Sony Group Corp

Okay, it is time to start Sony Group Corporation's Consolidated Financial Results Announcement Session. And my name is Okada. I'm with the Sony Group Corporate Communications. First, let me introduce the people on the stage. First, we have President, COO, and CFO, Mr. Hiroki Totoki. And we have Senior Vice President in Charge of Corporate Planning and Control, Lead of Group Diversity, Equity, and Innovation, and Support of Financial Services Business and the Determined Area, Ms. Naomi Satsuki. And the Senior Vice President in Charge of Finance and IR, Mr. Sadahiko Hayakawa. And also, Sony Financial Group Inc. Corporate Executive Officer and CFO, Mr. Kazuhiro Yamada. These four will be presenting the second 2024 second quarter actual and full year forecast and then have the Q&A session in total of 70 minutes. Mr. Tatoki, please. Okay, thank you. Today, Matsuoka-san, Hayakawa-san, and Yamada-san will explain the contents shown here, and I will give a general summary at the end. Hayakawa-san, please. Okay, thank you. So, consolidated sales, excluding the financial service segment for the quarter, increased 9%. compared to the same quarter of the previous fiscal year, to 2,973.4 billion yen. Operating income increased 57% to 389.3 billion yen, a record high for the second quarter and the first half of the fiscal year. Consolidated sales, including the financial services segment, increased 3% year-on-year to 2,905,600,000 yen. Operating income increased 73% to 451,100,000,000 yen, a record high for the second quarter. And net income increased 69% to 338,500,000 yen. The results by segment for the quarter are shown on the slide. Next, I will explain our consolidated results forecast for FY24 full year. Consolidated sales, excluding the financial services segment, have been increased slightly from the previous forecast to ¥11,800,000,000. Operating income is unchanged at ¥1,165,000,000. And operating cash flow has been increased ¥40,000,000 to ¥1,440,000,000. Consolidated sales, including the financial service segment, have been increased slightly from the previous forecast to 12,710,000,000 yen over income and then income unchanged at 1,310,000,000 yen and 980,000,000,000 yen respectively. The full year forecast by segment is shown here. Now, I will move on to the explanation of the state of each business. The first is the GNNNS segment. Sales for the quarter increased 12% year-on-year to 1 trillion 71.5 billion yen, primarily due to an increase in third-party software sales despite a decrease in hardware sales. Operating income increased 184% year-on-year to 138.8 billion yen, a new record high for this segment in the second quarter due to an increase in the profit of hardware, third-party software, and network services. We have increased the full-year forecast for sales by 4% from the previous forecast to ¥4,490,000,000. Taking into account the results of the quarter, we expect operating income to increase 11% to ¥355,000,000, a new record high for profit for this segment. Now, I will discuss the state of the business starting from our platform business. The number of monthly active users across all PlayStation platforms in September increased 8% compared to the same month last year to 116 billion accounts, making the eighth a consolidated quarter of growth compared to the same period of the previous year. The total play time also increased 14% compared to the same month last year, and 11% on a cumulative basis since the beginning of the current fiscal year, compared to the same period of the previous fiscal year, demonstrating steady growth for the platform. PS Plus is providing a stable base of earnings as sales on a US dollar basis increased 18% year-on-year, This is due to an increase in ARPU, primarily resulting from the shift to higher tiers of service and the impact of price revisions. As for third-party software, sales significantly grew due to contributions from solid franchise titles as well as hit new IP, including a new sports title and an action RGP title from China. Next is the studio business. Astrobot, released on September 6th, has received a Metacritic score of 94 and has garnered high praise from the gamer community. It is a hit which has sold over 1.5 million copies in the nine weeks since its release. 37% of the users who purchased Astrobot had not purchased a first-party title from us in the last two years. The percentage of younger age groups and families purchasing the title was much higher than other titles, and the title is contributing significantly to a widening of the user base through the acquisition of new users and expansion of our title portfolio. We launched two live services, new services. Two live service games this year. Helldiver 2 was a huge hit while Concord ended up being shut down. We gained a lot of experience and learned a lot from both. We intend to share the lessons learned from our successes and failures across our studios, including in the areas of title development management as well as the process of continually adding expanded content and scaling the service after its release so as to strengthen our development management system. We intend to build on an optimum title portfolio during the current mid-range plan period that combines single-player games, which are our strength, and which have a higher predictability of becoming hits due to our proven IP, with live service games that pursue upside while taking on a certain amount of risk upon release. As the quarterly results show, the platform business has strong momentum and we expect to see stable expansion of user engagement and associated revenue growth in the second half and beyond. In the studio business, we expect sales and profits to decline in the second half of the fiscal year compared to the same period of the last fiscal year when Marvel's Spider-Man 2 and Helldiver 2 were huge hits. However, we are making steady progress in the development of new titles and improving our live service game process, starting with Ghost of Yohei, which is the sequel to the smash hit Ghost of Tsushima. We plan to continue releasing major single-player game titles every year from next fiscal year onwards.

Next is the music segment. Sales for the quarter increased 10% a year to 448.2 billion yen and operating income increased 12% to 90.4 billion yen, primarily due to an increase in live performance, merchandising and licensed streaming revenues. Streaming revenue for the quarter increased 9% year-on-year for both recorded music and music publishing, a 5% and 6% increase respectively on a U.S. dollar basis. The FY24 forecast remains unchanged from the previous forecast. We are expanding our business globally in markets where streaming is fast-growing, such as the emerging market, including through digital music distributions and artist services provided by the Orchard and Aval. On the other hand, in countries and territories where streaming is more widespread, the consumption of catalog music is increasing. For example, the share of consumption of catalog music released more than 18 months ago reached 73% in the recorded music market in the United States. Additionally, in the Spotify Global Top 200, the share of songs released more than 10 years ago has increased significantly from less than 5% in the calendar year 2020 to more than 20% through the end of July 2024. This is primarily due to a shift in the age demographic of users to a more mature age group in those countries and territories, as well as younger listeners having more opportunity to consume major hit songs from the past due to discovery on social media platforms. We have carefully selected and acquired evergreen music catalogs through investment or the signing of licensing agreements. These music catalog assets serve as a stable earnings foundation for the long term, not only from the consumption of streaming, but also from the use in the media such as movies and advisement. Additionally, by also acquiring names and image and likeness rights related to the music artist for some catalogs, we are pursuing additional monetization opportunities like merchandising and experiential live events that use these rights. Next is the picture segment. The sales in the quarter decreased 11% year-on-year to 355.8 billion yen, primarily due to a decrease in the number of television programs in part due to the impact of the strikes in the previous years. Operating income decreased 37% year-on-year to 18.5 billion yen, mainly due to the decline in sales. For F524, we forecast sales to decrease slightly from the previous forecast to 1 trillion 510 billion yen and operating income to decrease 8% to 115 billion yen. We have revised downward the forecast for the operating income from the previous forecast primarily due to a revision in the results forecast of our India business in the media networks. In motion pictures, It ends with us. A film adaptation of the best-selling novel released on August 9th generated box office revenue significantly exceeding our expectations and contributed to the result of the quarter. We are still recovering from the impact of the strikes, but the number of major films released after the end of the strikes has been increasing, such as Bad Boys, Ride or Die, released in June, and Venom, The Last Dance, released last month. We expect the television and video streaming services licensing revenues to recover from the second half of this fiscal year through the next fiscal year. The Crunchyroll is actively expanding its global user base, including partnering with the Amazon Prime Video Channels and then signing a distribution agreement with the YouTube Primetime Channels where the service is scheduled to launch towards the end of the year. Moreover, we have begun streaming many new anime titles from the second half of this fiscal year and aim to further increase engagement with anime fans around the world. Regarding our business in India, the operating environment is challenged primarily due to a softness in the app market and decreased viewers of paid television. However, under the new local management team that started in August, we are strengthening our operations and rebuilding our strategies to grow the business over the mid to long term, including continuing to improve viewership through re-strengthening of our programming. Next is the ET&S segment. Sales for the quarter were 619.8 billion yen, essentially flat year-on-year. Offering income increased 15% year-on-year to 70.2 billion yen mainly due to the favorable impact of foreign exchange rates and cost reduction effects. The F-524 forecast remains unchanged from the previous forecast. Major markets such as North America, Europe, China, and Japan remain generally stable during the quarter, and solid business operations enable us to achieve operating income exceeding the same quarter of the previous fiscal year. We continue to pay close attention to inventory control, and while overall segment sales remain essentially the same as in the same period of the previous fiscal year, we were able to reduce inventory by approximately 10% at the end of the quarter. On the other hand, the imaging business, which significantly grew year-on-year in the first quarter and then June 30, 2024, mainly in China, was essentially flat year-on-year in the current quarter. As a result, we have incorporated into our forecast a proactive change to a more cautious production inventory plan in preparation for the year-end selling season. In the sports business, which is a gross access area, we are working to further expand our business opportunity by collaborating with the partners and incorporating new technologies centered on Hawkeye, which provides referee decision support solution based on the video data. On August 1st, we announced technology partnership with NFL in the United States. Through this collaboration, we aim to advance the practical application of our cutting-edge sports-related technologies such as using Hawkeye to assist referee decision, improving the accuracy of measuring key game metrics such as yards gained through the video data analysis. Also, on October 15th, we completed the acquisition of the Kina Trucks, a U.S. company that uses high-precision motion capture technology and data analysis to provide support services such as those improving athlete performance. The company has a strong affinity with Hawkeye in terms of technology for acquiring highly reliable sports data. We expect great synergy in terms of maximization of data accumulation and use. Although the sports business is not large in scale, we expect it to generate stable and high profits and aim to continue to focus on expanding it.

Next is the INSS segment. Sales for the quarter increased 32% year-on-year to 535.6 billion yen, primarily due to increased sales of image sensors of mobile products and the impact of foreign exchange rates. Operating income approximately doubled year-on-year to 92.4 billion yen, primarily due to the benefit of the increased sales and the favorable impact of foreign exchange rates. For FY24, we forecast sales to decrease 4% from the previous forecast to 1,770,000,000 yen. percent to 250 billion yen. The global smartphone market continued its gradual recovery trend with positive year-on-year growth continuing in China and Europe and signs of recovery in the North America market. Mobile sensor sales during the quarter significantly increased due to an increase in unit prices resulting from larger die sizes and steady shipment of image sensors for new products to a major customer. This led to the segment overall recording. Its highest ever second quarter sales. On the other hand, with regard to the second half, we have downwardly revised our sales and profit forecast for mobile sensors to reflect revision in the production plan of our major customer. The introduction of AI functionality and services into smartphones, which is currently underway, may bring short-term volatility to the high-end market depending on the speed of rollout and initial reasons. However, in the mid to long term, we expect that convenience brought by AI will make smartphone functionality more attractive, revitalizing the market and encouraging a shift to high-end products. On the production side, improvement in yields for mobile sensors are progressing as planned since the beginning of the fiscal year, and we expect to achieve normal run rate in the fourth quarter ending March 31, 2025. Last is the financial services segment. Financial services revenue for the quarter decreased 167.2 billion yen year-on-year to a negative 63.3 billion yen, primarily due to the impact of market fluctuations at Sony Life. This was due to the significant appreciation of the yen during the quarter, which led to a significant decrease in the yen-based valuation of the asset under management for the foreign currency denominated insurance. However, since the valuation of liabilities declined in a similar manner, this did not have a significant impact on profitability. Operating income increased 50.1 billion yen year-on-year to 65.7 billion yen per annuity due to the impact of interest rate fluctuations at Sony Life. Insurance service results at Sony Life, which are the baseload of profitability for the business, continued their stable trend at 49 billion yen. The FY24 forecast remains unchanged from the previous forecast. Sony Life's new policy amount continues to be strong with a cumulative first-half growth of 14% compared to the same period of the previous fiscal year. Preparations for the partial spinoff and the listing of Sony Financial Group Inc. planned for October next year are progressing smoothly. As a part of those preparations and in order to strengthen its governance and accelerate its decision-making, SFGI transitioned to a company with three committees, corporate governance structure as of October 1st. Next, I will explain efforts to improve and stabilize our economic value-based solvency ratio, ESR, which is an important issue ahead of the listing. ESL is an indicator of financial soundness of financial services business. It shows the level of capital relative to amount of risk calculated based on conservative assumptions after assets and liabilities evaluated on economic value basis. As shown on this slide, the ESL of SFG on a consolidated basis is within the target range. However, the high sensitivity of ESL to interest rate fluctuations is an issue for the life insurance business. and we are implementing measures to reduce sensitivity in terms of both capital and risk amount. With regard to capital, which is a numerator of ESL, the assets held on the balance sheet, such as our bonds, exceeded insurance liabilities, resulting in an overhead situation and a structure in which net assets decrease when interest rates rise. In order to correct this, We sold the portion of our yen-denominated bonds so as to mitigate over-hedging, and we are currently undertaking transactions designed to curb capital fluctuations. The amount of risk, which is the denominator, also increases as interest rates rise. So we are working to refine our risk measurement methods and further improve our risk management. We have created a two to three-year roadmap improving and stabilizing ESL, and we will continue to report on our progress and results. Finally, I would like to give you an overall summary. The key performance indicators for the entire Sony Group in the fifth mid-range plan are the operating income of 10% or more and a three-year cumulative operating income margin of 10% or more, both on a consolidated basis excluding the financial services segment. The consolidated result forecast for this fiscal year announced today predicts a new record high operating income a year or near the gross rate of operating income of more than 10%, an operating income margin of about 10%. We believe that we have gotten off to a good start in the first year of this mid-range plan. In the second half, there will be no major first-party software title releases in GNNS, and there will be an adjustment in demand from major customer in INSS. As a result of this and other factors, consolidated operating income excluding the financial services segment, is expected to be slightly lower than the same period of the previous fiscal year. However, business momentum is currently good, particularly in the GNS and music segment. We aim to produce solid results in order to achieve the targets of our mid-range plan. Moreover, under the mid-range plan, we aim to strengthen shareholders' return. and the cumulative amount of shares repurchased through the end of October out of 250 billion yen authorized this fiscal year was 237.1 billion yen. Amid a rapid change in business environment, we will continue to manage our business in a way that will enable us to achieve sustainable growth across the entire group while addressing the various challenges that each business faces. That's all for my explanation.