Sony Group Corp

Ladies and gentlemen, it is time to start the briefing of Sony Corporation's consolidated financial results for the third quarter ended December 31st, 2020. I'm happy to serve as an emcee. My name is Kato from Corporate Communications. This event is for the media and analysts and institutional investors to whom we have sent invitation. and it is being streamed online via our website's investor relations page. First, our Executive Deputy President and CFO Totoki will announce the consolidated results for the FY20 Q3 and the forecast for the full year FY20, and it will be followed by Q&A session. We expect a total of 70 minutes. Mr. Totoki, please. Thank you. Today I will explain the following. FY20 Q3 consolidated sales increased 9% year-on-year to 2,696,5 billion yen, and consolidated operating income increased a significant 59.1 billion yen year-on-year to 359.2 billion yen. mainly due to an improvement in valuation gains and losses on investment securities in other income and expense. Income before income taxes increased 167.1 billion yen year-on-year to 477.4 billion yen, and net income attributable to Sony Corporation stockholders increased 142.4 billion yen year-on-year to 371.9 billion yen. This slide shows the results by segment for FY20Q3. Next. I will show the consolidated results forecast for FY20. Consolidated sales are expected to increase 300 billion yen compared with the previous forecast to 8 trillion 800 billion yen, and operating income is expected to increase 240 billion yen to 940 billion yen. We have also upwardly revised the forecast for income before income taxes to 1 trillion 120 billion yen and net income attributable to Sony Corporation stockholders to 1 trillion 85 billion yen. Our forecast for consolidated operating cash flow excluding the financial services segment is 850 billion yen, an increase of 220 billion yen compared with our previous forecast. As for dividends this fiscal year, we expect to issue an year-end dividend of 30 yen per share, which, when combined with the interim dividend already paid, will make our expected annual dividend 55 yen per share this fiscal year, 10 year more than last fiscal year. This slide shows our forecast by segment. I will now explain the situation in each of our business segments. First is the game and network services segment. Sales in FY20Q3, during which we started selling the PlayStation 5, increased a significant 40% year-on-year to 883.2 billion yen. Operating income increased a significant 26.7 billion yen year-on-year to 80.2 billion yen due to an increase in sales from game software and network services. Services partially upset by increased costs associated with the launch of the PS5 and losses recorded on PS5 hardware resulting from strategic price points. FY20 sales are expected to increase 30 billion yen compared with the previous forecast to 2 trillion 630 billion yen. and operating income is expected to increase 40 billion yen to 340 billion yen, reflecting the strong results of FI20 Q3. As is evidenced by our forecast to record the highest profit in our history, despite undergoing a hardware transition this fiscal year, the profitability structure of our game business has changed dramatically due to an expansion of network services. Since starting to sell the PS5 in November, We have sold 4.5 million cumulative units as of the end of December. We are currently on track to meet our sales goals for the fiscal year of more than 7.6 million units, but we have not been able to fully meet the high level of demand from customers. We continue to do everything in our part to ship as many units as possible to customers who are waiting for PS5. Thanks to continued stay-at-home demand and the launch of the PS5, we have achieved a very high level of user engagement. Total PlayStation user gameplay in time in December was approximately 30% higher than the same month of the previous fiscal year. Moreover, as of the end of December, 87% of PS5 users were subscribers to PlayStation Plus, an extremely high level. We had more game software titles at the launch of the PS5 than at any previous PlayStation console launch in our history, and those titles have sold well. Our first party game title, Marble Spiders Man Miles Morales, recorded sell-through of 4.1 million units as of the end of December. Continuing with our strategy of enhancing our user engagement, we intend to take steps to further enhance the appeal of our network services offerings.

Next is the music segment. Third quarter fiscal 2020 sales increased 22% year-on-year to 264.5 billion yen, and operating income increased 23.4 billion yen to 59.7 billion yen. In recorded music, streaming revenue during third quarter fiscal 20 continued to grow at the high rate of 21% year-on-year. We have had success discovering and developing new artists, which has been a focus for us. Examples include Doja Cat, who has been nominated for Best New Artist and two other Grammy Awards in the U.S., and also musical groups U.S.O.B. and Niju, which have become big hits in Japan. And full-year fiscal 20 sales are expected to increase 50 billion yen compared to our previous forecast to 900 billion yen. And operating income is expected to increase 28 billion yen to 180 billion yen, primarily due to an increase in revenue of visual media and platform, including the anime business. And Demon Slayer, Kimetsu no Yaiba, the movie Mugen Train, which the Sony Group company Aniplex co-produced and co-distributed, has become the highest-grossing movie in history in Japan, with the box office revenue of 36.5 billion yen as of January 5th. Hits like this evidence Aniplex's ability to increase the value of content IP through its expertise in discovering superb original works, applying creativity to their production and marketing, the final product to grow the fan base. The theme song... A song by Lisa, an artist assigned to one of our group companies, has become a huge hit as well, demonstrating how our success spans the music segment. Next is the picture segment. The third quarter fiscal 20 sales significantly decreased 19% year-on-year to 191.2 billion yen, primarily due to a significant decrease in theatrical releases. Operating income increased 16.8 billion yen year-on-year to 22.2 billion yen, as the impact of the decrease in sales was offset by a significant decrease in marketing costs in motion pictures. For full year fiscal 2020, sales are expected to decrease at 10 billion yen compared with the previous forecast to 750 billion yen and operating income is expected to increase 24 billion yen to 72 billion yen reflecting results through the third quarter of this year. Due to the global resurgence of COVID-19, film releases have been delayed because theaters have been closed, and we have decided to postpone again the theatrical release of films like Ghostbusters, Afterlife, Cinderella, and Mobius. Our profitability this fiscal year has improved year on year, primarily due to the postponement of marketing costs resulting from the repeated postponement of releases. Next fiscal year, we expect motion pictures to be negatively impacted primarily by a decrease in home entertainment and television licensing revenue, mainly due to the lack of major film releases in the current fiscal year. On the other hand, in television productions, We expect profitability next fiscal year to improve, primarily due to licensing of library products, reflecting strong demand from video streaming and other services. Moreover, we expect to offset a portion of the softness in profitability of motion pictures with a recovery in advertising revenue in India and in the U.S., a strong performance of animation and media networks. Now I'd like to explain the strategic investments we are proactively pursuing in the entertainment space. All of these acquisitions require regulatory approval and are meant to further grow Sony. In December of last year, we announced the acquisition of Crunchyroll, a U.S. anime streaming service, which has 90 million registered users and over 3 million paying subscribers in over 200 countries and territories. Consumer interest in Japanese anime is increasing rapidly, particularly outside of Japan. As a company that currently owns both content and a DTC streaming service, we have positioned anime as a focus area. Through the planned acquisition, we aim to broadly distribute premium Japanese anime content produced by Aniplex and other studios to fans all over the world. Yesterday, we announced the acquisition of AWOL, a leading artist services and distribution business. as well as Cobalt Neighboring Results, the world's leading neighboring rights management business, both which cater to the rapidly growing independent music market. Through the planned acquisition of AWOL, we aim to expand our artist services business in the independent space, which is driving growth in the music market, and we aim to expand the foundation of our business in the music segment by enhancing the discovery and development of new artists.

Next is the electronics products and solutions segment. FY20 Q3 sales were essentially flat year-on-year at 649 billion yen, and operating income increased 25.4 billion yen year-on-year to 105.8 billion yen. FY20 sales are expected to increase 20 billion yen compared with our previous forecast to 1 trillion 890 billion yen. And operating income is expected to increase 58 billion yen to 125 billion yen, reflecting the results of FY20 third quarter. The operating environment improved somewhat during FY20 Q3 as stay-at-home demand for home AV products continued and demand for digital cameras and other products recovered. In the TV business, we were able to secure a high level of profit, resulting from our ability to maintain prices, reflecting a tight supply of panels, our efforts to shift sales to higher value-added models, and a reduction in operating costs. We faced a variety of constraints in regard to component procurement across multiple categories, but we were able to mitigate the negative impact on profitability. In preparation for the transition to a new management team in April, we are further strengthening the profitability structure of the business and the management of the segment as one entity. As a result, we have incorporated some one-time expenses including restructuring into our FY20 forecast. These are some of the new products that we have announced recently. All of them have a high degree of differentiation made possible by Sony's proprietary technology. Going forward, we expect to continue delivering high-value added products to customers. Next is the imaging and sensing solution segment. FY20Q3 sales decreased 10% year-on-year to 266.9 billion yen, primarily due to lower sales of image sensors for mobile devices. Operating income decreased 24.8 billion yen to 50.4 billion yen, primarily due to the impact of the decrease in sales and an increase in research and development expenses and depreciation. F-120 sales are expected to increase 50 billion yen compared to a previous forecast to 1 trillion 10 billion yen, and operating income is expected to increase a significant 55 billion yen to 136 billion yen. In September of last year, we terminated shipments of mobile image sensors to a certain major Chinese customer, but we resumed a portion of shipments to that customer from late November. Although we have incorporated the impact of this resumption into our forecast for the current fiscal year, we expect sales to the customer to decrease significantly year on year. As a result of the resumption of shipments, We reversed 8.5 billion yen of approximately 17.5 billion yen write-down of finished goods and work-in-progress inventory for the customer that we recorded at the end of the previous quarter. Now, I will explain the fiscal year forecast we issued today. orders from our other major non-Chinese customer have significantly exceeded the assumption we made in our October forecast, and we have reflected that fact in the current forecast for the fiscal year. As I mentioned at the last earnings announcement, We are striving to recover market share through an increase in sales of general-purpose sensors, and we are working to expand and diversify our customer base. In order to maximize business opportunities in the fiscal year ending March 31, 2022, and optimize investment efficiency, we have decided to increase utilization of our existing production capacity in FY20 fourth quarter, and we'll be stockpiling a certain level of inventory and we have incorporated into our FY20 profit forecast the utilization profit we expect to generate from stockpiling this inventory. Over the mid-range, we are developing products and engaging with customers to increase the sales of high-value-added products with the aim of recovering the profitability of the mobile image sensor business and returning it to growth from the fiscal year ending March 31, 2023. At CS held last month, we announced that we have begun public road testing in Europe of the Vision S, which is equipped with Sony's latest automotive image sensors. Through efforts such as this, focused on the long term, we aim to create new business opportunities. Last is the financial services segment. FY20 Q3 financial services revenue increased 4% year-on-year to 425.3 billion yen, primarily due to an increase in net valuation gains on investment in the general account of Sony Life Insurance Company. Insurance premium revenue at Sony Life decreased, but this was due to a decrease in single premium insurance that sold well in the same quarter of the previous fiscal year. New policy amount in force was higher than the same quarter of the previous fiscal year, and our insurance businesses continue to grow well. Operating income increased 14 billion yen year-on-year to 46.6 billion yen, primarily due to an improvement in foreign exchange gains and losses in U.S. dollar-denominated insurance at Sony Life. FY20 financial services revenue is expected to increase 140 billion yen compared with our previous forecast to 1 trillion 600 billion yen, primarily reflecting an increase in NIP valuation gains on investments in the separate accounts during FY20 Q3 at Sony Life. Operating income is expected to increase 15 billion yen to 170 billion yen, primarily reflecting the improvement in foreign exchange gains and losses at Sony Life and operating expense reduction. Now I will explain the future direction of the management of the financial services business. In the mid-range plan that is being compiled currently, Sony Financial Holdings will establish a strategy that aims to optimize the entire financial services group and concentrate resources in areas where it has a clear advantage and can differentiate, such as in the area of customer service. Specifically, the more than 5,000 Life Planner salespeople at Sony Life, who are at the center of our financial services business, will be positioned as the core strength of the financial group and will be augmented as a platform that sustains the financial services business. We have already begun fostering interactions between the life planners and the personnel in Sony's R&D divisions, and we are working to develop new financial products and services that fully leverage technology such as AI and cloud computing. Now I will update you on our capital allocation plan. Due to the improvement in the forecast for each business, we revised upward our FY20 forecast for operating cash flow excluding the financial services segment to 850 billion yen. As a result, our cumulative operating cash flow for the three years of our current mid-range plan is now expected to be 2.4 trillion yen higher than our target. We have set priorities for strategic investment and are currently proactively investing in the content, DTC, and technology areas. We plan to utilize excess operating cash flow from this fiscal year as a source of future strategic investment going forward. Opportunities for investment, especially in the entertainment space, are steadily increasing, and during the period of our next mid-range plan, which will begin the next fiscal year, we aim to make more investments for growth than we did during the current mid-range plan. Lastly, I will explain the upcoming change in our accounting standards. By a resolution of our Board of Directors as of today, we have decided to voluntarily adopt International Financial Reporting Standards, IFRS, instead of the U.S. generally accepted accounting principles we use currently. We will disclose our financial statements in accordance with IFRS from the first quarter ending June 30, 2021. This concludes my remarks.