Sony Group Corp

Good afternoon, ladies and gentlemen. It is now time to start this Sony Group's QAFI 2023 Consolidated Financial Results presentation meeting. I am Okada of the Corporate Communications. I would like to first introduce the speakers today, the President, COO and CFO Hiroki Totoki. Senior Vice President, in charge of the corporate planning group, D&I Promotion, also support financial service and entertainment segment, Naomi Matsuoka. And then Senior Vice President, in charge of finance and IR, Sadahiko Hayakawa. So those three will present the Q1 FY2023 consolidated financial results throughout the FY2023. And there will be question and answer session and we plan to have a 70 minutes of the session. Thank you. First speaker is Mr. Totoki. So the speakers today are Matsuoka and Hayakawa. And then toward the end, I'd like to make a summary comment. So first speaker, Hayakawa-san. Matsuoka and Hayakawa will present the consolidated results. Starting from FY23Q1, Sony has adopted a new accounting standard, IFRS 17, new standard pertaining to insurance contracts. The annual results for the same quarter of the previous fiscal year and previous fiscal year that will show today are presented. After recalculation, based on the new standard, we will explain the details later in the financial services segment part. Consolidated sales for the quarter increased a significant 33% compared to the same quarter of the previous fiscal year year-on-year to ¥2,963.7 billion. Consolidated operating income decreased ¥111.8 billion year-on-year to ¥253.0 billion primarily due to an ¥84.7 billion decrease in operating income of the financial services segment. This decrease in operating income of financial services segment was primarily due to the impact of the recalculation of the previous fiscal year's results, resulting from the application of the new standard and absence of a gain on the sales of real estate recorded in the same quarter of the previous fiscal year. Adjusted EBITDA decreased 90.6 billion yen year-on-year to 406.2 billion yen. Income before income taxes decreased 73.2 billion yen year-on-year to 1,276 billion yen. A net income attributable to Sony Group Corporation shareholders decreased 43.5 billion yen to 217.5 billion yen. Results by segment for the quarter are shown on this slide. Next, I will explain the full-year consolidated results forecast for FY23. The forecast for the full year is... 12 trillion 200 billion yen for sales, an increase of 700 billion yen from the previous forecast, 1 trillion 170 billion yen for the operating income, no change from the previous forecast, and 1 trillion 750 billion yen for adjusted EBITDA, no change from the previous forecast. The forecast for the consolidated operating cash flow excluding financial services Segment is unchanged from the previous forecast. The assumed exchange rates have been revised to approximately 135 yen to the US dollar and approximately 146 yen to the euro. The FY23 results forecast by segment is shown here. Now I will move on to an overview of each business segment. First is the games and network services segment. FY23 Q1 sales increased a significant 28% year-on-year to 771.9 billion yen primarily due to an increase in sales of third-party software, an increase in sales of PlayStation 5 hardware, and impact of foreign exchange rates. Operating income decreased 3.6 billion yen year-on-year to 49.2 billion yen primarily due to an increase in expenses, including the acquisition-related expenses of 16.6 billion yen despite the positive impact of higher third-party software sales adjusted to IBDA increased 5.7 billion yen year-on-year to 75.9 billion yen. FY23 sales are expected to be 4 trillion, 170 billion yen, an increase from the previous forecast of 270 billion yen. Operating income is expected to be 270 billion yen, no change from the previous forecast, and adjusted OIBDA is expected to be 375 billion yen, an increase of 10 billion yen from the previous forecast. Although we upwardly revised the sales forecast for third-party software, which is performing well, we have incorporated the deterioration in the profitability of PS5 hardware, mainly due to the changes in promotions by geographic region and the sales channel mix. Thank you very much. Gameplay time during the quarter was only 2% higher year-on-year and we see the year-on-year growth in software sales as being driven mainly by a considerable increase in spending per play hour by the expanding PS5 user base. PS5 hardware sales were 3.3 million units, a significant increase of 38% year-on-year. This amount is somewhat less than the expected progress toward our fiscal year sales target of 25 million units, but due to the promotion begun in July, we are seeing an improvement in the momentum of sales. We have positioned the accelerated penetration of PS5 hardware as one of the highest priorities in this fiscal year, and we will try to work steadily to implement necessary measures to achieve a hardware sales target of 25 million units. Towards the end of the calendar year, the first-party title Marvel's Spider-Man 2 and major third-party titles are scheduled to be released as well, and we expect that the entire game industry and the PS platform will be greatly energized. Next is the music segment. FY23 Q1 sales increased a significant 16% year-on-year to 358.2 billion yen, primarily due to the increase in streaming sales and impact of foreign exchange rates. Operating income increased a significant 12.4 billion yen year-on-year to 73.4 billion yen, primarily due to the impact of the increased sales and the recording of a measurement gain of 6.3%. From making an equity method affiliate, a consolidated subsidiary adjusted to OIBDA increased 8.2 billion yen year-on-year to 82.9 billion yen. Profit contribution from visual media platform was just under 10% of the operating income of this segment. FY23 sales are expected to be 1 trillion 490 billion yen, an increase of 80 billion yen from the previous forecast. Operating income is expected to be 280 billion yen, an increase of 15 billion yen from the previous forecast, and adjusted OIBDA is expected to be 335 billion yen, an increase of 10 billion yen from the previous forecast.

Streaming revenue for the quarter continued to grow, up 12% for recorded music and 18% for music publishing on a U.S. dollar basis. In recorded music, we are continuing to deliver hits at a high level. During the quarter, 38 of our songs on average ranked in the Spotify Weekly Global Top 100 songs. More than 70% of songs listened to in the music streaming market in the U.S. are catalog songs that were released more than 18 months ago. So creating continuous hits in the short term simultaneously leads to an enhancement of future catalog and increase in sales and market share over the mid to long term. At Sony Music Entertainment, we have doubled the number of creative personnel in the last five years, and the number of artists producing songs for streaming worldwide has increased 35%. As a result, current market share in the U.S. over the four years through last fiscal year has risen from 21% to 27%. and sales and operating income for the Sony Music Group, which includes music publishing overseas, have increased significantly at CAGRs of 17% and 24%, respectively. In addition to this continuous investment in artists and labels, we aim to achieve stable growth that outperforms the market by expanding our business in new areas, such as rapidly growing emerging markets and social media. In the domestic music business, Yoasobi's TV anime theme song, Idol, surpassed 300 million streams, the fastest song to reach this total number of streams in history, according to Billboard Japan's study. It held the number one spot for 16 consecutive weeks in the total domestic song chart. This momentum is spreading overseas, and the song has become a global hit and the biggest J-pop hit worldwide. reaching No. 7 on Billboard's global hit chart. With the expansion of the global anime market as a tailwind, we expect that overseas expansion of artists which SMEJ has been focusing on will accelerate further. Next is the pictures segment. FY23 Q1 sales decreased 6% year-on-year to 320.4 billion yen, mainly due to a decrease in deliveries on television productions and the impact of fewer releases of temple films in the previously. in the previous fiscal year in motion pictures. Operating income decreased a significant 34.7 billion yen year-on-year to 16 billion yen primarily due to the impact of the decrease in sales and increase in marketing expenses in motion pictures adjusted OIBDA decrease 33.4 billion yen year-on-year to 28.5 billion yen. FY23 sales are expected to be 1 trillion 470 billion yen, down 50 billion yen from the previous forecast. There is no change to the forecast for operating income and adjusted OIBDA. Spiderman, across the spider verse, which was released theatrically, theatrically in June, has become a huge hit, with box office revenue exceeding US$680 million worldwide as of August 7th, making it our highest-grossing animated film ever. With regard to bringing PlayStation IP to video, the live-action drama Twisted Fate The metal was launched on the Peacock streaming service in the U.S. in July, and the new movie, Gran Turismo, is scheduled to be released in theaters in the U.S. on August 25th. Regarding Crunchyroll, the number of paying subscribers surpassed 12 million in July, driven by the exclusive distribution of the television anime Demon Slayer. Kimetsu no Yaiba sold a Smith's Village arc, which started in April. And our anime business is steadily growing in popularity. a multi-faceted way with overseas distribution of the anime film Suzume no Otojimari and the strong sales of mobile game Street Fighter Duel. Although it is unclear when the strikes in Hollywood will end, we aim to work with Alliance of Motion Picture and Television Producers to negotiate a resolution with... unions as soon as possible so that we can restart normal production activity. Next is ET and S segment. FY23 Q1 sales increased 4% year-on-year to 571.8 billion yen primarily due to impact of foreign exchange rates despite a decline in smartphone and television sales. Operating income was 55.6 billion yen An increase of 2.1 billion yen year-on-year, primarily due to cost reductions in televisions, despite the impact of decreased smartphone sales. Adjusted OIBDA increased 3.9 billion yen year-on-year to 80.9 billion yen. FY23 sales expected to be 2 trillion 430 billion yen, an increase of 50 billion yen from the previous forecast. There are no changes to the forecast for operating income and adjusted The market environment for major product categories in the current quarter continued to be the same as the previous quarter, with televisions and smartphones facing severe conditions, while the market for digital cameras, headphones and other products remained strong. In each category, we are running our operations so as to respond to changes in the market environment, and we were able to secure stable profits across the entire segment. Inventory levels have improved significantly year on year, mainly for television due to the thorough management from production to sales, and we are managing them at the profit level. As the business environment for televisions and smartphones is expected to continue to be severe, We will pay close attention to cost and inventory control. We also plan to proceed with early reaping of income in the digital camera space by keeping up with recent strong demand. We have introduced the appealing new products that you've seen here, and we are focusing on securing the stable profits by continuing to enhance our product appeal. Next is I&SS segment. FY23Q1 sales significantly increased 23% year-on-year to 292.7 million yen, mainly due to high sales of image sensors for mobile products and the impact of foreign exchange rates. Operating income decreased 9 billion yen. year-on-year to 12.7 billion yen, primarily due to an increase in expenses such as depreciation and amortization expenses, despite the positive impact of foreign exchange rates and the effect of increased sales. Adjusted OIBDA increased 2.7 billion yen year-on-year to 70 billion yen.

Full FI23 sales are expected to be 1,560 billion yen, down 40 billion yen from the previous forecast. Operating income and adjusted OIBDA are expected to decrease 20 billion yen from the previous forecast to 180 billion yen and 425 billion yen respectively. Recently, the smartphone product market is worsening compared with our expectations due to a delayed market recovery in China, a prolonged slump in Europe, and a slowdown in North America. In a previous forecast, we assumed a gradual market recovery from the second half of the current fiscal year, but we have postponed that to the beginning of the next calendar year or the next fiscal year and have incorporated this revised timing into our sales forecast. In addition, in light of such product market conditions, smartphone manufacturers are making even greater further adjustment to their parts procurement and this is having a significant impact on the second quarter following on the first quarter. In addition to smartphones, the impact of the slow economic recovery in China primarily in image sensors for industrial and social infrastructure is noticeable and we have lowered our forecast. With respect to the increase in cost associated with the launch of mass production of new products for smartphones, we have reflected the latest production situation and have incorporated additional costs. However, production is gradually stabilizing, and we do not think that costs will continue to increase significantly going forward. On the other hand, the trend toward larger die-sized image sensors being adopted by Chinese makers in their new smartphone products in the second half of the fiscal year is becoming noticeable, not just in flagship and high-end phones, but middle-range phones as well. There's no change to our view that the trend toward larger mobile image sensors will drive the overall growth of the sensor market, which will grow at average annual rate of around 9% until FY2030. We plan to continue to implement measures from a mid- to long-term perspective as well, such as strengthening technology development capabilities and securing production capacity so that we can steadily capture growth opportunities when market condition recovers. Last is financial services segment. As we said at the beginning, Sony has adopted the new accounting standard IFRS 17 starting this fiscal year. First, I will explain the impact of the adoption of the new standards focusing on the important points. For details, please refer to page 15 of the handout. Under the new standard, financial services revenue decreased primarily because the portion of insurance premium revenue amounting to surrender value that used to be recorded as revenue is no longer recorded as revenue. In addition, under the new standard, the amount of liability increase or decreases depending upon market fluctuations due to insurance contract liabilities being re-evaluated based upon the latest financial variables such as interest rates at the end of each quarter. The increase or decrease of such liabilities related to minimum guarantee of variable life insurance is recognized as profit or loss and impacts operating income. Next, I will explain the full year results of the previous fiscal year recalculated based upon the new standard. Financial services revenue decreased by 39% from the previous standard to 889.1 billion yen, mainly due to non-recognition of surrender value. Operating income increased by ¥94.2 billion from the previous standard to ¥318.1 billion as a result of a significant decrease in insurance policy liabilities after recalculation, primarily due to the rise in ultra-long-term interest rates in the previous fiscal year and the recognition of profit due to that decrease. Because hedging operations meant to contain the impact of profitability of market fluctuation, were undertaken in the previous fiscal year in accordance with the previous standard, a significant difference arose as a result of the recalculation from this fiscal year. We have transitioned to hedging operations in accordance with the new standards. Now, I will explain this segment's performance in the current quarter on a year-on-year recalculated basis. Financial services revenue increased a significant 215% year-on-year to 681.4 billion yen, mainly due to a significant improvement in net gains and losses in the separate account at Sony Life, which benefited from a rise in stock prices in and outside Japan. There is no difference between the new and previous standards when it comes to the impact market fluctuations have on gains and losses in the separate accounts. Operating income decreased a significant ¥84.7 billion year-on-year to ¥54.5 billion mainly due to the fact that the impact of market fluctuation was controlled as a result of transitioning to hedging operations based on the new standard and due to the fact that there was a gain on the sales of real estate in the same period of the previous fiscal year. Adjusted OIBDA decreased ¥84.2 billion year-on-year to ¥61.4 billion The FI23 financial services revenue forecast is 1,320,000,000 yen, an increase of 450,000,000 yen from the previous forecast reflecting the result of the current quarter. There are no changes to the forecast for operating income and adjusted OIBDA. As has already always been the case, the forecast does not reflect the impact of market fluctuations from the second quarter onwards. In addition, we expect the insurance service revenue result of Sony Life to continue to stably grow in line with the expansion of policy amounting force. Finally, I would like to summarize. everything. Business areas such as entertainment and image sensors which we have positioned as growth areas are reaching opportunities for growth over the mid to long term and we aim to grow through the unique competitiveness each business has in its area. On the other hand, since the operating environment this fiscal year is uncertain and there are many risks, we are operating the businesses with an emphasis on risk management. In the hardware business of ET&S, INSS, and GNNS, We are responding primarily to the stagnation of the Chinese economy, the slowdown of the economy, mainly in Europe and the United States, and geopolitical risks. While in the pictures business, we plan to focus on various issues such as the strikes in Hollywood. We have reincorporated the expected impact of these factors and countermeasures into our current forecast. Inside Sony, we have begun to discuss the next mid-range plan which begins next fiscal year. while looking to the potential market recovery from next fiscal year as an opportunity and preparing to reach our next stage of growth. That's all for my presentation.