Softbank Group Corp

Now we would like to start SoftBank Group Corp Earnings Results Announcement for the six-month period ended September 30th, 2023. First, I would like to introduce today's participants. From left, we have Yoshimi Tsugoto, Board Director, NCFO. Kazuko Kimiwada, Corporate Officer, Senior Vice President and Head of Accounting Unit. Navneet Govel, CFO, SB Investment Advisors and SB Global Advisors. And Jason Child, Executive Vice President and CFO, ARM. Jason is attending through Zoom. Today's announcement is live broadcast over Internet. Now I would like to invite Yoshimitsu Goto to present you the earnings results and business overview. Thank you very much for joining today. Good afternoon, everyone. As usual, we have Miski Miwada, Head of Accounting, Navneet Dasie for Vision Fund. And also, in addition, we have Mr. Jason Child from Arm, CFO Arm. But actually, Arm just announced earnings this morning, Japan time. Of course, we wanted to have him in person, but because of that reason, we have him on Zoom today. So for this quarter, as an event for this six-month period, IPO of Arm was the biggest event for our group. was one of the biggest IPO in the market for this year, and September 14th, 2023, went public. This is the summary of the IPO. $52 billion for the market cap upon listing, of which 10% was offered to the market. So it's about... close to 700 billion yen equivalent and also the market cap about 7.5 trillion yen level. After then, share price actually has been moving in a robust way as of yesterday, also exceeding the price upon listing, so I believe that they made a good launch as a public company. And this is the investment return on ARM. Of course, it's just a few months after the IPO, but also like to share with you the MOIC. This is the metric used to describe the value of performance of the investment relative to its initial cost and the 3.2 times back then was an acquisition. It was 3.3 trillion yen. This was quite a large amount, of course, for SoftBank Group and as a CFO, I was a bit nervous for this amount when it comes to the acquisition. But still, we did have a very strong belief in this company as a dominant player in this market. Therefore, all the senior management actually was in sync in terms of making progress in the acquisition process in the short-term period. In the past, we made a relatively large acquisition, which is Alibaba and Sprint, and even compared with those, actually, the ARMA IPO also gave us a good investment return as of today already. Alibaba cost was very small, and as an investment project, it was a great investment, and the growth-wise, actually that Arm has already grown to 8.5 trillion yen level. So it is making great progress. Of course, IPO is just one of the milestones of the company's history and company's future. So we would like to keep a good expectation on Arm, especially Arm is the core of the core of the SoftBank Group and one of the most important strategic company for us. So that We believe AI can be the good leading position or the core position of the group which we are driving this AI revolution and also the AI-related services. So very much expecting and also supporting and also utilizing capability as well. In the past 10 years, actually, There are IPO ranking which you may not be very familiar. In the past 10 years, this is the top 15 IPO market cap of which six of them are SVG involved as a matter of fact. So these are the good track record which we would like to share with you. And because Masa, our CEO, has a great eyes to see to the future of the company which is one of the advantage and also strength of the company so we would like to take an advantage of such a good eyes that we have in the company and here on is the consolidated results. So as for net income, negative 1.4 trillion so since the last At the same time last year, we have negative figures here. And at the same time, actually, we have – in terms of the transaction of arms sales, actually, some of them are reflected to consolidate the P&L, and some of them are not. sorry, reflected P&L but not reflected balance sheet. So here that I can share the accounting treatment of acquisition of shares from Vision Fund 1. 25% equivalent shares were acquired from Vision Fund 1 in August and along with this acquisition, realized gain was recorded at Vision Fund. But this was intra-group transaction, therefore, it has been eliminated in consolidation so that that's not shown on P&L. But actually, in the other hand, increase in third-party interest is shown on P&L as an increase in costs. From the balance sheet point of view, the same amount, third-party interest, this is also shown in increase in liabilities. Therefore, this transaction, from the consolidated point of view, P&L and the balance sheet, both has a record in costs and liabilities. At the time of IPO, however, as you can see, about ¥745 billion of the offering was made, and we received the gain from there. But that's again after the offering remains as our subsidiary. So no impact on P&L point of view. And you may ask where that goes to. And this goes to cash on balance sheet as a positive ¥745 billion. And it goes to also the capital surplus and the non-controlling interest. So the cash itself, of course, has been recognized as an enhancement of the balance sheet, which is in this accounting segment. And also, to see the enterprise value of ours, you see the KPI in the following pages, which is net asset value. So there, we believe that we are reflecting this increase in our value. The biggest KPI for the metrics for the company is something that we believe is in the net asset value. Therefore, that together with net asset value and other KPIs, I want you to refer to those to see and measure our company's value and also our safetiness of the company. And here on is the gain and loss on investment. If you only see the amount year on year, last year, half year, half year, First half seems about the same, but the content itself has been changed a lot. So as you can see, blue portion, this is vision fund comparison. So this term, this quarter, this first half minus a negative 583 billion yen, but the last first half was a negative 4.3 trillion yen. So bid on fund improvement has also been seen in this first half of fiscal 2023. Last year, about the same timing, we also recorded the gain related to settlement of Adibaba prepaid forward contract, which was a relatively large number. So that was net to the... the last year's number, but this year we didn't have a similar type of one-off gain and ended with 963 negative billion. But also I'd like to highlight that the reduction in losses at visual funds. And here is the income before income talk. you see the number is quite different compared to the last first half. So that first half was 292 billion, and this first half is the minus 907. So it looks like 1.2 trillion yen equivalent of deterioration that you may ask what that is coming from. So number-wise, under the consolidated accounting, there are many factors there, but the majority, main part is from a movement of the third-party interest in Vision Fund. So last year, there was about 1 trillion yen level of the positive impact to the third-party interest in Vision Fund. But this year, as mentioned earlier for the slides, 226 billion negative impact. So this was actually the biggest impact to this time income before income tax. So this quarter has a bit different factor from the other quarters for the results. In KPIs, there are three important KPIs, net asset value and second of all, loan-to-value from the credit point of view. So net debt and the assets ratio. And the last but not least is cash position. Compared to end of June, net asset value has increased by ¥1 trillion. Loan-to-value also remained in safety level cash position, ended with ¥5.1 trillion. From the safetiness of KPI, we believe that these are all in very healthy positions. And this shows the change in net asset value by breaking down. So this time, close to one trillion increase for September end. And we have about share price increase of 0.5 trillion yen. And also, Forex was positive for this time, net asset value point of view. And some others, that comes to 16.4 in net asset value.

This slide shows NAV for share and share price. What we'd like you to look at is what they say, sub-bank discount. So actual stock price goes how close to the value. And with the ARM IPO, which was successful, the gap widened accordingly. As of end of September, net asset value per share was $11,000. Whereas share price was 6,335. So going forward, we have to figure out how we can narrow the gap from technical perspective and from fundamental perspectives, and we will continue dialogue with investors. And if you go deeper into equity value of holdings, as you can see, since Q4 last year, you can see it upward trend. And if you look further, you will realize that Alibaba, that equity value of holding, was almost sold out by us. But then ARM is now a new driver of the value of holdings. Of course, Sotbank KK is contributing a lot, thankfully, to their stock price. And distribution of portfolio is shown here. As you can see, Alibaba obviously is a Chinese stock. And from a geopolitical risk perspective, we have to be very careful about the Chinese market. We have been managing portfolio for the last few years and now from geopolitical risk management perspective, we are now in better position. And talking about net asset value again, since three quarter earlier, you can see upward trend of course market will move and we cannot be complacent but as far as our asset is concerned you can see the positive trend recently and loan to value 25% is our policy from safe operation perspective, and currently we are at the level of 10%. As an investment company, maybe some people may say you have to be more aggressive, you have to be more active. And the cash position, which is higher than $5 trillion, This is another promise related to another promise, which is make sure that we have a two-year worth redemption of the money. From that perspective, it's five-year equivalent as opposed to two-year for a debt redemption. And impact of Forex. How is it affected on our finances? And from consolidated perspective, consolidated net income or net loss was 0.6 trillion yen. But as an investment company, we want to have you look at net asset value to measure our value. And weaker yen is positive for net asset value, which is plus 1.9 trillion yen. And almost similar 1.8 trillion yen equity is posted for the accounting. Now let me talk about ARM. We are ready to talk more about ARM. For the last year, we kept saying that, sorry, we couldn't say a lot about ARM because ARM was in preparation for IPO. But now, we are happy to talk about ARM openly. ARM-based chip shipment is shown here. Actually, this curve is exactly what we expected when we acquired ARM in 2016. Since then, I believe that the number of shipments has been growing exponentially. And actually that was what we expected and illustrative image was, I believe, shown to you. And this is actual result and I'm sure that our expectation and actual result is really overlapped. So as the society move from IT to AI, everybody will need And I'm sure that ARM will meet people and society's expectation. And cumulative number of shipment to June 2023 was 270 billion. There are four major markets where ARM can grow further. As for mobile, they already have 99% share. And for cloud and automotive, IoT embedded. For those areas, for cloud, for example, market share was 7% in 2020. And likewise, in 2020, they had 33% of automotive market. And the share has been growing to, for example, 10% for cloud compute, 41% for automotive, and 65% for IoT and embedded. And 65% is almost close to a dominant position. And TAM is really big, actually, for each sector. And as you can see, there are a lot of opportunities out there. And as you can see on the far right, for cloud and automotive, over 10% of potential growth is expected. And that's really attractive. and talking about arms target markets in terms of mobile or for client mobile devices for consumers like smartphones and tablets and also other electronics and when it comes to automotive Incredible amount of chips are used in this market and infrastructure obviously and IoT like manufacturing and services. Chips are necessary components and an unimaginable number of chips are used in those sectors. In the past, AI, machine learning were running in computers, but AI and machine learning are getting closer and closer to you, to the edge. And AI will advance even further. As you can see, a lot of industrial leaders announced to adopt ARM's design in ARM's chip. For example, Google's latest smartphone, Pixel 8, was based on ARM's latest generation of CPUs, ARMv9. Also, Nvidia announced a second generation of ARM-based GH200 Grace Hopper superchip. Runesys Electronics announced adoption of Arm technology for next generation of chips for autonomous driving. So like you see, Arm is enjoying great business growth. And in terms of numbers, which was already announced by Arm, for quarterly revenue, the record revenue for the first quarter as a listed company. And multiple high value licenses contributed to this great performance. As for the revenue, by the way, it's partially different from what we disclosed before. because of the reflection of the latest number to the numbers used for F1 filing for IPO. Non-GAAP operating profit, 92% year-on-year. So they are growing strongly. And

and annual revenue is providing guidance for the future annual revenue. 2023, according to the guidance, it's providing the range of $2.96 trillion to $3.08 trillion. As you know, the semiconductor is relatively weak, however, including the second half is expecting very robust growth there. And guidance for the revenue, not only revenue, but also provided the guidance on non-GAAP operating expense as well as non-GAAP diluted earnings per share. Analysts forecast that the semiconductor industry will continue to recover although trajectory is unclear so we agree with such expectations. And here on SoftBank Vision Fund status that I would like to share with you including status. Here is the gain and loss on investments for the second quarter fiscal 2023, 232 million combined. So it was a positive after the last quarter. That also includes the gain on sales of Vision Fund 1. It's a large contribution to the total, mainly because of BAM. And this is the gain and loss on investments quarterly basis from the past. Well, environment is still tough, but still, if you see, the quarterly is recording positive numbers from the previous term. So we believe that we have hit the button and also making a good move towards the positive figures. And also, this is the cumulative gain-loss on investments. Again, starting from the three-quarter before, it is making a robust recovery. Going on, we are hoping that this numbers also turn in positive and make a further growth, and that's something that we also need to see. This is the cumulative investment return on Vision Fund 1. In summary, the left-hand side is investment cost, so it's about $90 billion invested, and so far $104 billion made as a return. Exited, orange portion, has making a good contribution to investment return. That also includes arm share transfer. The Bitcoin fund is private equity fund. However, now that the private company's portion becomes about one-fourth of the total, of course, and this includes that aiming for the IPO, which we expect. And at the same time, when you see the public companies The growth is something that we would like to expect further in the future. So we would like to bring numbers here to outperform further in the future from here. Vision Fund 2, on the other hand, $52 billion of the investment cost, and as of September 30th, cumulative investment return was about $31.5 billion, so that it's not yet a good performance. As I mentioned before, It is only about a few years, couple of years since the launch of Vision Fund 2. So we would like to take a little bit more time to see how that goes. Compared to Vision Fund 1, number of portfolio companies are larger and we hope that each individual portfolio companies in Vision Fund 2 can find a good growth driver so that we will be able to see the good growth in their value by supporting them in various ways. And the results so far from the Vision Fund, I believe they're easy. to understand is the number of IPO and actually since the inception, it has achieved already 50 listings. So even if you have IPO, because IPO is only the one milestone of the growth trajectory, but the company that can make an IPO means that the company itself has recognized well by the market and investors so that we can also expect the good future. But at the same time, looking at the market status, the environment may not always have the same movement as we expect. And in the past few years, we've been having a difficult environment so that even they have an IPO, but still the value has not been fully recognized in the market. So there are some portfolio companies that are not being able to show the good results yet. So out of these 50 companies, there are quite many that have not been able to fully recognized by the market yet. And also on your right-hand side, this is the robust late-stage portfolio companies. as we can select portfolio companies here on this slide, and also there are companies that we cannot show on this slide as well. There are quite many, and we are preparing that they will be able to see on this slide sometime near future. So the total fair value of late-stage portfolio accounts for $29 billion or above, and we hope we will be able to see the good growth on the way to IPO or upon IPO. And this is the portfolio company driving AI revolution. We are shifting to the investing mode as a result. What are we aiming for? What is the objectives? So before we go into that, let me explain to you What kind of portfolio company are there who can drive our AI revolution? So I give you two examples. First, ByteDance. I believe you are quite familiar with this company that they are the provider of TikTok. deploying AI algorithm to power the delivery of personalized content. And I believe they have a very good strategy and because 2L, so that's why many of you are enjoying TikTok service. So this AI algorithm providing the fresh and also something like content is provided to the customers. As you see on the below, share of social media users using TikTok actually increasing almost double the numbers in the past few years. I don't believe that we can find many of such content in the world right now. On your right-hand side, this is the portfolio from India, a company called Swiggy. So this is providing the online grocery ordering experience in Indian market, and they provide a kind of intuitive food and grocery ordering so that the AI is utilized for the recommendation for the users, and I believe that's a good way of using AI to build their business strategy. So AI investment for the second quarter. So there are a combined of the investments from SoftBank Balance Sheet and Vision Fund. In total, 1.5 billion. So last quarter was $1.8 billion of the investment of combining Vision Fund 1 to Latin Fund and SPGs. And further, if you compare with the previous quarter, the number is growing almost double or triple. So about two years ago, three years ago, we actually investing like one trillion per quarter. So compared to that, this looks quite modest. However, compared to last year, we are increasing a number of the invested amounts. So we are becoming more active. And you may see some increase in investment by SPG. From the strategic point of view, it is important from which entity that we're investing. So basically, in principle, our investment activity is done by vision fund. That's our basic understanding, basic principle. But invested by vision fund also requires the good financial return. How can you receive a financial return? But before then, we may want to think more harder or deeper to certain companies. If that's a company, probably rather not from the Vision Fund, but from our SoftBank Group balance sheet and see how the company grows. So we're having a lot of discussions where the entity to invest in these companies. So we are investing in AI, and that's the main strategy for our company. And for Vision Fund, it has a term. Also, basically, it's a minority investment. So there are some differences in between the investment by SPG. But the investment by SPG, actually, as Masa – almost more than a year ago that he's not showing up on this stage for the earnings, but he's been very much... devoting himself and involved in the discussion, how and what is going to be the changes in life cycles or life, people's life from the AI revolution. And we would like to be the first runner for such changes or the revolution. For the first quarter, second quarter, from the sense we have a little bit more investments from the SBG compared to from Vision Fund. And what are those investments? So I pick up two, three examples for you. First is the Sakevi. So they have a very high-quality autonomous driving technology. and so that that can optimize supply chain, delivery route, and energy efficiency. By having these developed, because truck industry does carry quite a huge issues, problems for a long time, but because this industry is also essential for the market and people, So that hasn't been able to fully resolve the situation. So for example, driver shortage, efficiency of uptime, and if you have a longer time of working, risk increase. That leads to safety issues, safety concerns, and also that leads to the CO2 emission of transportation costs. So this company, this business, may be able to find a dramatic solution for such an issue. And second is the company called Vario. This is the company convert pallet handling to autonomy with driverless forklift. So how efficient can you handle the pallet is important. So Pallet itself is controlled autonomously from AI and robotics solution utilizing a driverless forklift and not human driver so that it can change the speed. in an efficient way and also can move even wider. It has already gone public back in 2017, but this October through the takeover bid that we have acquired 71.4% of shares so far. So this has already been utilized. in many use cases in global basis. And also, we are very much excited for this company of the future.