Sony Group Corp

We'd now like to begin Sony Group Corporation's earnings announcement. I'll be serving as the MC. My name is Okada from Corporate Communications. Our first Executive Deputy President and CFO, Mr. Totoki, will present the Consolidated Results for FY21 and Consolidated Results Forecast for FY22, followed by Q&A. We are scheduled to end in about 70 minutes. Mr. Totoki, the floor is yours. Today, I will start by talking about the situation in Ukraine and Russia. At first, I want to express my deepest sympathies to the victims of the conflict. I hope that the conflict will be resolved as soon as possible and that peace will be restored. Our business scale in Ukraine and Russia was about 0.7 percent of consolidated sales in the fiscal year ended March 31st, 2022, FY21. And although these regions have minimal impact on our financial performance, we are monitoring the impact of the situation on the global economy going forward. Now I will discuss the following three topics. The consolidated results for FY21 and the consolidated results forecast for fiscal year ending March 31st, 23. FY's consolidated sales increased 10% compared to the previous fiscal year to 9,921,000,000,000 and consolidated operating income increased 247,000,000,000 to 1,202,000,000,000, both of which are record highs. Income before income taxes increased 119,000,000,000 to 1,117,000,000,000 and net income attributable to Sony Group Corporations. shareholders was 882.2 billion yen, a 147.4 billion yen decrease compared to the previous fiscal year, in which 256.8 billion yen in reversals of valuation allowances against deferred tax assets were recorded. Please see pages 4 to 10 of the presentation materials for each profit metrics adjusted to exclude one-time items. Consolidated operating cash flow, excluding the financial services segment, was 813.3 billion yen. The actual cash flow by segment is shown on the slide. This slide shows the results by segment for FY21. And next, I will show the consolidated results forecast for FY22. As sales are expected to be 11 trillion 400 billion yen and operating income expected to be 1 trillion 160 billion yen. This slide shows the factors leading to the change in forecasted operating income compared to the actual operating income of the previous fiscal year. Consolidated operating cash flow, excluding the financial services segment, is expected to be 1 trillion 50 billion yen. The assumed foreign currency exchange rates are 123 yen to the U.S. dollar and 135 yen to the euro. A ¥1 depreciation against the U.S. dollar is estimated to have an approximately ¥1 billion positive impact on operating income for the year, and ¥1 depreciation against euros is estimated to have an approximately ¥7 billion positive impact for the year. Our forecast is based on assumptions such as the projected growth rate of the global economy published by IMF in January, and it incorporates as much as possible recent major risks, such as the direct impact of the situation of Ukraine and Russia and the impact of COVID-19 in China. This slide shows our forecast by segment for FY22. I will now explain the situation in each of our business segments. Game and network services. FY21 results at first is that The FY21 sales increased 3% year-on-year to ¥2,739.8 billion. Operating income increased ¥4.4 billion year-on-year to ¥246.1 billion, primarily due to improvements in the profitability of PlayStation 5 hardware, despite the impact of lower sales of non-first-party software. FY22 sales are expected to increase a significant 34% year-on-year to 3,660,000,000 yen due to an expected increase in sales in all categories. Operating income is expected to decrease 41.1 billion yen year-on-year to 305 billion yen. This forecast is based on the assumption that the acquisition of Bungie Inc., which is currently under review by the relevant authority, will close in the third quarter ending December 31, 2022. Excluding the approximately 44 billion yen in expenses associated with acquisitions including Bungie, operating income is estimated to be essentially flat year-on-year. In addition, we plan to increase software development expenses aimed at strengthening first-party software at our existing studios by approximately 40 billion yen year-on-year, and we have incorporated that impact into this forecast. Our unit sales forecast for PS5 hardware is 18 million units, a number based on our current visibility into parts procurement. In order to strengthen our content development capabilities further, we entered into a definitive agreement this March to acquire Haven Entertainment Studios in addition to acquisition of Bungie. Haven is a studio founded by Jade Raymond, one of the primary creators of the blockbuster Assassin's Creed franchise. The studio has gathered many excellent developers in Montreal, Canada, known as a haven for game development, and it is currently developing a new game title. In addition to acquiring studios such as Bungie and Haven in recent years, we have significantly increased our investment in content development in our existing studios. As a result, our first-party software revenue has grown at a high rate. Going forward, we aim to grow the game business by strengthening our first-party software and deploying that software on multiple platforms.

Next is the music segment. Although sales of visual media platform decreased, fiscal 21 sales increased a significant 19% year-on-year to $1 trillion. 116.9 billion yen, mainly due to an increase in streaming revenue. Operating income increased 26.1 billion yen year-on-year to 210.9 billion yen, mainly due to the impact of the increase in sales. The contribution to operating income from visual media and platform accounted for approximately 20% of the operating income of the segment for the fiscal year. Fiscal 2022 sales are expected to increase 11% year-on-year to 1,240,000,000 yen, and operating income is expected to increase 19.1 billion yen year-on-year to 230 billion yen. In the fourth quarter ended March 31, 2022, streaming revenue increased 32% year-on-year in recorded music and 36% year-on-year in music publishing revenue. continuing to contribute significantly to the growth of the segment. In recorded music, we are strengthening our ability to discover and nurture artists, expanding our roster and acquiring new labels such as Alamo Records. As a result of these efforts, our ability to continuously create hits has steadily increased, with our having an average of 36 songs in Spotify's weekly global top 100 songs in fiscal 21. Moreover, new business opportunities with digital partners such as TikTok, Meta, and Roblox are steadily increasing and are expanding our base load of profitability. Next is the picture segment. With box office revenue in the U.S. recovering to approximately 50% of pre-COVID-19 levels, the operating environment for this segment is starting to return to normal, chiefly in motion pictures. In addition, mainly due to the historic blockbuster hit Spider-Man No Way Home and significant licensing revenue from the popular television series Seinfeld, F521 sales increased a significant 65% year-on-year to 1,238,900,000,000 yen. Operating income increased a significant 137.5 billion yen year-on-year to 217.4 billion yen due to the impact of the increase in sales and recording of a 70 billion yen gain from the transfer of GSN Games. Although motion pictures revenue is expected to decrease due to the lack of major releases on par with the previous fiscal year, fiscal 2022 sales are expected to increase 7% to 1,330,000,000,000 year-on-year, mainly due to the impact of exchange rates and expected increase in media networks revenues. Operating income is expected to decrease a significant 117.4 billion yen year-on-year to 100 billion yen, mainly due to our not forecasting one-time items such as in the previous fiscal year. The focus for fiscal 2022 operating income margin for the segment is 7.5%. a decrease compared to the last two fiscal years, which benefited from lower expenses resulting from fewer releases and the licensing of films to digital distribution services. However, when compared to before the COVID-19 pandemic, the profitability of the segment has steadily improved. In this segment, we see the increase in demand for content, chiefly from video distribution services, as an opportunity, and we are strengthening our content IP as a result. A pillar of our IP strategy is leveraging the Sony Pictures universe of Marvel characters, and we are following up on Venom and Morbius with the production of another Spider-Man character spin-off called Kraven the Hunter. In addition, following the success of the first movie adaptation of the popular PlayStation game title, Uncharted, in motion pictures, we are leveraging our game IP by proceeding with the adaptation of Ghost of Tsushima and The Last of Us into video content. In television production, we are pursuing strategic investments such as the acquisition of industrial media, which has a reputation for producing variety in documentary content such as the popular TV show American Idol, and the acquisition of Bad Wolf, a leading drama production studio in the UK. Next is the electronics products and solutions segment. Fiscal 2021 sales increased 13% year-on-year to $2 trillion, 339.2 billion yen, mainly due to an increase in sales of TVs and digital cameras resulting from an improvement in product mix. Mainly due to the impact of the increase in sales, operating income increased 85.1 billion yen year-on-year to 212.9 billion yen. During the previous fiscal year, We faced various supply constraints, such as continued disruption of manufacturing and logistics resulting from the COVID-19 pandemic and a shortage of components, mainly semiconductors, however. We were able to overcome these issues mainly through close management of a supply chain and achieved operating income margin of over 9%. Fiscal 22 sales are expected to increase 3% year-on-year to 2 trillion 400 billion yen, mainly due to the impact of exchange rates, despite a decrease in unit sales of TVs. Operating income is expected to decrease 32.9 billion yen to 180 billion yen. This forecast incorporates the total of an already observable impact and an estimated additional impact going forward of approximately 30 billion yen on our supply chain due to the spread of COVID-19 in China. Going forward, due to the continued spread of infection, there is a possibility that the operation at factories in Shanghai and the surrounding region, as well as procurement of parts from the region, will be constrained. Thus, we currently expect it will take approximately three months for the situation to normalize. With the situation in Ukraine and Russia and the slowdown of the global economy resulting from rapid inflation, we expect the demand environment this fiscal year to be even more severe than recent years. By quickly responding to the changes in the market going forward and further enhancing our resilience to changes in the environment through digitization and streamlining of our operation, we will aim to maintain and improve our profitability. Now, I'd like to explain the change in the name of this segment. We have been using visual, audio, communication, and other technologies to deliver Kando in the form of entertainment experiences to our customers in this segment for quite some time. Going forward, we will work with creators to create the entertainment of the future by providing technology that enables new visual and audio experiences while also providing new services such as virtual production and sports entertainment. To further clarify the direction of these businesses, we have changed the name of this segment to Entertainment Technology and Services. The details of the change will be explained by Mr. Maki, the head of the business segment briefing to be held this month.

Next is the Imaging and Sensing Solutions segment. FI21 sales increased 6% year-on-year to 1 trillion 76.4 billion yen, primarily due to impact of exchange rates and sales increase of sensors for digital cameras and industrial equipment. Operating income increased 9.7 billion yen year-on-year to 155.6 billion yen, primarily due to the impact of the sales increase. FY22 sales are expected to increase 37% year-on-year to 1 trillion 470 billion yen, and operating income is expected to increase 44.4 billion yen to 200 billion yen. During the previous fiscal year, we achieved a certain level of success, expanding and diversifying our customer base and recovering our unit market share, but the business environment throughout the year was quite severe. due to the stagnation of the smartphone market in China. Recently, however, we are seeing manufacturers refocusing on increasing the size, image quality, and added value of the image sensors they are purchasing for their high-end smartphones scheduled for release in FY22 and beyond. Thus, we expect the growth of the mobile image sensor market to accelerate again going forward. There is also a movement to pursue better image quality even in the mid-range phones, and thus we believe there is room for us to further increase our market share. Due to growth in sensors for mobile devices, stable growth in the market for sensors used in digital cameras and industrial applications, and a significant market expansion for automotive sensors, we have upwarded revised our forecast revenue CAGR for this segment over the course of the current mid-range plan to approximately 20% per year. To respond to this more robust demand and to ensure that we can capture growth opportunities, we plan to increase capital expenditure during this mid-range plan from approximately 700 billion yen to approximately 900 billion yen, primarily due to the capital expenditure increase and an increase in the R&D expenditures to maintain and expand our technological competitiveness. The timeline for improving profitability has been slightly delayed from our initial plan, but we do expect that the profit will continue to grow along with the increase in sales over the medium term. Last is the financial services segment. FY21 financial services revenue decreased 8%. 8% year-on-year to 1 trillion 533.8 billion yen, primarily due to the decrease in the net gains on investments in the separate accounts at Sony Life Insurance. Despite the impact of an increase in insurance premium revenue at Sony Life, operating income decreased 4.7 billion yen year-on-year to 150.1 billion yen, primarily due to one-time loss at a subsidiary of Sony Life related to the unauthorized withdrawal funds. New policy enforced at Sony Life during FY21 grew 3% year-on-year, driven by our success in selling insurance to corporations. FY22 financial services revenue is expected to increase 6% to 1,440,000,000,000 yen, and operating income is expected to increase 69.9 billion yen to 220 billion yen. The operating income forecast includes the combined impact of approximately 43 billion yen from a gain on the real estate sales completed last month and the impact of the recovery of the funds associated with the unauthorized withdrawal, about which we recorded a loss in the previous fiscal year, both at Sunilife. Now, I would like to explain the progress of our fourth mid-range plan. Under the theme of Sony's evolution, during this mid-range plan, we aim to evolve Sony into a company that achieves fast and high growth through investment and business expansions in growth markets and through further collaboration across our businesses. Sales are on a higher growth curve than originally expected, driven by growth in our four priority investment areas, the GNNS, Music, Pictures, and INSS segments. Operating income has also increased significantly compared to the previous plan, and we now expect it to exceed 1 trillion yen per year. Based on this, we expect the three-year cumulative total adjusted EBITDA, which is our consolidated group KPI, to increase to 4.9 trillion yen, up 14% compared to the target of 4.3 trillion yen. Now I would like to update you on the progress of our capital allocation. The amount of consolidated operating cash flow generated during the three years of this mid-range plan, excluding the financial services segment, is expected to increase by 200 billion yen compared to the original plan to 3.3 trillion yen or more, mainly due to the operating income improvement. Added to this amount would be the carryover from the previous mid-range plan, borrowing and asset sales, leaving a total of more than 4 trillion yen available to be allocated. As for how this amount will be allocated, I explained earlier that we will increase capital expenditures in the INSS segment by approximately 200 billion yen. Thus, we have made no change to our plan to make strategic investment to 2 trillion yen or more. A total of approximately 1 trillion 60 billion of strategic investment has have been executed or decided, including 97.4 billion yen in repurchase of Sonic stock, and we believe our investment for long-term growth are progressing rapidly. Lastly, we have obtained another authorization to repurchase a maximum of 200 billion yen of Sonic stock over the next year. These repurchases continue to be part of our strategic investments and will be implemented in a flexible manner. We believe that the external environment in FI22 will be quite harsh with many risks and issues that we will have to address, and as CFO, I am managing Sony with the highest sense of caution. At the same time, we will continue to take steps to achieve growth over the long term while responding swiftly to changes in the environment. This concludes my remarks.