Sony Group Corp

The time has come. We'd like to now begin FI 2023 Q2 Financial Results Announcement for Sony Group Corporation. I am Okada, Corporate Communications. I will be serving as Master of Ceremonies. Let me introduce the people on the stage. First, Mr. Hiroki Totoki, President, COO, and CFO. Naomi Matsuoka, Senior Vice President, Corporate Planning and Control, lead of Group DE&I, support for finance, business, and entertainment area. Sadahiko Hayakawa, Senior Vice President in charge of finance and IR. Today, three persons will be explaining the consolidated results for the second quarter, FY23, and full-year consolidated results forecast, after which we are going to have Q&A session. We are scheduled to have a total of 70 minutes. Todoki-san, the floor is yours. Today, after Ms. Matsuoka and Mr. Hayakawa explain the contents shown here, I will summarize the entire earnings briefing. Mr. Hayakawa, please go ahead. From here, Miss Matsuoka and I will explain. Consolidated sales for the quarter were 2,828.6 billion yen, an increase of 8% compared to the same quarter of the previous fiscal year. Consolidated operating income significantly decreased 106.4 billion yen year-on-year to 263.0 billion yen, mainly due to the 64.3 billion yen decrease in the operating income of the financial services segment. I will explain the details in the parts devoted to each business. Adjusted EBITDA decreased 60.8 billion yen year-on-year to 426.4 billion yen. Income before income taxes decreased 113.5 billion yen year-on-year to 257.6 billion yen. And net income attributable to Sony Group Corporation stockholders decreased 81.6 billion yen to 200.1 billion yen. Results by segment for the quarter are shown here. Next, I will explain the full year consolidated results forecast for FY23. The assumed exchange rates for the second half of the fiscal year have been revised to approximately 142 yen for the U.S. dollar and approximately 152 yen for the euro. The full year forecast is for sales to be 12 trillion 400 billion yen, an increase of 200 billion yen from the previous forecast, for operating income to be unchanged at 1 trillion 170 billion yen, and for net income attributed to Sony Group Corporation stockholder to be 880 billion yen, an increase of 20 billion yen from the previous forecast. Adjusted EBITDA is expected to be 1 trillion 785 billion yen, an increase of 35 billion yen from the previous forecast. The consolidated operating cash flow forecast excluding the financial service segment is expected to be 1 trillion 160 billion yen, a decrease of 90 billion yen mainly due to the impact of the foreign currency conversion adjustment resulting from the change in the foreign exchange rates assumption and the increase in working capital in the G and NS segment. The FI23 results forecast by segment is shown here. Now, I will move on to an overview of each business segment. First, the G and NS segment. Fi23 Q2 sales increased a significant 32% year-on-year to 954.1 billion yen, mainly due to increased sales of PlayStation 5 hardware and an increase in third-party software sales. Operating income increased 6.8 billion yen year-on-year to 48.9 billion yen, mainly due to the impact of increased sales despite a deterioration in profitability of PS5. Adjusted OIBDA increased 18.9 billion yen year-on-year to 83.1 billion yen. PFI 23 forecasted for sales to be 4,360,000,000 yen, an increase of 190,000,000 yen from the previous forecast. Operating income to be unchanged at 270,000,000 yen, adjusted OIBDA to be 385,000,000 yen, an increase of 10,000,000,000 yen. The overall number of monthly active users for the PlayStation in September was 107 million accounts, an increase of 5 million from the same month last year, and the proportion of PS5 users who have high user engagement increased to a little over 40% of the total. In addition, total gameplay time during the quarter increased 4% year on year, a stable level of growth. PS5 hardware unit sales for the quarter were 4.9 million units, basically in line with our expectations and a 25% increase over the number of PS4 units sold in the second quarter FY2016 when we sold 20 million units for the year. We have kept unchanged our high target of 25 million units for PS5 sales this fiscal year. To achieve this target, we plan to release a new PS5 model that is smaller, lighter, and has expanded data storage capacity. We also plan to introduce to the market PS Portal through which users can enjoy remote play in combination with the PS5. This is expected to assist us in increasing the sales momentum during the year-end selling season, which is the largest opportunity to sell products. On the other hand, while carefully monitoring the results of our sales promotion activities during the year-end selling season, we are proceeding with business operation that aims to balance the penetration of PS5 with profitability. As for software, the PS5 exclusive title Marvel's Spider-Man 2, which is released on October 20, sold through more than 5 million units worldwide as of October 30, and it has become a big hit. Regarding PlayStation Plus, by continuing to offer attractive new features and content to our users, such as starting cloud streaming of PS5 title from October on our top tier service premium, we aim to increase engagement while further expanding the composition ratio of our top tier services extra and premium. Next is the music segment. FY23 Q2 sales significantly increased 14% year-on-year to 408.7 billion yen, mainly due to the increased streaming revenue and the impact of the foreign exchange rates. Mainly due to the impact of the sales increase, operating income increased 2.3 billion yen to 81 billion yen compared to FY22 Q2, in which a one-time gain of 5.7 billion yen was recorded due to the receipt of litigation settlement. Adjusted OIBDA increased 9.6 billion yen to 97 billion yen. Profit contribution from visual media and platform was approximately 20% of the operating income of the segment. The FI23 forecast is for sales to increase 70 billion yen from the previous forecast to 1 trillion 560 billion yen, and operating income and adjusted OIBDA to each increase 15 billion yen to 295 billion yen and 350 billion yen respectively.

On a US dollar basis, streaming revenue for the quarter increased 9% for recorded music and 10% for music publishing, which is stable growth. During the current quarter, we had the hits shown here, including Doja Cat's latest single, Paint the Town Red, which was number one for four consecutive weeks on the Billboard Global 200 chart. Moreover, the new album released in October by Remus Entertainment artist Bad Money has become a huge hit, debuting at number one on the US Billboard album chart and having 21 songs from the album ranked in the top 100 of Spotify's global song rankings immediately after the release. In order to achieve growth that outpaces the market over the mid to long term, the Sony Music Group is focused on strengthening its competitiveness in growth areas. In the rapidly expanding field of indie labels and independent artists, we are building an ecosystem across SMG, including expanding our repertoire and service capabilities for artists through The Orchard and AWOL. We are also focusing on expanding our business in growing global markets. In Latin America, where the market size last year increased significantly, 26% year-on-year to 1.3 billion U.S. dollars, SMG has established itself in the number one position in recorded music as growth in places like Brazil has accelerated due to the acquisition of some dividend. in March 2022. In other growth markets such as China, India, and Southeast Asia, we are also actively discovering and developing artists, acquiring catalogs, and expanding artist services through the Orchard and AWO. Next is the pictures segment. Sales for the quarter increased significantly, 18% year-on-year, to 399.6 billion yen, and operating income increased 1.8 billion yen to 29.4 billion yen, mainly due to an increase in the number of delivered works in television productions and the impact of foreign exchange rates. Adjusted OIBDA increased 2.2 billion yen year-on-year to 42.6 billion yen. The FY23 sales forecast is ¥1,460,000,000. Down ¥10 billion from the previous forecast, operating income is forecasted to be ¥115 billion, down ¥5 billion and adjusted OIBDA to be ¥165 billion. No change. The Writers Guild of America strike ended on September 27 following an agreement with the American Association of Motion Picture and Television Producers. In addition, an agreement was reached on November 8 local time in the negotiation with the Screen Actors Guild and we expect that the protracted strike will come to an official end after certain processes are undertaken within the union. Due to delays in production constraints and promotional activities, we are seeing negative impacts such as a delay in the release of certain motion pictures and a delay in the delivery of television productions. we have incorporated the impact that can be assumed at the present time into our forecast for the fiscal year. Even after the strike ends, it will take time for business activities to normalize due to the concentration of productions and theatrical releases, so we expect this to have a negative impact on next fiscal year's results. However, we plan to engage in cost control and other measures to try to reduce the impact. Additionally, Crunchyroll's business is growing steadily, and last month it finalized a global distribution agreement with Amazon. As a result, Amazon Prime Video members can now subscribe to the service as an add-on channel and enjoy more than 1,300 titles of anime content provided by Crunchyroll. This service has already been launched in the U.S., Canada, Sweden, and the United Kingdom, and we plan to further expand the service area in the future. Next is the E, T, and S segment. Sales for the quarter were 613.5 billion yen, down 9% from the same quarter of the previous fiscal year, in which demand for TVs increased due to a recovery from lockdowns in Shanghai. Operating income significantly decreased 16.8 billion yen year-on-year to 61.0 billion yen mainly due to the impact of the lower sales of TVs. Adjusted OIBDA decreased 15.0 billion yen year-on-year to 87.6 billion yen. FY23 sales are expected to be 2 trillion 440 billion yen, an increase of 10 billion yen from the previous forecast, and the forecast for operating income and adjusted OIBDA remain unchanged at 180 billion and 280 billion yen, respectively. The market environment for major product categories during the current quarter continued to be difficult for televisions, while products such as digital cameras and headphones remained strong. Regarding televisions, in response to shortage demand and increasing price competition, we are proactively revising our sales plans conservatively and controlling sales risks and inventory risks, as well as focusing on cost reduction measures. Regarding the digital camera market, especially in China, which is strong, we will aim to maximize sales and profits during the year-end selling season and further expand market share in each region through the sales of new mirrorless single-lens cameras and interchangeable lenses, which we introduced in the current quarter in October and which are selling well. Regarding inventory levels, we have thoroughly managed everything from production to sales and we have further reduced inventory levels compared to the same period of the previous fiscal year across all our major product categories and have been able to control inventory at appropriate levels.

Next is the INSS segment. Sales for the quarter increased 2% year-on-year to 406.3 billion yen. Operating income decreased significantly by 27.6 billion yen year-on-year to 46.4 billion yen, mainly due to an increase in expenses, including depreciation and amortization expenses, despite the positive impact of foreign exchange rates. Adjusted OIBDA decreased by 15.0 billion yen year-on-year to 107.1 billion yen. FY23 sales are expected to be 1 trillion 590 billion yen, an increase of 30 billion yen from the previous forecast, and operating income and adjusted OIBDA are expected to be 195 billion yen and 440 billion yen respectively, an increase of 15 billion yen each. In the smartphone product market, although we see signs that the demand decline is bottoming out in China and emerging markets, the North American market shows a significant year-on-year decline, and at this point, there is no change to our view that a recovery in the market will take place from next fiscal year. smartphone manufacturers are incorporating larger die-sized sensors into their new products, mainly at the high end, and the mobile sensor market by value, driven by this, is expanding as expected. Regarding the yield rate of our new mobile sensor product, we have achieved a certain level of improvement through the initial measures taken so far, and although unit shipments are increasing, the impact on profit remains unchanged from the previous assumption and is expected to push down the operating income forecast of the segment for the fiscal year by approximately 15%. Regarding automotive sensors, the market as a whole continues to show high growth due to the normalization of the supply chain and the progress of electrification in the automotive industry, but intensifying competition in the Chinese market is resulting in some of our customers capturing a low share. This combined with the fact that the shift to higher ADAS functionality by our major customers is lower than we expected has resulted in us slightly revising downward our forecasts for the current fiscal year. Furthermore, regarding the image sensor market for industrial and social infrastructure, we have further reduced our forecasts for this fiscal year, mainly due to the effects of the slow economic recovery in China. Despite these factors, by incorporating the positive impact of foreign exchange rates and additional cost reduction measures, we have upwardly revised our operating income forecast for FY23 for the segment. Here, I would like to explain our current view of next fiscal year and beyond. Looking ahead to next fiscal year, although we expect the sluggish smartphone market, which is putting pressure on profits in the current fiscal year, to recover, we believe that the improvement will progress slowly. Regarding the yield issue, which is another factor putting pressure on profits, we are re-examining our processes and systems from design through manufacturing, but the impact is expected to remain into next fiscal year. Next fiscal year, deterioration from our original plan resulting from yield cost per our new mobile sensor is expected to decrease significantly from the current fiscal year to approximately one-third. However, the production volume of this sensor is expected to grow significantly as our main model, so we expect that the impact on profit for the next fiscal year will be approximately 70% of the impact amount on profit for the current fiscal year. There's no change to our view that the trend toward larger die-sized mobile sensors will drive the overall growth of the image sensor market in the mid to long term, and that the business will steadily expand in automotive as well as in industrial. and social infrastructure applications, which are expected to grow in the mid-term due to labor saving and automation. Last is the financial services segment. Financial services revenue for the current quarter was 103.9 billion yen, a significant decrease of 42% year-on-year, mainly due to a deterioration in gains and losses from market fluctuations associated with variable life insurance, despite steady growth in insurance profitability at Sony Life. Operating income was 15.7 billion yen, a significant 64.3 billion yen decrease year on year, mainly due to a deterioration in net gains and losses at Sony Life and the impact of revaluation pursuant to the application of the new accounting standard on the results of the same quarter of the previous fiscal year, as well as a 22.1 billion yen recovery of an unauthorized withdrawal of funds recorded in the same quarter of the previous fiscal year. Adjusted OIBDA decreased 41.8 billion yen year-on-year to 22.7 billion yen. Sony Life's new policy amount significantly increased 49% year-on-year to reach 2 trillion 507.9 billion yen, and policy amount in force continues to steadily increase in the current quarter. Regarding the FY23 forecast, based on the results of the current quarter, we are forecasting financial services revenue to be 1 trillion 210 billion yen, a decrease of 110 billion yen from the previous forecast, and operating income and adjusted OIBDA to be 155 billion yen, and 180 billion yen respectively, a decrease of 25 billion yen each. Please note that this forecast does not take into account the impact of market fluctuations from the third quarter onwards. Although the application of the new accounting standard has affected valuation gains and losses due to market fluctuations, we expect Sony Life's Insurance Service results, which is the core business of this segment, to continue to grow in a stable manner. Finally, I would like to summarize everything. First, I would like to discuss the growth of the Sony Group. Three-year cumulative adjusted EBITDA, which is the KPI of our current mid-range plan, is expected to be approximately 5.1 trillion yen, or 19% above the target of 4.3 trillion yen. This is an average annual growth rate of approximately 9% compared to the results of the fiscal year ended March 31, 2021, the final year of our previous mid-range plan. In particular, during the current quarter, The operating income of the three entertainment businesses of GNNS, Music and Pictures, which are our growth areas, all increased year on year and accounted for 61% of consolidated operating income. We are steadily making progress on the evolution to a growth business portfolio. On the other hand, we need to continue to pay close attention to the business environment surrounding Sony, which includes economic slowdown around the world as well as geopolitical risks and the division of the global economy as a result. In the second half of the fiscal year, we intend to focus on responding to this business environment in each business and to establish a foundation for growth for the next mid-range plan and beyond. In particular, we plan to focus our efforts on the top priorities of increasing the market penetration of PS5 and expanding the PS5 user base as a result in the GNNS segment, as well as an improvement of the product yield and measures for improving profitability such as operational efficiency in the INSS segment. We will put the finishing touches on the current mid-range plan in order to address any negative factors before the next fiscal year. That's all for the explanation.