Sony Group Corp

FI2023Q3, Consolidated Financial Results Announcement for Sony Group Corporation, I am Okada, Corporate Communications. I will serve as the Master of Ceremonies. The people on the stage are Mr. Hiroki Totoki, President, COO and CFO. Ms. Naomi Matsuoka, Senior Vice President in Charge of Corporate Planning and Control, Lead of Group Diversity Equipment and Inclusion, Support for Financial Services and Entertainment Area. Mr. Sadahiko Hayakawa, Senior Vice President in Charge of Finance and IR. These three people will be explaining the FI23 Q3 results and fully forecast, followed by Q&A. A total of 70 minutes is allocated. Mr. Totoki, the floor is yours. Today, after Mr. Matsuoka and Mr. Hayakawa explain the contents shown here, I will summarize the entire earnings briefly. Mr. Hayakawa, please go ahead. Matsuoka and Hayakawa will explain. Consolidated sales for the quarter were ¥3,747.5 billion, a significant increase of 22% compared to the same quarter of the previous fiscal year, a record high on a quarterly basis. And consolidated operating income increased ¥41.8 billion year-on-year to ¥463.3 billion, the second highest level on a quarterly basis. Net income increased 42.4 billion yen year-on-year to 363.9 billion yen, and adjusted EBITDA increased 75.5 billion yen to 605 billion yen. Nine-month cumulative consolidated operating cash flow excluding the financial services segment was 618.5 billion yen. The full year forecast is for sales to be 12 trillion 300 billion yen, a decrease of 100 billion yen from the previous forecast, for operating income to be 1 trillion 180 billion yen, an increase of 10 billion yen from the previous forecast, and for net income to be 920 billion yen, an increase of 40 billion yen from the previous forecast. Adjusted EBITDA is expected to be ¥1,770 billion, a decrease of ¥15 billion from the previous forecast, primarily reflecting the impact of the foreign exchange rate on non-operating profit and loss. The consolidated operating cash flow forecast, excluding the financial services segment, is expected to be ¥1,080 billion, a decrease of ¥80 billion from the previous forecast. mainly reflecting an increase in working capital in the G and NS segment. Now I will move on to overview of each business segment. First is G and NS segment. FI23Q3 sales increased a significant 16% year-on-year to ¥1,444.4 billion, primarily due to increased third-party software sales and the impact of foreign exchange rates. Operating income decreased significant ¥30.1 billion year-on-year to ¥86.1 billion yen, primarily due to a deterioration in the profitability of PlayStation 5 hardware, mainly due to promotions, and adjusted OIBDA decreased 26.8 billion yen to 113.1 billion yen. The full-year forecast is for sales to be 4 trillion 150 billion yen, a decrease of 210 billion yen from the previous forecast, and operating income and adjusted OIBDA remain unchanged. Inventory-related reserves that were additionally recorded in the current quarter mainly due to an increase in inventory resulting from the decline in PS5 unit sales in the current quarter are expected to be recorded as a recovery gain in the fourth quarter due to a decrease in inventory. As a result, there is no impact on our full-year operating income forecast, but there is an expected shift in profit of approximately 30 billion yen from the current quarter to the fourth quarter. PS5 hardware unit sales in the quarter were 8.2 million units, which fell short of the target to hit our annual shipments of 25 million units. but was a record high number of quarterly unit sales for PS5, and cumulative sales have exceeded 50 million units. Due to the impact of the increasing popularity of PS5 and third-party free-to-play hit titles, Key user engagement metrics have increased significantly with monthly active users for all OPS in December reaching a record high of 120 million accounts and total game play time for the quarter increasing 13% year-on-year. Based on the results for this quarter, PS5 unit sales for this fiscal year are expected to be around 21 million units. Regarding first-party software, the cumulative sales of Marvel's Spider-Man 2, which was released in last October, exceeded 10 million copies as of February 4th. And the Marvel's Spider-Man game series has now sold through over 50 million units, including on PC. The game is our second blockbuster hit in two years following God of War Ragnarok, which was released in the same period last year, and is making a major contribution to profits. Regarding network services, despite the impact of a slight year-on-year decrease in the number of PS Plus subscribers, Sales increased 11% year on year, mainly due to the impact of a further shift to higher end services and price revisions. Now, I would like to explain our current view on the outlook for this segment next fiscal year. Regarding the PS5 hardware, which will enter its fifth year since launch, partially due to its entering the latter half of the console cycle, we aim to optimize sales with a greater emphasis on balance with profits, so we anticipate a gradual decline in unit sales from next fiscal year onwards. We expect third-party software sales to continue to expand gradually due to the expansion of the PS5 installed base and the high level of user engagement. In network services, we expect subscribers to be on par with this fiscal year or slightly less due to the impact of price revision we implemented in this fiscal year, but we expect sales to gradually expand due to a shift to attractive premium services. Regarding first-party software, we aim to continue to focus on producing high-quality works and developing live service games. But while major projects are currently under development, we do not plan to release any new major existing franchise titles next fiscal year, like God of War Ragnarok and Marvel's Spider-Man 2. Although the burden of acquisition-related costs will ease next fiscal year, we expect profit from first-party software to decrease slightly from this fiscal year due to the impact of the decrease in sales. Based upon this, operating income for the next fiscal year is currently expected to increase slightly from this fiscal year. However, while this is our baseline, we are reviewing measures for further improvement in profitability in advance of the annual forecast results announcement this May.

Next is the music segment. FY23 Q3 sales increased 16% year-on-year to 422.1 billion yen and operating income increased 13.1 billion yen to 76.1 billion yen, both significant increases. Adjusted OIBDA increased 19.9 billion yen year-on-year to 98.5 billion yen. Streaming revenue for the quarter on a U.S. dollar basis continued to grow, increasing 12% for recorded music and 17% for music publishing. Profit contribution from visual media and platform was a mid-single digits percentage of the operating income of the segment. The FY23 forecast is for sales to increase 10 billion yen from the previous forecast to 1 trillion 570 billion yen, operating income to be unchanged, and adjusted OIBDA to increase 10 billion yen to 360 billion yen. In recent years, the expansion of the streaming market has greatly expanded the revenue opportunities and asset value of music catalogs that have been released for a certain period of time. During the quarter, the total streams of five of our holiday song catalogs by our artists exceeded one billion in the United States. Mariah Carey's album, Merry Christmas, ranked in the top 10 of SME's album sales for the quarter, 29 years after it was released. In music publishing, the use of catalogs synchronized with images such as background music for movies and advertisements is also an important source of revenue. Today, we have established a strong foundation that we expect will contribute to achieving stable revenue and expanding our market share in the music business by acquiring the publishing rights to the large catalog works led by EMI Music Publishing and the catalogs of industry-leading artists such as Bruce Springsteen and Paul Simon. Moreover, depending on the rights for each catalog, we plan to expand opportunities to use the music and are working to create new revenue, such as in the artist's merchandise and event promotion areas. Of the four major awards presented at the 66th Grammy Awards on February 5th, Miley Cyrus won Record of the Year, and Victoria Monet won Best New Artist. Sony Music Group artists and songwriters won awards in multiple other categories, including SZA, who was nominated in nine categories, the most of any artist this year, and won in three of them. Next is the picture segment. In the current quarter, sales increased by 10% year-on-year to 366.3 billion yen, and operating income increased significantly 16.2 billion yen year-on-year to 41.6 billion yen, mainly due to increases in television and digital streaming licensing revenues and home entertainment sales and motion pictures. Adjusted OIBDA increased 16.3 billion yen year-on-year to 56.4 54.6 billion yen. The FY23 forecast is for sales to increase 10 billion yen from the previous forecast to 1 trillion 470 billion yen, and for operating income and adjusted OIBDA, they will remain unchanged. Although the Hollywood strikes have finally ended, Delays in script development have caused continuous changes in movie release schedules and delays in the delivery of television shows. As a result, we estimate the impact of the strikes on profits in the current fiscal year to be a little less than 20 billion yen. Next fiscal year, in addition to continued delays and releases, it is expected that digital streaming licensing and other revenues will decline due to a decrease in the number of films released this fiscal year, so the negative impact on profits due to the strikes is expected to reach its peak and the amount of such impact on a US dollar basis is expected to be slightly less than twice as much as in the current fiscal year. On the other hand, the paying subscribers of Crunchyroll, which is driving growth in this segment, exceeded 13 million as of the end of December last year and have expanded at an average pace of 23% a year since we acquired the business in August 2021. In addition to continuing to provide appealing anime content to core fans, we are focusing on measures to broaden the anime fan base and deepen engagement by collaborating with external partners such as Amazon, expanding the service into growth markets such as Brazil, India and Southeast Asia, and further expanding in business areas such as theatrical distribution, anime, movies and e-commerce. Amortization costs associated with the acquisition are expected to decrease significantly from next fiscal year onwards, and we expect this to further contribute to profit in this segment. For the next fiscal year, despite the challenging environment where the impact from the strikes on profitability is expected to increase, we are aiming for a level of operating income that exceeds the current fiscal year as we intend to further grow our Crunchyroll business. develop and produce content all over the world, enhance theatrical distribution by distributing films from third-party studios, and maintain a strong focus on cost control. Next is the entertainment, technology, and services segment. FY23 Q3 sales decreased 2% year-on-year to 735.7 billion yen, mainly due to lower sales of televisions and operating equipment. and operating income decreased ¥3.9 billion to ¥77.2 billion, and adjusted OIBDA was ¥103.4 billion down ¥1.9 billion. The FY23 forecast is for sales to decrease ¥10 billion from a previous forecast to ¥2,430 billion, and for operating income and adjusted OIBDA, they will remain unchanged.

In North America, expected growth was not being made. There was no sign of major decline in demand, and expected sales were relatively steady. In the Chinese market, while demand for television fell sharply, demand for digital cameras was higher than expected, and overall performance was roughly in line with the expectation. Furthermore, as a result of careful production and sales control, the overall inventory level in the segment at the end of December was significantly reduced to 341.3 billion yen, an 18% decrease year-on-year. Regarding televisions in the fourth quarter, we plan to further reduce inventory and reduce costs based on results of the year-end selling season. Regarding digital cameras and interchangeable lenses, we aim to continue to expand our businesses, including through the introduction of new products to the market. Next is the imaging and sensing solution segment. FY23 sales for the quarter increased significantly 21% year-on-year to 505.2 billion yen, primarily due to an increase in sales of image sensors for mobile and operating income increased 14.9 billion yen to 99.7 billion yen, both new record highs for the segment. Adjusted OIBDA increased 29.0 billion yen year to year to 163.7 billion yen. The FY23 forecast is unchanged from the previous forecast. We believe that smartphone product market, which has continued to experience negative growth compared to the last calendar year, has hit the bottom in the current quarter. but the North American market is still showing declines compared to the last calendar year, and there is still uncertainty in the outlook. During this quarter, sales increased significantly year-on-year, primarily due to a recovery of the smartphone product market and the introduction of large-sized sensors for high-end products. Nevertheless, we plan to continue to operate our business cautiously, for the time being while continuing to monitor product market trends and inventory status. The yield rate of mobile sensors, which is the most important issue for current fiscal year, is progressing following the improvement curve assumed in the previous forecast, and the impact on profitability has not changed from the previous forecast. Regarding the sensor business, other than the mobile sensor, the delay in recovery in the sensor market for industry and social infrastructure has become particularly noticeable, so we plan to proceed with position adjustments and improve inventory in the fourth quarter. Sales in the segment during the current mid-range plan are expected to grow significantly by an average of 22% year-on-year basis and 8% on the US dollar basis. We have been able to steadily transition our mobile sensors to become larger and more value-added, and we believe that we will be able to continue to grow our business in the period of the next mid-range plan. On the other hand, at a time when sales are not increasing as planned, primarily due to the market environment, we recognize that significant increase in manufacturing costs, mainly due to capital expenditure and production operation losses, such as those brought on the all armed by deterioration in yields are issues that needs to be addressed in order to further improve profitability going forward regarding image sensor capital expenditure in the period next mid-range plan we plan to leverage production capacity and strategic inventory were built up ahead of time to optimize the investment lastly there is a financial service segment For the current quarter, mainly due to impact of market fluctuation on Sony Life, financial services revenue increased 287.3 billion yen year-on-year to 311.7 billion yen, and operating income increased 30.2 billion yen to 77.3 billion yen, both significant increase. Adjusted OIBDA increased 30.5 billion yen year-on-year to 84.3 billion yen. Sony Life's cumulative new policy amount in force during the nine-month end of December 31, 2023, continued to grow steadily, increasing 22% year-on-year to 7.3 trillion yen. FY23 financial service revenue is expected to increase 90 billion yen from our previous forecast to 1 trillion 300 billion yen, and opening income is expected to increase 20 billion yen from the previous forecast to 175 billion yen, reflecting the recording of a gain mainly from the transfer portion of the share of Sony Payment Services Inc. by Sony Bank. Adjustable OBDI is unchanged from the previous forecast. Please note that the forecasting corporate costs associated with profit quality improvement measure at Sony Life going forward, excluding the record of the gain mainly from the transfer I just mentioned, we have made no change of our previous forecast. Finally, I would like to speak about the main points regarding the forecast for this fiscal year and outlook for each business in next fiscal year and beyond. Regarding the outlook for the current fiscal year, consolidated operating income for the quarter reached a level approaching the record high level achieved in the third quarter of the fiscal year ended March 31, 2022. and I think we have created good momentum toward completing the current mid-range plan. Looking ahead to the next fiscal year, in the GNNS segment, we expect operator income to slightly increase from the current fiscal year as the gradual growth in third-party software and network services due to the expansion of PS5 installed base offsets a decrease in profit from first-party software. In the picture segment, although the impact of the strikes is expected to peak next fiscal year, we are aiming for a level of operating income that exceeds the current fiscal year, mainly due to the expected growth of control, development of global production, and through controlled costs. In the INSS segment, we expect moderate sales growth due to a recovery of the smartphone market as well as increasing the size and value added of mobile sensors which have been promoting to date regarding image sensor capital expenditure during the period of the next mid-range plan we currently assume that we will be able to keep it to approximately 70 to 80 percent of the current mid-range plan period by taking full advantage of existing production facility and strategy inventory. In the financial service segment, we were able to obtain approval for the corporate restructuring plan for partial spin-off under the Act of Segmenting Industrial Competitiveness of Japan. Based on the approval, we are working in earnest to prepare for the spin-off and listing of the shares of Sony Financial Group Inc. in October 2025. That's all for my explanation.