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.

Thank you very much. Totoki Matsuoka and Hayakawa made the presentation. Now... At 16.25, we would like to entertain the questions from the media. At 16.50, we would like to entertain questions from the investors and analysts. And each session consists of about 20 minutes. Some people have already pre-submitted the questions, so please link your phone to that registered phone number. And then as to this way to ask questions in some of the matters of consideration, please refer to our invitation letter. So please wait for a few minutes before we resume the session. Thank you. Thank you very much for waiting. We will now like to have the session to entertain questions from the media. The speakers are the same as the previous presenters, the three people on the screen. So let us start to entertain questions. We'd like to ask you to keep your questions to just two questions per person. So please push the asterisk and then push number one after that if you have a question. The first question is from the Furukawa-san from Nikkei. Please go ahead and ask a question. I hope you can hear me. Furukawa of Nikkei newspaper. Thank you very much for this opportunity. I have two parts of questions. The first question is about your financial results, as Mr. Tadoki explained to us. The situation is maybe leveling off, like games and semiconductors and other issues. But from the Q1, of course, you are in the middle of that phase, but Mr. Tadoki, What is your vision for the growth? Which area and segment are likely to grow more? Do you have a vision on this growth scenario? That's my first part of the question. And my second part of the question is about the situation, the strikes. To what extent that the movie, new film release might be delayed because of the U.S. strikes of the actors and others? so that in the generative AI is linked to this problem because that might have adverse impact upon music and films and pictures. Some of the content assets might be undermined by the potentially by the AI. So what do you think of that potential impact by AI? Thank you very much for your question. As to your first question, So in the next fiscal year and the growth scenario that I have in mind, actually in this mid-term business plan, the content IP, DTC, as well as technology investment, as well as some of the diversified business segments should have an intergroup collaboration. Those are promoted as a result. In the last three years, we accumulated that $1.9 trillion of capital investment equipment. M&A needs $1.8 trillion for that strategic investment. So gradually, we made progress. For the mid to long term, we have already planted the seeds for the future growth potential. that's the first point as to the collaboration within our group companies and segments playstation game ip will be used the rust bus hbo that actual the drama to be production but that became a big hit in 2022 that in february uncharted was released in the theater and those were success in following those successes numerous projects are ongoing therefore So there's a strong momentum now, like together with the music business, this kind of entertainment business, three segments of the entertainment business in the next mid-term plan that we expect a big growth, a sufficient growth to be achieved. As for the INSS segment, for this fiscal year, of course, there could be maybe some stagnation or we are leveling off the growth to a certain extent. Of course, the revenue, the sales are going up in terms of profitability. That's slightly some area where we are not fully satisfied. So we must secure the profitability in a growth scenario. That's something we have to implement in the mid-term, the plan. And that's our challenge and priority. In 2024 and afterwards, semiconductor market situation and maybe the market situation improves, especially in China, like recovery in Chinese smartphone market is expected. But we have to be prepared fully so that we will be ready for the next term. As to respond to your second part of the question about the strike-related issues. And it's not directly just linked to the strikes, but of course the generative AI has an adverse impact, and I think that's something I'd like to respond to you. It's not only affecting these films and pictures, the game production, the music production and creator support, or the anime, that the multilingual, the... The translation and so forth could be supported by AI. So the stakeholders have the rights and copyrights and that should be respected in introduction of AI and so on. Like music copyright, it might be... violated so we have to protect the IP as well as the artists and content related issues must be solved just not by Sony standalone but we have to have the entire industry involved in order to discuss to identify the future solution that's my thought on this thank you so we'd like to move on to the next question Nishida-san who is a freelancer please go ahead

Nishida-san, please. Very difficult to hear your voice. I'm very sorry, but I cannot hear your voice. Can you repeat your question once again? Can you hear me? Your voice is not clear. Your voice is not clear, unfortunately. Can you just put the microphone a little bit more distantly? I am very sorry. Since the voice is not clear, And for the time's sake, we'd like to move on to the next person to ask questions. Umegaki-san from Toyo Keizai, please. Umegaki from Toyo Keizai. Can you hear me? Yes, I can hear you. So please go ahead. I have two questions. And first question is that, as was already mentioned, the three areas of segments of entertainment, the total income, the exceeds 54%, the three segments combined, it is still very high. So you talked about next MLP. What the percentage you would like to reach for the total income of those three segments. And so now, the China slowdown, and you have already mentioned in INSS, and for other segments, what is the impact? For instance, for the consumer spending has been quite weak in China. So what is the impact on overall business of Sonic Group? Thank you very much for your question. And so I would like to answer the two questions. And as for entertainment, three segments combined, the operating income What is our plan to reach the certain percentage? And we do not have any target in terms of the percentage, but three segments, entertainment segments combined, and also INSS, where the growth is expected. So comprehensively, I believe that the percentage or the portion of the profit earned by those segments will increase. And the second question is, other than INSS, what is the slowdown of Chinese economy on other segments? And for the consumer spending, the ETNS will be affected. The TV and smartphones are areas which is severely affected. But currently, as far as FY23 is concerned, the slowdown in China, since there is great concern about that, so our plan is made quite conservatively, and therefore, management itself has been going quite well. But on the other hand, as for the camera, the market, which is performing quite well, and under COVID-19, The activities have been restricted in the past. But there is a very good demand in this area. So we would like to reap the profit as early as possible in this area. That's all.

Now we'd like to move on to the next question. If you have any questions. Anybody? Please press asterisk followed by number one. Abe-san from Nikanko, Industry Daily. I'm Abe from Industry Daily, Nikanko. Can you hear me? Yes, I can. Thank you. Related to the question asked earlier, ET&S segment, digital camera is the area that I have questioned. the sales unit increased which resulted in increased profit by regions. Can you explain, for example, year-on-year basis growth rate? Can you enlighten me? In addition, In this area, Chinese market, you said that there is robust market demand in China. Going forward, do you expect robust demand will continue in the Chinese market? What is your view of the Chinese market and the demand in the market in China? Thank you very much for your question. Hiti and segment. digital camera increase in the number of units sold and what is the breakdown by regions was your question. In the first quarter, camera body and lens, both are doing well. By regions, China and Asia, sales has been very robust. and Europe and US, the competition with others is getting more severe. So in some areas there is some slight decline in the share but we are making additional investment such as sales promotion and we are expecting our share to increase going forward. We should not be optimistic and we have to be prepared for the possible slowdown of the market and we have to invest for new products and also we'll be controlling both production and sales. Thank you.

We'd like to entertain next question. Kyodo Tsushin, Endo-san, please. Endo from Kyodo Tsushin, I hope you can hear me. The sales are going up because that after the COVID-19, there's maybe the percussion after that, that for the people traveling again that they like to use some more digital camera. Is that a new demand? The link to the COVID-19 and the pandemic, how the demand is increasing after the COVID-19 pandemic? Thank you for the question. As I said, there's maybe a reaction after the COVID-19 pandemic. Let's say at one time, demand was down. That's a fact. So people now have the pent-up demand. So last year, already that the people already bought lots of cameras after that. So the strength of demand is still persistent, which is a great pleasure. We have a continuing demand from a macroscopic standpoint that the traveling demand is going up. People spend more money on traveling, vacations and so on, I suppose. So that might have a good impact on that demand. Thank you.

So we'd like to move on to the next question. Those are the questions. Please press asterisk and then press number one. Nishita-san, who is a freelancer, please go ahead. Can you hear me? Yes, I can hear you. Please. I have two questions. And the first point is about game business. The third party, the application has increased. How do you assess this? Do you think that this trend will be here to stay? Or do you think that you need more efforts to promote this? And so that is related to that. In your document, PlayStation Plus, the number of users, there is a change in the disclosure conditions. So is there any reason for that? And secondly, about pictures, particularly for drama, the streaming service overseas, is there any other impact of the fluctuation of the overseas market in this area? Thank you very much for your question. The gaming network service, You are talking about the increase of third party titles and I think your question is about our assessment on that. And during the first quarter, The new title from the third party, we have very strong ones. And so in a software, overall, there has been increased revenue from this. So, of course, on our part, the strong titles, the third-party titles, should continue to prosper. And as a platformer, we are very happy about it. And first-party titles... And our new titles, because of the release timing, there has been the reduced sales year on year. But not only the third-party titles, but we'd like to make greater efforts for the first-party titles. And your second question is about PS+. and change of the assumption about disclosure conditions. And about PS Plus, we just ceased to announce, reveal the disclosure, and also there has been some expansion of the disclosure. So Matsuoka-san will cover this point. And FY22, in June, there was renewal. And after that, the PS Plus in addition to the greater number of the subscribers and move to the more attractive titles with the increase in up. So we have been expanding the PS Plus business, so extra and premium. We would like to continue to promote the shift in order and in order to do so we'd like to increase the service appeal and on this basis we are able to confirm the growth through the network services expansion. And so we stopped disclosing the number of subscribers as a result. And what are included in others? That is software sales other than PS Plus. They will be newly released. So in this area, the multi-platform will be covered, including PC. So we'd like to promote this. So with additional disclosure, I hope that we can give the update about our progress. And about the pictures. In your second question, drama streaming, is there any impact of overseas market? And so in overall, the disenvironment surrounding this area is that in overseas theatrical market, there are the many tentpole films released. So they become very active. But as a result of strike, In the major studios, the productions have been actually delayed in major studios. And so there is some concern about advertising. So the theatrical business, after July, we have to pay close attention. And there is the competitive environment among the streamers. And so the contents investment of those players may not... decrease immediately but as a result of the strike there will be the change of the schedule about the production and therefore the future development since impact will emerge from now we'd like to pay attention to that. Thank you.

Time is running short, so the next will be the last question. Because of the constraint of time, I'd like to ask the person to limit to one question. Tsutsumi-san from Nikkei Newspaper, please. Tsutsumi from Nikkei. Can you hear me? Yes, we can. Please. One question. PS5 sales. You said that the actual is lower than the forecast. What is the reason for lower than expected sales? The sluggish personal spending or the users went to other game hardware? Can you please explain the reasons? Thank you for your question. First quarter sales was 3.3 million units. slightly lower than the expectation. But from last year, 38 percent increase. We also believe that the demand is strong and promotion itself was rather limited. In view of the profitability, we limited promotion activities. And slightly weak, so starting from July, in some regions, we have started promotion on full-flight basis. So as a sell-through, we are looking at the sell-through, and we are seeing good signs already. So in view of the seasonality of the sales, the first quarter slightly less than the target, but On a fiscal year basis, especially calendar year, year end, calendar year end, by that time we believe that there is ample possibility for us to catch up. Especially toward the third quarter, we will be increasing the number of sales, and it's important to increase the sales. And we will aim to achieve the target. Thank you.

Thank you very much. Now it is time for us to end this media Q&A session. Thank you very much. Thank you. So we'd like to soon start the Q&A session for the analysts and investors. Please wait for a few minutes. Thank you. Thank you very much for waiting. Let us now start this Q&A session for the investors and analysts. I would like to serve as the MC. I am Kondo of the finance and IR group member. The speakers are the same as the media session. The photos are shown on this PowerPoint slide. So we'd like to now entertain questions and comments from the analysts and so on. Two questions per person, please. When you have a question, please push the asterisk and then push number one. First, from the Mokhanstani MEUFG, Ono-san, please. Thank you for this opportunity. I'm Ono of Morgan Stanley. My question is about games, and the other one is INSS, so I have two questions. First of all, that throughout the year that you have the annual plan, for gaming network systems in the 207 billion yen is something that, 270 billion, so that it actually, that it's only 10 billion, so that software, of course, the third party is the focus, so... You had an analysis of flat but you have raised the plan and so there might be some impact, maybe the upside of this sales figure. However, this is only that level of the profitability you achieved. So maybe hardware promotion was accumulated and maybe that's the result. But what is the size and scale you're expecting? Do you have some hint for the total scale you'd be achieving? The second part of the question is, previously you showed the outlook for the downward trend. lower the revenue and income so that the production costs are very high. And that is a very challenging situation, which the expense is regarded as an estimate to be very high. On the other hand, China is another place where they meet the low range of the smartphones that the price reduction had to be implemented in China. So the additional 20 billion, the downward adjustment was done. But what is the change taking place to influence that balance? Those are two possible questions. Thank you very much for your question. First of all, about the game and network service related question. Throughout the year, what is the annual plan? annual plan? How should we interpret our annual plan? Maybe that's the gist of your question. But in terms of profit, profitability, what you said is right. Third party software, The good sales in the first quarter is reflected in there. In the second quarter and afterwards, the sales plan was adjusted upward. So that is one impact. And the other one is the foreign exchange rate that we have revised it to the weaker yen situation. So that would push up this sales. On the other hand, what about operating income? The third-party software sales are going up and then, of course, the profit will be pushed up by that. But the first-party titles, the sales launch was delayed, postponed, and there's some postponement from this fiscal term to the next term. So that was taken into account in that adjustment. Another factor is the promotion and other activities. There's no major change to the promotion plan. However, some part of that, because there was original channel mix that is direct sales versus the so-called the other sales channels and that kind of sales. So that's the sales channel mix. Compared to our original forecast, rather than direct sales, I think other ones going through the retail shops and the dealers, I think that proportion is likely to increase more. So we have to pay margin for that. So that margin has to be taken into account in the change to sales channel mix. That part means how to calculate and estimate this expense there, and we are quite conservative. But the 15 million units, 25 million units is something that we have set as a target, and we would like to really achieve that target. And our intention is taking into account in this revised plan. Another factor, the second part of the question about INSS-related question. Of course, there is some production cost increase that was impacted and in China the smartphone momentum is being changed. But these are two factors. which have to be considered and taken into account. That is to say, as of April, we announced the outlook, and that's a change. The production expense compared to the original plan has increased slightly. So that increased production cost was taken into account. But now, I think we have considered fully all the potential increase. And in China... As of April, compared to the April outlook, the current outlook in the smartphone market recovery is more likely to be delayed. So that was also taken into account. So these are the factors which were...

This quarter, that will be higher than year on year. But the market condition is worse than your April forecast. So is there any change about your strategy? Well, the reason for the march, FY23, why you are quite optimistic. And for pictures, because of negotiation, it's not easy for you to reveal your strategy about the pictures. And so strike, how to deal with strikes of writers and the actors, how to incorporate the impact into your financial results at this moment. Thank you very much for your question. And first is INSS. The first quarter, at the end of first quarter, the inventory level And about it, if I may explain, as a result of sales expansion, that has increased. And also, there is some downside of the downward revision of sales during the first quarter. And for the future outlook, logic and sensor, strategic inventory will decline towards the end of the year. But inventory amount itself, the sales has been expanding. So, at the end of FY23, compared to the end of FY22, it is expected to increase. There is no change in this forecast. But I should say that basically as a result of sales expansion, this is increased. As a result of sales increase. And so it does not mean that we have excessive inventory. And we have to pay close attention to the quality of inventory. But to a certain extent, we'll keep inventory under control. And we have to effectively utilize the equipment and have appropriate timing for the investment. And what is the reason we are optimistic about FY24? And the reason is that the demand for the image sensor increases. We do not think that we make wrong assumption about it. And the issue is that pertains to the manufacturing cost or excessive the inventory of our competitors' inventory in China. So as a result, decline of ASP. So that has adversely impacts the profitability. And as for the business, the volume itself, our forecast is not quite incorrect. And so that is the reason we are quite optimistic about FY24. And your second question about the pictures. About this fiscal year, under our assumption, We have actually incorporated our assumption into the forecast. And for the details, very difficult for me to share the details with you. But in terms of profitability, the impact on this fiscal year's business is relatively limited. Because business turnover is long for the motion pictures industry. And therefore, that is the reason that we forecast this way. Thank you very much for your answers.

Thank you, Hirakawa-san. Moving on. J.P. Morgan Securities. Ayada-san, please. Thank you. Ayada from J.P. Morgan. I have two questions, if I may. The first question is about games. Earlier, full year, profit increase was explained. The first quarter, profit change. Can you elaborate on the first quarter? Compared to last year, 3.6 billion decrease and FX impact about 6 billion decrease. In your explanation, you talk about Bungie expense is negative 16.6 billion and positive side, Software increase, add-on point, about 80 billion yen. So the software increase and there's contribution to profit. The change of the sales channel was explained as well. On the other hand, the profitability of software seems to be deteriorating. In the current quarter, the sales of software is large, but mainly older titles are sold. So the content of the software sales, can you explain that? That's my first question. My second question, I and SS, full year. downward revision, 20 billion and the breakdown of this downward revision with the effects about 50 billion positive I believe. So negative side, around 70 billion impact is there. On the negative side, the breakdown, The sales forecast is a revised downside, and this is about half of the total, about 30 to 40 billion. And then the increase in the expenses of mass production launch, about 30 to 40 billion. So the magnitude of the increase in expenses, can you please elaborate? These are my two questions. Thank you very much for your questions. Your first question. First quarter, profit increase or decrease and the breakdown for that. Profitability itself, basically, is not changing so much according to our analysis. First quarter, the factor for the first quarter, first M&A related expenses, acquisition related expense and then Bungie acquisition and this is on a full consolidated basis now. So the cost related to full consolidation of Bungie. And the first quarter, the breakdown, I have not explained, on the fiscal year, about 68 million. M&A related expense and expenses for full consolidation combined, we are looking at that number for your reference. And then, your second question, INSS. As you pointed out, the impact of the reduced revenue and the expenses related to launch of the mass production of new product, these are negative factors, and the positive factor is exchange rate, as you pointed out. The breakdown, we are not disclosing the breakdown, so it's very difficult for me to explain, but I would say image sensor for mobile decrease in revenue and industrial social infrastructure image sensor decrease in revenue. So not only for the mobile, but image sensor itself is impacted by reduced revenue. That can be a hint for you to understand. That's all. Thank you.

Thank you very much. We have a short remaining time, so just one question per person from now on, please. From Citigroup is our son, please. Thank you very much. It's our city group securities. I have a question about semiconductor related question. The inventory is to be lowered, reduced, and then the production expense, I think related to this production yield, but I think that will be improved, I understand, in the future. and demand is likely to go up. There are three factors affecting the Q2, and later on those are the important factors. If you separate this Q2 and the second half, I think the semiconductor is likely to improve markedly, but still the figure is still so low, or despite this fact. Maybe the improvement or recovery might be delayed slightly. So during the second half, would that happen markedly? So could you please tell us the factors and background factors for your forecasting analysis? Thank you for your question about INSS. Of course, during the second quarter and the second half, when you split the two analysis, as to the second quarter, there's a seasonality influence. In other words, the demand is weak in Q2. So there is emphasis on this second half, so that the second half, I think, is emphasized mostly. That's how to read it. Thank you, Ezawa-san.

So from Mizuho Securities, Nakane-san, please. Nakane from Mizuho Securities. I have one question. for the game, PS5, now the sales is a bit weak. But in the U.S. and Asia and Europe, what is the situation? And can you just share with promotion, 25 million is the target of unit sales, according to Totoki-san. And so current exchange rate is soon to continue. There is the gap of exchange rate. So I believe that for that portion, there is deterioration of profit. If the exchange rate stays this way or if the depreciation of yen install base is important. So you put more emphasis on install base than the current profitability. Or PS5, when you think about future profitability, if there is a major change in foreign exchange rate, you have a plan to change this. Now, 135 yen against the dollar, and do you think that this is a conservative estimate? Thank you very much for your question. For PS5, gaming network service segment, PS5, and currently it's a bit weak. And what is the situation by regions? Easier question. And by regions, currently in Japan, the sales is strong, and the same holds true for Asia. And about North America, the response to the promotion is quite favorable. And United Kingdom, it's a bit weak, but Europe as a whole has been performing quite well. And that seems to be the current response. And our target of 25 million units, And so in light of the impact of foreign exchange rates, even we sacrifice profitability whether we will put emphasis on install base. That seems to be the heart of your question. And currently, of course, expansion of install base is important, so we will continue to make efforts. But we do not make any extreme measures in order to achieve this. So is the strength of demand and of course a certain level of profitability and expansion of install basis. So those three factors must be well balanced. So the extreme promotion as a result of extreme the promotion even We acquired the subscribers. Very difficult to follow that trend. Therefore, we would like to use data-driven method approach to make it appropriate level. Thank you, Nakane-san.

Next person will be the last person. SMBC Niko Securities, Katsura-san, please. Katsura from SMBC Nikko Securities. Can you hear me? Yes, we can. Thank you. I would like to ask a question on a consolidated operating cash flow excluding financial services segment. Full year, 1.25 billion remains unchanged. Significant improvement as compared to last fiscal year. First quarter... Cash flow is negative, but as compared to last year, slight improvement. And going forward, how are we going to look at this? Can you please explain? That's the background. Inventory, ET&S, the inventory level is controlled, as you have explained. First quarter, G&S and SS, slightly heavy inventory. Other factors? Full year operating cash flow is maintained. And as compared to three months ago, what are the plus and what are the minus, negative factors? Thank you. Excluding financial services, consolidated cash flow. Hayakawa-san, please. I would like to respond to your question. First, first quarter operating cash flow is minus 80.7 billion yen. Year on year, you have made a comparison, but it's compared year on year, positive by 90 billion. First quarter, then it is negative. The key point, the PlayStation 5 inventory and INSS, first quarter and second quarter, inventory has built up slightly so based upon these cash flow level has come down but This is the working capital, especially PlayStation 5, toward the third quarter selling through, which results in cash returning. That is the assumption. So ultimately, this fiscal year, excluding financial services, 1.25 trillion yen is our forecast, which remains unchanged. Basically, for the cash flow, working capital, especially game, PlayStation 5, and iOS inventory, In the first quarter, these will have impact. That's our analysis. Thank you. Thank you very much.

So this concludes today's QFI 2023 Consolidated Financial Results presentation on behalf of the Sony Group Corporation. I would like to again thank you all very much for your participation.