Sony Group Corp

Good night to begin. Sunny Group. Earnings announcement. I'll be serving as the moderator. I am from Corporate Communications. My name is Okada. First, Executive Deputy President and CFO Totoki will present the FY 2022 second quarter earnings and FY 2022 forecast, followed by Q&A. In total, we're scheduling for 17 minutes. With no further ado, Mr. Totoki, please. Today, I would like to start by talking about the business environment surrounding Sony. We recognize that the risk of the global economy slowing down is increasing further due to the factors such as rising tensions between the U.S. and China, soaring energy prices, and expanding inflationary pressure, as well as rapid interest rate hikes in various countries. We are taking steps to prepare for further deterioration of the business environment in each of our businesses, especially in entertainment technology and services, ETNS, and imaging and sensing solutions, INSS, which are relatively more sensitive to an economic recession. Now I'd like to explain the following. The consolidated results for the second quarter ended September 30th. FY22, Q2, and the consolidated results. Consolidated sales for the quarter increased 16% compared to the same quarter of the previous fiscal year, year-on-year, to 2,751.9 billion yen, and consolidated operating income increased 25.6 billion yen to 344.0 billion yen, both record highs for the second quarter and first half. Income before income taxes increased 62.7 billion yen year-on-year to 345.8 billion yen, and net income attributable to Sony Group Corporation shareholders increased 50.9 billion yen to 264.0 billion yen. This shows the results by segment for FY22Q2. Next, I'll explain the FY22 consolidated earnings forecast. The forecast for consolidated sale is 11 trillion 600 billion yen, an increase of 100 billion yen from the previous forecast. The forecast for operating income is upward revised to 1 trillion 160 billion yen and increase of 50 billion and the same amount that forecasted at beginning of fiscal year. The forecast for consolidated operating cash flow including financial services segment is unchanged. The assumed foreign exchange rates are approximately 140 yen to the U.S. dollar, approximately 138 yen to the euro. The forecast for each segment is as follows. And I'll explain the situation in each of our business segments. First, the game and network services GNNS segment. Q2 sales increased 12% year-on-year to 720.7 billion yen, primarily due to the impact of foreign exchange rates, despite a decrease in sales of third-party software. Operating income increased a significant ¥40.5 billion year-on-year to ¥42.1 billion primarily due to the recording of expenses associated with acquisition including Bungie Inc. An increase in software development costs and the negative impact of foreign exchange rates partially offset by a decrease in losses on hardware. The 22 sales are expected to be 3 trillion, 230 billion yen, an increase of 10 billion yen from the previous forecast due to the impact of foreign exchange rates, partially offset by a reduction in the sales forecast for third-party software reflecting results of Q2. On the other hand, operating income is expected to be 225 billion yen, a decrease of 30 billion yen from the previous forecast. Regarding hardware profitability, we are expecting a slight improvement from the previous forecast due to price changes and cost reduction partially offset by the negative impact of the foreign exchange rates. Regarding software profitability, we have downwardly revised our forecast because we think it will take more time for engagement to recover from its current low level. In addition, our forecast for expenses associated with acquisition is expected to increase from the previous forecast by ¥4 billion due to the impact of foreign exchange rates and amount to approximately ¥61 billion. Operating income excluding amount is estimated to be Although a total gameplay time spent by PlayStation users during Q2 increased slightly versus the previous quarter, it decreased 10% year-on-year, primarily due to the impact of an increase in opportunities to go outside, resulting from a reduction in COVID-19 infections. When we compare software sales for this quarter with the same period of the previous fiscal year, we see sales of past library titles decline sharply, while sales of major new titles remain strong. Users appear to be playing a smaller number of titles out of a desire to spend less money. The number of PlayStation Plus subscribers accounts at the end of September decreased 4% from the end of June to 45.4 million accounts. We see that this decrease results from a greater decline in user engagement amongst PS4 users than expected. On the other hand, the ratio of PS Plus subscribers among PS... 5 users remains at a level significantly higher than that of PS4. We are putting even more effort into accelerating the penetration of PS5 hardware to recover this user engagement going forward. Regarding production of PS5 hardware, restrictions on the supply of materials and logistics have significantly eased, and the number of units produced during the quarter exceeded 6.5 million, progressing faster than planned. We recognize that demand from customers for PS5 continues to be strong, as the actual sales situation at resale stores in the U.S. is such that in September it took an average of 17.5 hours to sell out 100,000 units after their arrival. To meet this strong demand, we will do our utmost to bring forward supply into the year-end holiday selling season and aim to exceed our FY22 forecast of 18 million units. In terms of first-party software, we plan to release a new popular franchise title, God of War Ragnarok, on November 9. The previous God of War game released in 2018 was one of the largest titles ever released exclusively for PlayStation, selling 23 million units cumulatively to date. We expect similar performance from the new title as well. Regarding Bungie, Destiny 2 The Witch Queen Season of Plunder, which was released in August, is off to a good start. In addition, we have announced Destiny 2 Lightfall, which is an expansion pack scheduled for release in February of next year, and we are receiving great expectations from fans as a result. In addition, Bungie's collaboration with PlayStation Studios is progressing well. Regarding PS software, we released Marvel's Spider-Man in August, and the popular IP that was also a hit movie, Uncharted Legacy of Thieves collection in October. The titles have been rated highly, with Metacritic Metascores of 87 and 88 respectively, and in the two months since release, sales of Marvel's Spider-Man approached the highest level ever for a PC software title released by Sony. In this way, we are actively pursuing various measures to ensure increased user engagement, and re-accelerating the growth of our game business from both the hardware and software perspectives. We expect to see the results of these efforts contribute to sales and profit in earnest from the second half of this fiscal year and next fiscal year.

Next is the music segment. Q2 sales increased a significant 32% year-on-year to 359.3 billion yen, mainly due to the impact of falling exchange rates and the increase in streaming sales. Operating income was 78.7 billion yen, a significant increase of 28.1 billion yen year-on-year, mainly due to the positive impact of Forex exchange rate and increase in sales. The contribution of operating income from visual media and platforms accounted for mid-teens, a percentage of the operating income of the segment of the quarter. In the mobile game application, thanks to the collaboration with Lasengo, which Aniplex acquired in February this year, our efforts to strengthen development service are progressing smoothly and our sales paid grand order in the first of this fiscal year, which is the eighth year since launch of the title exceeded the level of the first half of the previous fiscal year. Primarily due to the impact of the falling exchange rate and the result of the fiscal year so far, we upwardly revised both sales and operating income forecast sales to ¥1,770 billion and the increase of ¥90 billion, and the previous forecast and operating income ¥265.2 billion and the increase of ¥35 billion from the previous forecast. Streaming sales in this segment continues to grow steadily with the year-on-year increase of 34 recorded media, 78 music publications. In the recorded music, an average of 48 of our songs ranked at the top 100 songs in the Spotify's weekly global music ranking for the first half of the years, which substantially excluded an average of 36 of our songs of 12 months. And we are maintaining a high share of hit shares by continuing to generate hits from the contribution of the new artists and well-established artists as Beyonce. And with the six new albums in the six years of renaissance. Now I will take a moment to review our strategic investment in this segment. And we are actively making a strategic investment to capture further growth in music and the market, which is driven by A-ball, some mid-level alum records, and merchandising, ceremony of losses, and podcast production, something else. and for the acquisitions. In addition, we are carefully selecting which music catalogues of industry-leading influential artists to acquire, such as Blues, Springsteen. These acquisitions perform the important role of generating stable long-term loyalty income, further expanding song revenues, opportunities, and increasing our presence in the music industries. These strategic investments are steadily producing results, and we expect our operating income of this first fiscal year, Sony Music Group, which is responsible for music business outside of Japan, to reach the record high for the sixth consecutive years. Next is the picture segment. Q2 sales increased 29% year-on-year to 337.5 billion yen, primarily due to the impact of the Forex exchange rate. Operating income decreased 4.2 billion yen year-on-year to 27.6 billion yen, primarily due to the existence of the same period of the previous years of licensing revenue from digital streaming services. Fiscal year FY22 sales are expected to be ¥1,450 billion and the increase of ¥70 billion from the previous forecast primarily due to the impact of the forex exchange. We have upward revised operating incomes are forecast to ¥115 billion and the increase ¥15 billion compared to the previous forecast. In the motion pictures, as you can see, Sony released original works in different genres during the quarter and all of them performed well. Among those were the Cradle scenes and the movie adaptations and the best-seller novel, which achieved box office revenue that greatly exceeded our expectations. The movie was made by our 3,000-picture studio, and which was the partnership of HarperCollins and the major global publishing companies, we are seeing the success of our efforts in discovering the excellent original works and made. Now I'd like to give you an update on the Clunchy role and the animation business distribution service. The integration of the Clunchy role and Fanimation services is progressing smoothly, and the number of paying numbers are increasing nearly 10 million so far. The company is also actively involved in overseas theatrical distribution of Japanese animation. Dragon Ball Super Super Hero was released in August in the U.S. and secured a number of box office sales in the first week of the release. Also on August 4th, we completed the acquisition of the rights staff and the U.S. commerce company and sells anime DVD, characters goods, and comic books. Next, I'd like to explain our recent acquisitions of PIXOMONDO. Having several facilities in North America and Europe, PIXOMONDO offers end-to-end services from visual production to visual effects. It is a pioneer in the field, having won numerous Academy and Emmy Awards for the project it has worked on. It has superb technological capabilities and a rich history of success, and it is also known for using the Unreal Engine game engine properly. provided by Epic Games, which we invest to make its visual effects. In the visual production market, which is expected to grow significantly in the future, we will aim to combine Sony's hardware and software technologies and our video production know-how with Pixelmon's technology capabilities to establish leading positions. Lastly, I will explain the progress toward the merger of Sony Pictures Network India and Z Entertainment Enterprise. Following the approval of The Competition Commission of India on October 4th, these shareholders approved the merger of the extraordinary shareholders meeting held on October 14th. The merger process is progressing steadily and we currently expect the transaction to close by the end of first half of the next year.

Next is the ET&S segment. Q2 sales increased a significant 16% year-on-year to 677 billion yen, mainly due to the impact of foreign exchange rates. Operating income increased 5.1 billion yen year-on-year to 77.8 billion yen, primarily due to the positive impact of foreign exchange rates and the impact of an increase in sales of digital commerce. Although we have incorporated the additional risk of market slowdown in the second half of the fiscal year, our FY22 sales forecast is 2,510,000,000 yen, an increase of 60%. billion yen. There is no change from the previous forecast for this operating income. In the current quarter, we are able to quickly recover from the supply chain turmoil caused by the lockdown in Shanghai in order to restore a stable supply. This enabled us to recover sales and profit primarily in the digital camera for TVs. The deterioration of the business environment is becoming a such as increasing tower pressure on price due to oversupply of panels and sluggish demand, especially in Europe. We anticipate that the environment will become even more severe going into next fiscal year due to the global economic slowdown. we are going to minimize the risk. As the end of September, daily turnover inventory in every product category has decreased versus the end of June, and we are planning to close attention to demand trends as we reduce inventory even further. In addition, we are accelerating our efforts to strengthen our business structure from next fiscal year onwards. and sales operations, strengthening the cooperation between ETSS, INSS, and GNNS in procurement and logistics, and further optimization of the break-even point according to the business environment. In addition, new business areas which have been positioned as our growth axis, such as sports, life science, network services, and virtual production, are expected to increase their sales by approximately 20%. Next is the ISS segment. Q2 sales increased a significant 43% year-on-year to 398.4 billion yen, mainly due to the impact of Forex and higher sales of image sensors for mobile devices. Operating income was 74 billion yen, a significant increase of 24.3 billion yen year-on-year, mainly due to the positive impact of Forex and the benefit from the increase in sales. Our sales forecast remains unchanged. We have upwardly revised our operating income forecast by 20 billion yen from the previous forecast to 220 billion yen, primarily due to the positive impact of foreign exchange rates. The slowdown in the smartphone market, particularly in China, did not improve during Q2, but the impact was generally within the scope assumed in our previous forecast. However, for the high-end smartphone cameras, progressing as expected with larger die size, higher resolution, and higher performance, benefiting from this sales reached a historic high for the segment in the second quarter. Due to the improved supply of logic semiconductors, it has become possible to increase the production of large die size and higher resolution sensors, which means that we can proactively introduce high-value added sensors. We expect image sensor shipments in the third quarter to end in December 31 to remain at a high level, but we also believe that we need to consider the risk of further economic slowdown in the end-user product market. Therefore, in the current forecast, we have incorporated additional risk into our sales and we have made a conservative forecast. Regarding inventories, we are continuing to utilize existing production capacity and manage strategic inventories or optimize the timing of future capital investment. Inventory at the end of the quarter was up about 33% year-on-year, which we believe is fully in line with our sales growth. From the next fiscal year onwards, we expect the trend of increasing adoption of large die size and higher resolution centers in the high-end smartphones. At the same time, the automotive business is also steadily expanding, and we have great expectations for the business to grow. Last, the financial services segment. FY22 Q2 financial services revenue decreased 70% year-on-year to ¥304.5 billion, mainly due to the deterioration in net gains and losses in investment in the separate accounts at Sony Life Insurance. Operating income at Sony Life increased a significant ¥11.6 billion year-on-year, to 54.6 billion yen, primarily due to the impact of the recovery of the funds that were subject of unauthorized withdrawal. The FY22 financial services revenue forecast is 1 trillion 310 billion yen, a decrease of 130 billion yen from the previous forecast. And there is no change from the previous forecast for the operating income. To summarize the earnings announcement, our biggest regret is that we have made a significant downward revision to the operating income forecast of the G&S segment for the second consecutive quarter in a row. As CFO, I take this very seriously and I view improving the accuracy of our earnings forecast. On the other hand, when looking at the entire group in the first half of the fiscal year, we think that each business responded swiftly to major changes in the business environment. Furthermore, the results of the investment we have made in the music and I and SS segments have made up for the weakness of G and NS segment, and the cost structure of each business segment has balanced out the significant fluctuations in foreign exchange rates, and therefore we are able to strengthen our resilience. We anticipate that... The business environment will become even more severe from now into the next fiscal year, and each business is taking steps to prepare for this. In addition, while facing these issues in the short term, we will also work to implement measures to grow over the long term. This concludes my remarks. Thank you.