Sony Group Corp

It is now time to start Sony Group Corporation's Cisco 2021 first quarter earnings announcement. And my name is Okada. I'm in charge of corporate communications. I shall be serving as the MC today. Now, this session is being held for journalists, analysts, and institutional investors to whom we have sent out invitations in advance. And this is being live webcast. through our investor relations website today. First, we have Hiroki Satoki, the Executive Deputy President and CFO to present to you the fiscal 2021 consolidated results and also the consolidated results forecast for fiscal 2021. And then we'll have a Q&A session. The duration is about 17 minutes. Mr. Satoki, please. Thank you very much. And I would like to talk about these two topics today. We have changed our accounting standards to IFRS from the current fiscal year, so the results for the current quarter, our forecast for the current fiscal year, and the results for the previous fiscal year, which I will explain today, are all based on IFRS. Fiscal 21 first quarter consolidated sales increased 15% compared to the same quarter of the previous fiscal year, to 2,256,800,000 yen, and consolidated operating income increased a significant 58.3 billion yen year-on-year to 280.1 billion yen, both record highs for the first quarter. Income for income taxes increased 14.6 billion yen year-on-year to 283.2 billion yen, and net income attributable to Sony Group Corporation shareholders increased 18.2 billion yen to 211.8 billion yen. This slide shows the results by segment for fiscal 21 first quarter. Next, I will show the consolidated results forecast for fiscal 21. Our consolidated sales forecast remains unchanged from the previous forecast. Our operating income forecast has increased 50 billion yen from our previous forecast to 980 billion yen, primarily reflecting the results of fiscal 21 first quarter. We have also upwardly revised our forecast for income before income taxes to 955 billion yen, and our forecast for net income attributable to Sony Group Corporation shareholders to 700 billion yen. Our forecast for consultability operating cash flow, excluding the financial services segment, has decreased 20 billion yen from the previous forecast to 890 billion yen. Although forecasted operating cash flow will benefit from the upward revision in the forecast for profit, we project an increase in acquisition of content assets, such as music catalogs, which are included in operating cash flow under IFRS. This slide shows our forecast by segment for fiscal 21. I will now explain the situation in each of our business segments. First is the game and network services segment. Fiscal 21 first quarter sales increased 2% year-on-year to ¥615.8 billion, primarily due to an increase in hardware sales resulting from the launch of PlayStation 5 and impact of foreign exchange rates partially offset by lower software sales. Operating income decreased a significant 40.6 billion yen year-on-year to 83.3 billion yen, primarily due to the impact of the decrease in software sales, a deterioration in hardware profit, and an increase in selling in general and administrative expenses. Our fiscal 21 forecast remains unchanged from the previous forecasts. and there is no change to this fiscal year's target of selling more than 14.8 million units of PlayStation 5, which was the number of units we sold of PlayStation 4 in the fiscal year after its launch. Fiscal 21 first quarter software and network services revenue decreased 15% compared to the same quarter of the previous fiscal year when stay-at-home demand was high around the world, primarily due to a decrease in software add-on revenue from third-party titles. Nevertheless, software sales increased 38% compared to the same quarter of the fiscal year ended March 31, 2020, that is fiscal 2019, which was before the COVID-19 pandemic, and we believe that the game market has expanded significantly over the last three years. Similarly, Total gameplay time of PlayStation users in Cisco 21's first quarter decreased 32% year-on-year, but increased 18% compared to the same quarter of Cisco 2019, showing continued steady growth. Sales of first-party software decreased compared to the same quarter of the previous fiscal year when The Last of Us Part II was a big hit, but sales... Of all the titles we have released during the quarter, including Ratchet and Clank, Wrist Apart, and MLB The Show 21, exceeded our expectations. Thanks in part to... A strong add-on sales, MLB The Show 21 contributed significantly to sales and profit during the quarter. We have begun to release our first-party titles on platforms other than PlayStation, and MLB The Show 21 was one such title, which followed upon initial success we had with the PC versions of Horizon Zero Dawn and Days Gone. PlayStation Studios, which oversees our first-party software production on a global basis, is accelerating investments to strengthen its production capabilities. In June, we announced the acquisition of Housemarque, which is the 13th studio under PlayStation Studios. Housemarque is a Finnish studio from Finland that has been successful for more than 20 years due to its superb technological capability and creativity, and it has received extremely high praise for Returnal, which it developed and released exclusively on PS5 in fiscal 21st quarter. Seven of our 13 studios have been acquired and have produced numerous hits and compelling IPs, such as The Last of Us series, The Horizon series, and Ghost of Tsushima. In July, we announced the acquisition of Nixis, a Dutch software development company that has excellent technology for porting game software between different platforms, such as PCs. We expect that Nixis will offer technological support to all our studios in a horizontal manner. Going forward, we intend to continue to proactively make strategic investments with the aim of developing new IP, supporting our multi-platform strategy, and strengthening our service offerings, including through add-on content.

Next is music segment. Fisco 21Q1 sales increased a significant 44% year-on-year to 254.9 billion yen, a sales increase in all categories driven primarily by growth in streaming. Sales of products related to Demon Slayer, Kimetsu no Yaiba, the movie Mugen Train, were the primary driver of the increase in sales of visual media and platform. Primarily due to the benefit of the increase in sales, operating income increased significantly to 55.4 billion yen, 19.7 billion yen higher than the same quarter of the previous fiscal year, in which a 7.2 billion yen one-time gain was recorded for the transfer of an equity stake in a third party. Fiscal 21 sales are expected to increase 50 billion yen compared to a previous focus to 1 trillion 40 billion yen, and fiscal 21 operating income is expected to increase 28 billion yen compared to a previous focus to 190 billion yen. The previous fiscal year's operating income included one-time gains of 13.2 billion yen mainly from the transfer of equity stakes and the historic blockbuster hit Demon Slayer. Nevertheless, we expect operating income this fiscal year to exceed that of last fiscal year because of the strong current momentum. Streaming revenue, which is the largest growth driver in this business, grew considerably due to strong paid streaming and a recovery in advertising-supported streaming, which was negatively impacted by By the COVID-19 pandemic, during the quarter, streaming revenue increased significantly, 53% year-on-year in recorded music and 70% year-on-year in music publishing. We are steadily improving our ability to generate hits by discovering and nurturing new artists. In this quarter as well, we had an average of 36 songs in Spotify's global top 100 songs ranking and debut songs from our new artists are increasing in this hit ranking. In the area of strategic investment, we completed the acquisition of the DIY artist service business AWOL in May. This acquisition will strategically complement the orchard in the growing indie market, enabling us to provide service to artists in various stages of their careers. In June, we announced the acquisition of Something Else, a major British podcast production company, and Alamo Records, a music label focused on hip-hop in the US. And in July, we announced an alliance with the rapidly growing online game platform Roblox. The alliance provides our artists the opportunity to connect with the Roblox community through virtual events and other means, and it creates revenue-generating opportunities that go beyond music. Through proactive strategic investments and partnerships such as these, we aim to further grow our business and generate higher profitability than our competitors. Next is the pictures segment. FY2121 sales increased 17% year-on-year to 204.7 billion yen, mainly due to an increase in sales of media networks and motion pictures, partially offset by a decrease in sales of television productions. Operating income decreased 1.7 billion yen year-on-year to 25.4 billion yen, mainly due to the decrease in sales and increase in production costs in television productions. Fiscal 2021 sales are expected to decrease 20 billion yen compared to our previous forecast to 1,120,000,000,000 yen, primarily due to later-than-originally-anticipated theatrical release of Motion Pictures' product. and deliveries of TB programming product. Fiscal 21 operating income is expected to increase 7 billion yen compared to our previous focus to 90 billion yen, mainly due to an increase in licensing revenue partially upset by the impact of the decrease in sales. In motion pictures, while the U.S. box office revenue has recovered to about 40% to 50% of what it was prior to COVID-19, it remains uncertain whether when the situation will return to normal due to a resurgence of COVID-19. Given these circumstances, we are taking a flexible approach to our release strategy for films that are ready to be introduced to the market so as to maximize long-term value of those works. For example, While we decided to further postpone the theatrical release of major films like Venom and Hotel Transylvania Transformania, we decided to license to video streaming services the films Cinderella and Vivo, which were originally scheduled for theatrical release. Meanwhile, demand for content from video streaming services remains strong, and the increase in licensing revenue from new releases and catalog product has exceeded expectations. the decrease in revenue caused by the lack of major theatrical releases in the previous fiscal year. In media networks, our video direct-to-consumer services are increasing their customer base significantly, with paid subscribers since June 2020 increasing approximately 80% at our anime DDC service, Funimation, and approximately 700% at Sony Live, our video DDC service in India. KillFlix, which we acquired last fiscal year, has also increased its paying subscribers quickly, reaching a number today that we thought at the time of acquisition it would take another year to achieve.

Next is the electronics products and solutions segment. Mainly due to an increase in unit sales of televisions and digital cameras, as well as the impact of foreign exchange rates, sales for the quarter increased significantly to 576.3 billion yen, a 59% increase compared to the same quarter of the previous fiscal year, which was severely and negatively impacted by COVID-19. Operating income increased a significant 80.6 billion yen to 71.8 billion yen a year, primarily due to the benefit of the increase in sales and an improvement in the product mix. Fiscal 2021 sales expected to increase 60 billion yen compared to the previous forecast to 2,320,000,000 yen, and operating income is expected to increase ¥22 billion to ¥170 billion to reflect the results of fiscal 21 first quarter. In the TV business, the market for high-end value-added live-stream products, which is our focus, remains strong. But we are beginning to see a decline in the stay-at-home demand focus that happens. The stay-at-home demand that has continued since last fiscal year in the market for low-priced, small and medium-sized products. While the supply of TV panels is tight, we have maintained price and shifted our focus to higher value-added models, resulting in the average selling price rising a significant 38% year-on-year. In the digital camera business, which suffered a significant contraction in demand around the world due to COVID-19, sales were strong in significant in all regions due to recovery in demand and a shift in the market to high performance and high-spec products, as well as a strong product competitiveness. At the same time, the recent resurgence of COVID-19 in Southeast Asia has caused governments to place restrictions on personal and corporate activity, and we have had to reduce our operations at our factories in Malaysia from the end of May. There is a risk that are parts of a component supply chain could also be negatively impacted. Fiscal year 21 forecast incorporates these emerging supply side risks as well as demand side risks, such as lower stay-at-home demand from the second half of the fiscal year. Next is the imaging and sensing solutions. Fiscal 21 first quarter sales increased 6% year-on-year to 218.1 billion yen and operating income increased 4.3 billion yen year-on-year to 30.5 billion yen. Fiscal year 2021 sales are expected to decrease 30 billion yen compared to our previous forecast to 1 trillion 100 billion yen, but our operating income forecast remains unchanged from the previous forecast. In the mobile sensor business, shipments to Chinese manufacturers have slowed since May, primarily due to the stagnation of the Chinese smartphone market, and inventory adjustments. However, since we have incorporated this level of demand to some extent into our forecast, we recorded sales and profit for the quarter that were essentially in line with our expectations. We were able to offset year-on-year decrease in shipments to a certain Chinese customer and generate overall segment sales and profit that exceeded the same quarter of the previous fiscal year because of a steady increase in shipments to a major non-Chinese customer and the recurring demand for image sensors for additional cameras. Regarding the efforts we have made to expand our customer base, adaptions of our image sensors by Chinese smartphone manufacturers is progressing smoothly and we have made strides in recovering our market share on a volume basis so far this fiscal year. In addition, we have gotten off to a good start when it comes to getting a high value added image sensors designed into our flagship models that many smartphones manufacturers plan to launch in the fiscal in the first half of 2022 on the other hand we are concerned about the high-end smartphone market in China which is lacking momentum because there are no big hit products like those that have been sold in 2019 and 2020 by the Chinese manufacturer previously mentioned since this situation could have an impact On the speed of which our mobile sensor business profitability is expected to recover from the next fiscal year, we are monitoring the situation as well as the recovery of the Chinese smartphone market in the short term. Lastly is the financial services segment. Fiscal 21 first quarter financial services revenue decreased 6% year-on-year to 414.4 billion yen, primarily due to the decrease in net gains on investments in the separate accounts at Sony Life Insurance Company Ltd. Operating income decreased 12 billion yen year-on-year to 24 billion yen, mainly due to the impact of a one-time loss recorded at a consolidated subsidiary of Sunny Life. As was announced today by Sunny Life, in May of this year, we discovered an unauthorized withdrawal of approximately 17 billion yen out of the bank account in the name of SA Reinsurance Limited, an overseas consolidated subsidiary of Sunny Life. As a result, we recorded a loss equal to the amount of the withdrawal in first quarter. After making this discovery, Sony Life immediately took action, including reporting the matter to the relevant authorities, and they continued to work with authorities investigating the matter to recover the funds and gain full accounting of what occurred. We sincerely apologize for causing concern, but this matter has no impact on the insurance contracts that the customers of Sony Life have entered into. Our fiscal year 2021 forecast for financial services revenue remains unchanged from the previous forecast. Operating income is expected to decrease 17 billion yen compared to the previous forecast of 153 billion yen. At the IR Day held in May, we explained a strategy to maximize the value of the financial services business by strengthening group management to sustainably grow the business in a profitable way. To demonstrate our progress in line with this strategy from this earnings announcement, we have decided to disclose two important indicators for assessing the COVID value of Sony Unite. Market Consistent Embedded Value, MCEV and new policy value in a supplemental information document every quarter. We also increased the dividend that the financial services citizens paid at the end of the previous fiscal year by 20 yen per share to 90 yen per share. The business is expected to make additional contributions to the Sony Groups through stable dividend increases. This concludes my remarks. Thank you.