly revised by 3% to 11.700 trillion yen. The operating income forecast has been upwardly revised by 35 billion yen to 1.165 trillion yen and the net income forecast has been upwardly revised by 55 billion yen to 875 billion yen. Our operating cash flow forecast remains unchanged from the previous forecast at 1.400 trillion yen. Consolidated sales are expected to increase 2% from the previous forecast to 12.610 trillion yen. Operating income is expected to increase by 35 billion yen to 1.310 trillion yen and net income is expected to increase 55 billion yen to 980 billion yen. The net income forecast is 9.4 billion yen, higher than that recorded in the previous fiscal year. Operating income on both consolidated and including financial services is expected to reach record highs. The full-year forecast by segment is shown here. Now I will move on to the explanation of the overview of each business. The first is the G&NS segment. Although hardware sales decreased, FY '24 Q1 sales increased significantly 12% year-on-year to 864.9 billion yen, primarily due to the impact of foreign exchange rates and increased first-party software sales. Operating income increased significantly 16 billion yen year-on-year to 65.2 billion yen, mainly due to the benefit of increased revenue from the first-party software and network services despite increased costs, including expenses resulting from the global restructuring we undertook. For FY '24, we are now forecasting sales to be 4.320 trillion yen, an increase of 120 billion yen from the previous forecast, and operating income to be 320 billion yen, an increase of 10 billion yen. Despite not releasing any notable titles, user engagement during the quarter remained high, driven primarily by expanding PlayStation 5 installed base and contributions from popular franchise software titles. The number of monthly active users of PlayStation was 116 million accounts, the highest number ever recorded for June, up 7% compared with the same month of the previous fiscal year, and total play time also increased 8%. In terms of our software titles, Helldivers 2 is performing better than our May forecast and PC version of Ghost of Tsushima and the Destiny 2 expansion content, the final shape are also contributing to earnings. This month, we plan to launch our live service game Concord, followed in September by Astro Bot and the PC version of our smash hit title, God of War Ragnarok. As for the Network Services, U.S. dollar-based sales increased 13% year-on-year, driven mainly by a steady shift to premium services and an increase in ARPU (average revenue per user), resulting from price revisions in PS Plus. Under the new management structure, the Platform business group is steadily maintaining and expanding the number of active users and user engagement as priority initiatives and intends to work to further strengthen the PS platform and establish a stable earnings base. Additionally, the Studio business group is strengthening its development schedule and optimizing development projects in order to consistently and continuously release hit titles. Next, the Music segment. FY '24 Q1 sales increased significantly 23% year-on-year to 442 billion yen, primarily due to the impact of foreign exchange rates as well as increased live box office revenue and streaming revenue in recorded music. Operating income increased 12.5 billion yen year-on-year to 85.9 billion yen, mainly due to the benefit of the increased sales and the favorable impact of foreign exchange rates. A 6 billion yen remeasurement gain resulting from the consolidation of a company previously accounted for using the equity method was recorded during Q1 of the previous fiscal year. On a U.S. dollar basis, FY '24 Q1 streaming revenue in recorded music increased 5%, and Music Publishing increased 20% year-on-year. For FY '24, we expect sales to increase 50 billion yen from the previous forecast to 1.740 trillion yen and operating income to increase 15 billion yen to 330 billion yen. Global market growth in calendar year 2023 was 10% higher in recorded music and 11% higher in music publishing, both compared to the previous year. In addition to an increase in the number of paying subscribers for streaming services and market expansion in emerging markets, recent price revisions by music distributors have led to market growth for the ninth consecutive year in recorded music and the 11th consecutive year in music publishing. In the medium term, the market is expected to continue to grow at a mid-to-high single-digit average annual growth rate, driven by increased ARPU and further growth in emerging markets. From early on, Sony Music Entertainment has been strategically focusing on capturing the expansion of the Indian market and building a robust ecosystem as seen from the 100% consolidation of The Orchard in 2015 and the acquisition of AWAL in 2021. Through The Orchard’s approximately 50 locations around the world, we are expanding our business in rapidly growing emerging markets, providing a wide range of services such as digital music distribution and data analysis using the latest technology. By actively pursuing strategic investments in emerging markets, including Brazilian label Sam Libre and Remus Entertainment, and the Latin Music label Bad Bunny, to which The Orchard has been providing services, we have established a strong presence in Latin America, India, Africa, and other markets around the world. As can be seen with the success of Sony Music Entertainment Japan, its artists Yoasobi and overseas markets, we have been able to create hits that transcend national and regional borders through The Orchard. Next is the Pictures segment. FY '24 Q1 sales increased 5% year-on-year to 337.3 billion yen due to the impact of foreign exchange rates, despite a decrease in U.S. dollar-based sales, primarily resulting from a decrease in the number of television programs delivered and a decrease in the number of theatrical releases. Operating income decreased 4.7 billion yen year-on-year to 11.3 billion yen, primarily due to the impact of the decrease in U.S. dollar-based sales. For FY '24, we forecast sales to be 1.520 trillion yen, an increase of 40 billion yen from the previous forecast, and operating income to be 125 billion yen, an increase of 5 billion yen. In the first half of the calendar year 2024, theatrical box office revenue in the U.S. remained at a level approximately 20% lower than the previous year, primarily due to the impact of the strikes. However, from June onwards, the release of tentpole films from major studios, including ours, has increased, and we expect box office revenue to gradually improve. During the quarter, we had hits with our popular franchise, Bad Boys: Ride or Die and The Garfield Movie, which we distributed worldwide. It Ends With Us, a film adaptation of a best-selling novel, is scheduled to be released on August 9th. The trailer set a record of approximately 130 million views in the first 24 hours following its release. We are hopeful that it will be a strong indicator of the success of our efforts to discover excellent original works and turn them into films. As for Crunchyroll, the number of paying subscribers exceeded 15 million in July. To capitalize on the rapid expansion of the anime market, we have signed a global distribution agreement with Amazon Prime Channels. After launching in the U.S. and the U.K. in October last year, we began distribution via Amazon in Brazil, France, India, and other countries since April this year. In addition to further expanding opportunities for engagement with anime fans, we've announced our plan to expand our e-commerce site, Crunchyroll Store, which was previously only available in North America and Australia, to 34 European countries. On June 12th, Sony Pictures Entertainment completed its acquisition of Alamo Drafthouse Cinema. Alamo operates 41 theaters across the U.S., where customers can enjoy a movie while dining. Alamo is a leader in the dine-in cinema industry and ranks seventh in North America in terms of box office share. It has approximately 4 million enthusiastic loyalty members, over-indexing on younger demographics. By building upon Alamo's connections with the spend community, we look forward to creating synergies with the content IP, including not only movies but also games, music, and anime. We also look forward to opportunities for Alamo and Crunchyroll to collaborate. With this acquisition, SB established a new business division, Sony Pictures Experiences, and aims to further strengthen its efforts in the experiential live entertainment business. Next is the ET&S segment. Although television sales decreased, FY '24 Q1 sales increased 5% year-on-year to 600.9 billion yen, mainly due to the impact of foreign exchange rates. Operating income increased 8.4 billion yen year-on-year to 64.1 billion yen, primarily due to the favorable impact of foreign exchange rates. For FY '24, we forecast sales to be 2.420 trillion yen, an increase of 50 billion yen from the previous forecast and operating income to be 190 billion yen, unchanged from the previous forecast. With regard to operating income, despite the favorable impact of foreign exchange rates, we are maintaining our previous forecast by incorporating the risk of a worsening market environment and the impact of rising logistics costs. Looking at the market environment during the quarter, our key product categories in Japan, Europe, and North America trended according to our expectations. While in China, the television market contracted significantly and the digital camera market, including solutions, grew significantly. As for the television business, we were able to achieve highly resilient operations during the quarter by focusing on inventory control and cost-cutting initiatives. We aim to continue to do so while also focusing on high-value-added products, such as the new Bravia 9 Series, which we believe will further enrich the cinema viewing experience at home. As for the imaging business, which includes digital cameras, we intend to pay close attention to demand trends in China, where the market is growing rapidly and aim to further expand profitability by diversifying to reach a greater audience primarily through the launch of the new vlog cam product ZV-E10 Mark II. By emphasizing inventory control across the segment, we were able to further reduce inventory at the end of the quarter compared to the same quarter of the previous fiscal year, which is contributing greatly to the stabilization of profitability in the business segment. In preparation for possible future changes in the business environment, we aim to focus on managing inventory and accounts receivable based on conservative demand forecasts to control cash flows. Next is the I&SS segment. Fiscal '24 Q1 sales increased significantly by 21% year-on-year to 353.5 billion yen, mainly due to the impact of foreign exchange rates and increased sales of image sensors for mobile devices. Operating income increased significantly by 23.9 billion yen year-on-year to 36.6 billion yen, mainly due to the favorable impact of foreign exchange rates and increased sales. For fiscal '24, we expect sales to increase 10 billion yen from the previous forecast to 1.850 trillion yen. We expect operating income to increase 5 billion yen from the previous forecast to 275 billion yen as the favorable impact of foreign exchange rates is partially offset by the impact of a significant decrease in demand for micro OLEDs used in AR and VR. The global smartphone product market during the quarter continued to show a gradual but steady recovery, similar to the previous quarter. In addition, the trend towards polarization of price ranges in the product market, particularly in China, continues. This has accelerated the expansion of the high-end smartphone market, which has furthered the expansion of the size of the sensors we ship. Thus, the market environment is progressing generally in line with our previous forecast. From the second quarter onwards, we expect the trend towards larger sensors for ultra-wide angle and telephoto cameras to continue. We believe that this trend, together with improved sensor performance to enhance camera video capabilities, will be medium-term growth drivers for the mobile sensor market. In terms of production, improvements in yields for mobile sensors are progressing as planned in May, and we aim to achieve a normal run rate during this fiscal year. We will maximize existing production capacity while being selective in making new investments, together with other development and operational efficiency measures. We intend to work to improve profitability, a key theme of this mid-range plan. Last is the Financial Services segment. Fiscal '24 Q1 Financial Services revenue decreased significantly by 34% year-on-year to 448.6 billion yen, primarily due to the impact of market fluctuations at Sony Life. Operating income decreased significantly by 24.5 billion yen year-on-year to 30 billion yen compared to the same quarter of the previous fiscal year, which benefited from the recording of a gain on the sale of bonds at Sony Life. Insurance service results at Sony Life, which are the baseload of profitability for the business, continued their stable trend at 41.8 billion yen. The fiscal '24 forecast remains unchanged from the previous forecast with financial services revenue of 910 billion yen and operating income of 145 billion yen. With regard to financial services revenue, gains from the separate account at Sony Life exceeded our main forecast due to the impact of market fluctuations. However, taking into account factors such as uncertainty about market fluctuations, we are maintaining our previous forecast. Now we will discuss the opportunities and challenges for growing our Life Insurance business. Sales of insurance products at Sony Life have grown significantly over the last five years. In terms of sales channels, the agency channel has grown significantly, in addition to our mainstay Life Planner channel. And in terms of customers, our business with corporate customers has grown significantly in addition to our traditional strengths in individual customers. The new policy amount for the agency channel and with corporate customers in fiscal '23 grew 2.3x and 3.7x, respectively, compared to fiscal 2019. Due to this growth, Sony Life's share of new policy amounts in fiscal '23 reached 16%, continuing to rank first in the industry for two consecutive years. Even though Japan's population is declining, we have continued to increase our sales of insurance products by expanding our share, and we believe that we have ample opportunities for growth going forward. On the other hand, we believe that there is an issue with how easily our business performance and financial soundness are affected by market fluctuation factors, particularly interest rates. Regarding new policies currently being sold, we have already reduced the sales ratio of so-called high capital load products, such as whole life insurance. We are preparing to enhance our hedging against market fluctuation risks. Regarding our efforts to address financial issues, including existing contracts, we plan to present our progress to date and future initiatives at the second quarter earnings announcements. In the Financial Services segment, at the business segment meeting we held in May, we stated adjusted net income of 120 billion yen as a key performance indicator for the fiscal year ending March 31, 2027. As a result, from this quarter, we have begun disclosing adjusted net income, the details of the adjustments and other metrics.

Hiroki Totoki, President, COO and CFO

Finally, I would like to give you a general summary. As I mentioned at the beginning, the uncertainty or instability of the market is making it more difficult to forecast future performance. But we have the fifth MRP and we have a strategy to enhance our resilience to changes in the environment. We recognize that we've entered a period where the real value of that strategy is being called into question. In terms of our business portfolio, our entertainment area is the largest, and relatively speaking, the impact of macroeconomics is not as significant or direct. However, we must consider various risks and carefully conduct our business. There is no change in that thinking. The key performance indicators for the entire group laid out in our mid-range plan include a 10% or higher growth rate of operating income and a 10% or higher three-year cumulative operating income margin on a consolidated basis, excluding financial services. Our Q1 results represent steady progress towards that goal. We plan to make every effort to maintain these targets and our goal of strengthening shareholder returns, and we intend to regularly provide updates on our progress. That's all from my presentation.

Unidentified Company Representative, Emcee

So those are the presentations by Totoki, Matsuoka, Hayakawa, and Yamada. From 4:27, we'll have a Q&A session with the media. From around 6:50, we'll have Q&A with investors and analysts. It will take approximately 20 minutes for each of those Q&A sessions. Those who have preregistered to ask questions, please connect to the phone number provided. And please read the material provided for how to ask questions. Now please wait until we are ready to resume.

Operator, Operator

Thank you for your patience. We would now like to address questions from the media. The people answering the questions are the same ones who presented earlier. We will now begin the question-and-answer session. The first question is from Toyo Securities.

Unidentified Analyst, Analyst

Thank you. I have a question about G&NS. You carried out a restructuring exercise for the studio business group and Toyo franchise management of the development project over the last three months. Moving forward in August during this fiscal year, what kind of restructuring do you plan to implement?

Hiroki Totoki, President, COO and CFO

Thank you for your question. At this moment, the restructuring has already been announced. The purpose is to optimize our cost structure and portfolio. Simultaneously, we aim to enhance the efficiency of the business. So back-office functions should integrate with the studio of SIE. The Banji initiative is considered important as the new live service Marathon titled Marathon, where the headcounts and resources will be concentrated. High-quality and engaging game experiences should be developed. We want to concentrate resources there. Functions other than that and other types of title development will be transferred to the PlayStation Studio Group. Thus, there will be some reallocation of resources. The organizational structure will be changed, and we aim to optimize our overall studio structure. Thank you.

Operator, Operator

Next question, Nikko, Sato-san, please?

Unidentified Analyst, Analyst

This is Sato-san, Nikko. I have two questions. First, about the IT strategy in general. Paramount's acquisition. Why did you not submit another proposal? In the entertainment IT sector, what sort of size of investment are you planning for? And what proportion of operating income will be IP-based? What is your final vision? Second, regarding the global economy, there’s a slowdown, and we see a division between the U.S. and China. How do you view this? What measures do you have in place to address this? Lastly, what concerns do you have towards the next U.S. presidential administration?

Hiroki Totoki, President, COO and CFO

Regarding the IP strategy, I believe your question was about the general strategy. The reason we do not propose again a proposal to acquire Paramount is that we believe at this point in time, the Paramount acquisition does not fit well with our strategy, and that is the judgment we have handed down. The proportion of IP earnings within our operating income is still difficult to determine; however, in the entertainment business, IP is related in some way or another, and so it is at the core of how we generate revenue. We would like to focus on strengthening the IP. This remains unchanged. Concerning the global economy, currently, the global economy is being driven by U.S. consumption. In our business, we must focus on the economy and consumption in the United States. Currently, there are some signals indicating an economic slowdown, as macroeconomic numbers indicate. However, how deep this will be or how long it will last is very difficult for us to foresee. So we must watch these developments closely. Regarding expectations towards the next U.S. administration, we want to respect the choice of the American people, and we will keep an eye on what changes will result.

Operator, Operator

Next question, please.

Unidentified Analyst, Analyst

Umetu from Nikkei Business. I have two questions. Crunchyroll has surpassed 15 million users, which you indicated is good news. Do you believe this momentum will continue for the foreseeable future? What is the current situation and the outlook for growth? Additionally, you mentioned enhancing resilience as part of your strategy in the MRP; given the high uncertainty, what do you consider the most crucial factor for strengthening resilience?

Hiroki Totoki, President, COO and CFO

Thank you for the questions. First, regarding Crunchyroll, I will defer to Matsuoka-san to respond.

Naomi Matsuoka, Senior Vice President, In Charge of Corporate Planning and Control

Thank you. For Crunchyroll, earlier we discussed that we exceeded 15 million subscribers in July. We have great works like Yaiba, which are contributing to our growth. Additionally, our partnerships with platforms like Amazon Prime are also helping in increasing subscribers. We are in strong partnerships with anime creators in Japan and are expanding our content through these collaborations. In terms of pricing, we offer valuable services at an attractive price point. Our presence is expanding in overseas markets, and we are cultivating great IP while working on multiple languages to cater to diverse audiences. Regarding your question about enhancing resilience, in the short term, financial measures such as inventory control and cash flow management are critical. Personally, I believe that the most important aspect for enhancing resilience is diversity in our operations and our workforce. Diverse ideas and people generate new perspectives and analysis on various matters, leading to synergistic effects. Although it's challenging to manage diversity, pursuing it will bring forth innovative ideas.

Operator, Operator

We will move on to the next question. Tanaka-san from Asahi Shimbun, please. Can you hear me?

Unidentified Analyst, Analyst

Can you hear me? This is Tanaka speaking from Asahi Shimbun. Can you hear me?

Hiroki Totoki, President, COO and CFO

Yes, we can hear you.

Unidentified Analyst, Analyst

Thank you for the opportunity. This is Tanaka from Asahi Shimbun. In connection to the previous question regarding Paramount, I have additional questions. Up to now, you made a proposal about acquisition, and you did not make it very clear at that time. If there is anything that you can disclose, what was your motivation or intention behind that acquisition attempt? And you also said that you would not re-propose because it does not fit your strategy. Can you elaborate on that? As for Sony's strategy, where exactly does it diverge from the potential acquisition?

Hiroki Totoki, President, COO and CFO

Regarding each individual project, it's very difficult for me to answer. However, as I have mentioned earlier, high-quality IP is a focus for us. If an asset can be acquired at the right price and structure, we would take the opportunity seriously. The company Paramount is quite large, and acquiring the entire organization poses a significant risk that may not align well with our capital allocation strategy. That is the primary reason.

Operator, Operator

Next question please, Nishikata from NHK.

Unidentified Analyst, Analyst

Two questions. First, about the Paramount acquisition. If you were able to submit another proposal and thought that you could strike a deal at an appropriate price, would you have done so? The second is about the CMOS sensors, as EVs are increasingly being produced domestically in China. Are there any concerns regarding the sales of your CMOS sensors due to this?

Hiroki Totoki, President, COO and CFO

Regarding your first question, I do not have anything to add to my previous response. I apologize. About your second question regarding electric vehicles, we supply sensors for automobiles to various OTA (original equipment manufacturers), including Chinese manufacturers, and we are competing in that market. We want to ensure we maintain an advantage in that regard. However, automotive sensors and smartphone sensors are different markets. The automobile sensor market is still relatively small, so we should observe its growth closely.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

We're starting to run out of time. So we will take one more question. Please limit your question to one due to time constraints. Are there no more questions? Seeing none, we will end this Q&A session for the media. The investor analyst Q&A session will start at 4:48. Thank you for waiting. I'd like to start the investor analyst Q&A session. I'm with the IR Group at Condo and will be serving as the moderator. Similar to the media session, these four will be responding to your questions. So, first question from BofA Securities, Hirakawa-san, please?

Mikio Hirakawa, Analyst

Thank you. Hirakawa of BofA Securities. About games and music, I have a question. Regarding games, monthly active users showed a 7% growth year-on-year, which is a very strong number. Can you discuss the background in more detail? There was a large update last year that contributed to the increase in monthly active users. Were there any other factors? Additionally, how do you see the music streaming sales growth? Until Q3 last year, it was double-digit growth without considering foreign exchange impacts. Now, at 6% in Q1, it seems to be slowing down. Do you think this reflects a midterm growth trajectory? What was the cause for the lower growth rate?

Hiroki Totoki, President, COO and CFO

Thank you for the questions. For the first, about gaming and network service, the 7% year-on-year growth is indeed strong, and we see it positively. The increased PS5 installed base and contributions from many franchises are key factors. I won’t go into individual titles, but this growth can be attributed to several titles performing well. Matsuoka-san, please take regarding the music question.

Naomi Matsuoka, Senior Vice President, In Charge of Corporate Planning and Control

For streaming services, the overall growth reflects previous trends. The moderation in growth rates can be attributed to price rises from a year ago that have diminished in impact. We observed good results, but some slight decline is seen in ad-supported streaming service revenue. However, in constant currency calculations, the growth remains in the 6% range, and overall streaming growth aligns with projections.

Operator, Operator

Thank you. Next question is from SMBC Nikko, Katsura. Please.

Ryosuke Katsura, Analyst

Can you hear me? My name is Katsura from SMBC Nikko. I have questions regarding I&SS semiconductors and financial services. For I&SS, you mainly supply major firms in North America. If you have any pluses or minuses over the last three months, please share that with us. I noticed that you increased production in your supplementary documents; this projection seems stronger. What’s your outlook on that? Looking at mid- to long-term risks, what are your views on position in the market? Also, for financial services, I think the operating income of the second quarter should be around 21%. What’s your assessment of that and overall outlook?

Hiroki Totoki, President, COO and CFO

Thank you for your question. I will answer the I&SS part. Regarding individual customers, excluding that aspect, we have increased production for high-end products, which is primarily why we see growth in production. The risk of competition entering the market has been an ongoing concern; we constantly analyze competitors and aim to leverage our technology edge. As for long-term risks, the actual probability of competition is relatively low. Your question about financial services, Yamada-san will respond.

Kazuhiro Yamada, Senior Managing Director and CFO, Sony Financial Group, Inc.

Thank you for your question. The first quarter progress rate of 25% is indeed lower for two reasons. The first is that there was an increase in surrenders, particularly dollar-based. As interest rates rise and the Yen depreciates, there has been an uptick in policy surrenders. Additionally, for the non-life sector, natural disasters impacted profits. Despite these challenges, we see upside potential as our overall sales performance has been strong this quarter. Life insurance sales, although good, do not immediately equate to profitability as we are gradually increasing our presence in the market. While there are many influencing factors, the market conditions remain challenging. Compared to the end of June, interest rates fell, yet the stock market showed declines and currency fluctuations presented as challenges. Thus, on balance, we maintain a cautious but optimistic stance on market conditions, carefully managing profitability.

Operator, Operator

Next, from Mizuho Securities, Nakane-san, please?

Yasuo Nakane, Analyst

Thank you. This is Nakane from Mizuho Securities. I have two related questions. First regarding investor return and buyback and next is about the balance sheet. In the period since May, you have accumulated buybacks near 100 billion yen, with average prices exceeding 14,000 yen. Your continued buyback implies investing in Sony as a strategic move. Has your policy fared? Second, looking at your shareholders' equity ratio, you reported over 50%. Previously, you mentioned a target of over 40%. How do you view your minimum target for the shareholders' equity ratio?

Hiroki Totoki, President, COO and CFO

Thank you very much. The first question, Hayakawa-san will respond.

Sadahiko Hayakawa, Senior Vice President, In Charge of Finance and IR

Yes, as you mentioned, we have been actively buying back shares as part of our strategic investment. We aim to adjust the buyback strategy relative to our overall business performance and share pricing, ensuring that we maintain flexibility. From this fiscal year, we aim to strengthen shareholder returns and aim to increase our total payout ratio to 40%. Currently, we are optimistic about our buyback strategy. As for the shareholders' equity ratio, as of end of June, that was 50.4%. We have not altered our commitment to maintaining a healthy balance sheet, assessing investment opportunities, and being competitive in financing terms. As profits accrete, ratios will evolve with buybacks in mind. Currently, we aim for a balance of capital efficiency on our balance sheet.

Operator, Operator

Thank you very much. Next, JPMorgan Securities, Ayada-san, please?

Junya Ayada, Analyst

Thank you. Ayada from JPMorgan. I also have two questions regarding games and I&SS. About games, add-on sales growth is approximately 20%. Can you provide a breakdown of this revenue, including both first-party and third-party titles? And regarding your inventory levels in I&SS, we note an increase from March, suggesting seasonal factors impacting work in progress. Can you clarify current inventory levels and their implications for Q2 utilization?

Hiroki Totoki, President, COO and CFO

Thank you. For the games and network service question, the 20% growth is indeed reflective of both first-party and third-party contributions, though mostly from third-party. There are various titles contributing to the revenue growth steadily. The request for specific titles is challenging to disclose. As for your second question regarding finished inventory levels, we see that sales sizes level out. Q2 utilization for mobile image sensors is near full capacity.

Operator, Operator

The time is running short, so this will be the last question. Please limit your question to one. Could you please proceed with your inquiry?

Unidentified Analyst, Analyst

Thank you. My question is about economic conditions. Totoki-san previously explained that foreign exchange rates and U.S. markets are major impacting factors. Based on this information, can you highlight specific categories that are affected? For instance, concerning U.S. economy and foreign exchange, which categories are more influenced? In your assessment, how do you interpret the economic concerns in light of your business model?

Hiroki Totoki, President, COO and CFO

Regarding foreign exchange, Hayakawa-san will provide an answer.

Sadahiko Hayakawa, Senior Vice President, In Charge of Finance and IR

Thank you for your question. For our forecast of financial results reflecting recent rapid foreign exchange fluctuations, we updated projections with yen depreciation against both the euro and the U.S. dollar, reaching their most significant impact on the I&SS segment. Our sensitivity analysis reflects that implication. For instance, a $1 increase results in significant yen adjustments translating to 70 billion yen to 80 billion yen adjustment, though we actively undertake countermeasures and monitor our financial results closely. The overall sales relative to our business scale indicate that, within certain ranges, the foreign exchange impact may not be overwhelming. Therefore, we aim to control these effects. Above all, regarding macroeconomic risks that could significantly affect our business, geopolitical risks stand out. Past U.S.-China relations have affected our business, and we must remain cautious about these aspects.

Unidentified Company Representative, Emcee

Thank you very much. It's time for us to end, and we'd like to thank you for taking part in our Q1 earnings announcement meeting. Thank you.