Sony Group Corp

Ladies and gentlemen, we'll now begin FY21Q2 earnings announcement of Sony Group Corporation. I am Okada from Corporate Communications. I'll be serving as Master of Ceremonies today. This session is for media analysts and institutional investors to whom we have sent out an invitation in advance. This session is webcast live on our investor relations website. First, Mr. Hiroshiki Totoki, Executive Deputy President and Chief Financial Officer, will explain the consolidated results for FY21Q2 and the consolidated results forecast for FY21, followed by Q&A. Duration is 70 minutes. Mr. Totoki, the floor is yours. Today, I will discuss the following topics. Consolidated results for second quarter ended September 30, 2021, increased 13% compared to the same quarter of the previous fiscal year to 2,369.4 billion yen, and consolidated operating income increased 3.2 billion year-on-year to 318.5 billion yen, both record highs for the second quarter. Income-before-income taxes decreased 20.6 billion yen year-on-year, to 283.1 billion yen, primarily due to a deterioration of valuation gains and losses on securities investment. Net income attributable to Sony Group Corporation's shareholder was ¥213.1 billion, a decrease of ¥245.5 billion compared to the same quarter of the previous fiscal year, which included the recording of a ¥214.3 billion reversal of variation advances recorded against the deferred tax assets. Please see pages 3 to 6 of the presentation material for a depiction of each profit matrix. This slide shows the results by segment for FI21Q2. Next, I will show the consolidated results forecast for FI21. Consolidated sales are expected to increase 200 billion yen compared to our previous forecast to 9,900,000,000 yen, and operating income is expected to increase 60 billion yen to 1,040,000,000 yen. We have also upwardly revised our forecast for income-before-income taxes to 990 billion yen, and our forecast for net income attributable to Sony Group Corporation shareholders to 730 billion yen. Our forecast for consolidated operating cash flow, excluding the financial services segment, is unchanged at 890 billion yen. This slide shows our forecast by segment for FY21. I will now explain the situation in each of our business segments. First is the game and network services segment. FI21Q2 sales increased a significant 27% year-on-year to ¥645.4 billion, primarily due to an increase in PlayStation 5 hardware sales and an increase in game software sales of third-party titles. Operating income decreased 22.7 billion yen year-on-year to 82.7 billion yen, primarily due to a deterioration in the profitability of hardware and peripheral devices. A FY21 forecast remains unchanged from the previous forecast. Driven by an increase in add-on content sales, Q2 game software sales exceeded those in the same quarter of the previous fiscal year, When stay-at-home demand was strong, total gameplay time of PlayStation users decreased 17% year-on-year. But the fact that add-on content sales exceeded those in the same quarter of the previous fiscal year is a positive sign that the quality of user engagement has increased. In the second half of this fiscal year, the first-party software titles Horizon Forbidden West and Gran Turismo 7 as well as major third-party software titles are scheduled to be released. As more game fans play these exciting titles, we expect user engagement to increase even more. At this time, there is no change to our FI21 unit sales target for PS5 hardware, but several factors are significantly impacting the supply of the product, such as the disruption of the global distribution supply chain and limitations on the supply of components, especially semiconductors. We are continuing to exert every effort to maintain the momentum of the PlayStation platform by meeting the expectations of the people who are waiting for PS5. To further strengthen our software development capability, we announced the acquisition of FireSprite in September and Bluepoint Games this month. Both companies have excellent technical capabilities and superb track records, and they have heretofore contributed to the development of many of our game software titles. Going forward, we plan to leverage these studios to increase the development capability of the PlayStation Studio and diffuse the expertise necessary to deploy games to PCs and mobile devices. As a result of the acquisition announced since the beginning of this fiscal year, the number of PlayStation studios will increase by 4 to 16, and the number of developers will increase by almost 20%. We plan to continue to aggressively invest in our development capability going forward. Next is the music segment. Fi21Q2 sales increased a significant 18% year-on-year to 271.6 billion yen, primarily in due to an increase in streaming revenue. Despite the impact of the increase in sales, operating income decreased to 50.6 billion yen, 3.7 billion yen lower than the same quarter of the previous fiscal year, in which a 5.9 billion yen one-time gain was recorded for the transfer of business outside of Japan. The combination to the operating income of the quarter from visual media and platform, which includes mobile game application and anime, accounted for approximately one-fourth of the operating income of the segment. FI21 sales are expected to increase 30 billion yen compared to our previous forecast to 170 billion yen, and FI21 operating income is expected to increase 10 billion yen to 200 billion yen.

Streaming revenue in Q2 continued to grow at a high rate, 38% year-on-year in recorded music and 47% year-on-year in music publishing. Sony Music Group, which is responsible for our music business outside of Japan, where the growth of the streaming market is conspicuous, is expected to reach record high operating income this fiscal year for the fifth consecutive year. We continue to generate hits thanks to enhanced efforts to discover and nurture artists. In Q2, the recorded music business had an average of 38 songs in Spotify's Global Top 100 Songs ranking. Moreover, the new song, Easy on Me, which was released by world-renowned singer-songwriter Edel after a six-year admittance on October 14th, made history as the most played song on Spotify in a single day. We have high expectations for album 30, which will be released next month. As Sony's competitive advantages in the music business lie in our global ecosystem, that can meet the diverse needs of artists and the fact that because our music business is part of the Sony Group, we can offer artists opportunities to express their creativity in areas such as games and pictures. In addition, we are enhancing our many artist-friendly initiatives, such as offering them financial and other support, and we believe these initiatives underpin the strong financial performance of this segment. Next is the picture segment. FY21Q2 sales increased a significant 40% year-on-year to 260.7 billion yen, primarily due to an increase in sales of television productions and media networks. Despite the impact of the increase in sales, operating income decreased 1.2 billion yen year-on-year to 31.6 billion yen, primarily due to an increase in marketing expenses related to the release of films in theaters. FY21 sales expected to increase 60 billion yen compared to our previous forecast to 1,180,000,000 yen, and operating income is expected to increase 18 billion yen compared to our previous forecast to 108 billion yen. Primarily in the U.S., we have begun to gradually release major films in theaters, and our film, Venom, Let There Be Carnage, which was released this month, generated box office revenue approximately 1%, 10 billion yen in the first three days of its release in the U.S., which is the best opening performance of any film during the pandemic. We are planning to release our compelling IP from Sony to theaters going forward, such as Ghostbusters, Afterlife, and Spider-Man No Way Home. On the other hand, we plan to monetize family-oriented films this fiscal year, such as Hotel Transylvania and Transformania. by directly licensing them to video streaming services, as we do not believe they will draw sufficient theatrical audiences during the pandemic. Going forward, we plan to continue to respond appropriately to the changes in the environment through a flexible releasing strategy aimed at maximizing the long-term value of our films. Last month, we signed an unbinding terms sheet to merge subsidiary of Sony Pictures Entertainment, SBE, and Z Entertainment Enterprises, a media company in India. Under the proposed merger, SPE would hold a majority stake in the resulting merged company. Under the term sheet, the two parties are conducting mutual due diligence and Z has agreed to negotiate exclusively with SPE for a period of 90 days with the goal of reaching definitive agreement India has an economic base which is rapidly growing, primarily among the younger generation, and is the largest linear TV market in the world that is still growing. In addition, the opportunity for digital distribution services is beginning to grow rapidly due to improvements in India's communications infrastructure. SP's Indian business, which includes the video distribution service Sony Live, is a leading TV broadcasting business in India. and it accounts for slightly less than 40% of the sales of media networks in Q2. As a growth area in the picture segment, we plan to continue to proactively seek opportunities to expand this business by using the profitability of the TV broadcasting business and our content assets to strengthen our digital distribution service. Now I will explain our anime business that spans the music and picture segment. On August 9th of this year, we completed the acquisition of Crunchyroll by Funimation, a joint venture between SP and Aniplex. Crunchyroll is the world's largest anime and dedicated direct-to-consumer service with more than 120 million registered users and more than 5 million paying subscribers in more than 200 countries and territories. The market for Japanese anime outside of Japan is has grown significantly at a compound annual growth rate of 30% since 2014. We aim to create the most beloved video distribution platform for anime fans around the world by delivering compelling content through enhanced distribution service brought about by the integration of Funimation and Crunchyroll. And next is the electronics, products, and solutions segment. Primarily due to the impact of foreign exchange rates and an increase in the sales of smartphones, Q2 sales increased 9% year-on-year to 581.9 billion yen. Operating income increased a significant 19.3 billion yen year-on-year to 72.7 billion yen, primarily due to the benefit of the increase in sales and improvement in the product mix. FY21 sales are expected to decrease. 40 billion yen compared to a previous forecast to 2 trillion 280 billion yen. While operating income is expected to increase 20 billion yen compared to the previous forecast to 190 billion yen to reflect the results of FY21 Q2. During Q2, we were unable to meet the demand for some products because the resurgence of the COVID-19 pandemic in Southeast Asia led to limitations on our factory operations, and on the supply of contents. However, we maintained a high level of profitability due to our ability to maintain prices and shift to higher value-added models. In the TV business, although we were able to maintain market prices during Q2, a rapid decrease in panel prices going forward could impact the market prices of our products, so we have incorporated that possibility into in our forecast and will closely monitor market trends in order to control inventory and margin. In addition, limitations on the supply of components, especially semiconductors, have recently become apparent, and we have incorporated the impact of these shortages in our forecast for the fiscal year. Prior to incorporating these risks, the forecasted operating income for the second half of the fiscal year was essentially flat compared to the second half of the previous fiscal year. And next is the imaging and sensing solution segment. FY21 Q2 sales decreased 9% year-on-year to 278.3 billion yen, and operating income decreased 1.0 billion yen year-on-year to 49.7 billion yen. Our FY21 sales forecast remains unchanged from the previous forecast, but operating income is expected to increase 10 billion yen compared to our previous forecast to 150 billion yen.

Our FY21 sales forecast remains unchanged for the previous forecast, but operating income is expected at increased 10 billion yen compared to our previous forecast, 150 billion yen. Although the mobile sensor business was impacted by the recent weakness in the Chinese smartphone market, that tight supply and demand situation for semiconductors in general and delays in the production of smartphone and Thank you very much. Securing the logic wafers necessary to increase the quantity and enhance added value of our sensors from the next fiscal year has become a major issue. We are continuing to negotiate with our funders, but the tight supply and demand situation is expected to continue next fiscal year. Despite these challenges, we upwardly revised our fiscal year forecast for image sensors sold to audiovisual and industrial equipment, The market for these sensors is growing faster than anticipated, primarily due to recovery in the market for digital cameras and increase in demand for factory automation. This market is more stable than the market for mobile application and has helped profitability. So we expect that it will contribute to the stabilization profit of the entire image sensor business going forward. Now I'd like to discuss the potential construction of a semiconductor factory in Japan by Taiwan Semiconductor Manufacturing Company, which was announced by TSMC the other day. Sony outsources almost all the production of logic wafers as part of the process of our manufacturing image sensors. So securing a stable supply of logic wafers is a critical business issue at the time when the global semiconductor shortage is expected to be prolonged. Because building a factory of this nature could serve as a possible solution to this problem in close collaboration with TSMC and the Ministry of Economy, Trade and Industry of Japan. We are studying the possibility of adding TSMC's Japan factory to our sources of logic wafer by leveraging our expertise managing our own semiconductor factories in Japan to assist TSMC in building the new factory. We believe that further strengthening and deepening our partnership with TSMC, which has a world-leading semiconductor production technology, is extremely meaningful for Sony. However, this matter is subject to further study and discussion. Last is the financial services segment. FY21Q2 financial services revenue was 368.4 billion yen, essentially flat year-on-year, and operating income increased 6 billion yen to 43.1 billion yen, primarily due to an increase in profit at Sony Life Insurance Company Ltd. New policy amount in force at Sony Life during Q2 exceeded that in the same quarter of the previous fiscal year, primarily due to the strength of our business selling to cooperation. FY21 financial services revenue is expected to increase 90 billion yen compared to our previous forecast to 1 trillion 490 billion yen. Our forecast for operating income remains unchanged from the previous forecast. I will discuss the strategic investments we are accelerating in order to grow over the medium to long term. Approximately 1.4 trillion yen in strategic investment we made from April 1, 2018 to March 31, 2021 was used to acquire businesses, while the rest was used to obtain minority equity states. stakes, and repurchase Sony's stock, we expect to generate operating cash flow of approximately 180 billion yen from the acquired businesses over the three years from April 1, 2021 to March 31, 2024. As a part of our resources for capital allocation, we intend to use this cash flow from further investment, accelerating the cycle whereby returns generated from previous investments are used to invest in Our ability to invest early in areas with high growth potential has increased, and opportunities to invest have also steadily increased, especially in the entertainment space. During the period of current mid-range plan, we plan to make strategic investment more than 2 trillion yen, including Sony stock repurchases. The total amount paid so far for companies and assets that have already been acquired, including Crunchyroll, is approximately 280 billion yen, The total amount of investment already decided upon is approximately 120 billion yen. Last week, we announced the sale of GSN Games, a casual mobile game business under PSC. We plan to reallocate the capital generated from the sale of businesses and assets like this to strategic investment in gross area. This concludes my remarks.