Sony Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 3 speakers on the call.

Operator

Time has come. We'd like to now begin FY 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.

Operator

First, Mr. Hiroki Totoki, President, COO and CFO Naomi Matoaka, Senior Vice President, Corporate Planning and Control, lead of Group DE and I, Support for Finance Business and Entertainment Area Today, 3 persons will be explaining the consolidated results for the Q2 FY 'twenty three and full year consolidated results forecast, after which we are going to have Q and A session. We are scheduled to have a total of 70 minutes. Tautoki san, the floor is yours. Today, after Ms.

Operator

Mazzoka and Mr. Hayakawa explained the contents shown here, I will summarize the entire earnings briefing. Mr. Hayakawa, please go ahead. From here, Ms.

Operator

Matsuoka and I will explain. Consolidated sales for the quarter were JPY 2,828,600,000,000, an increase of 8% compared to the same quarter of the previous fiscal year. Consolidated operating income significantly decreased JPY 100 and JPY 6,400,000,000 year on year to JPY 263,000,000,000 mainly due to the JPY 64,300,000,000 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 JPY 60,800,000,000 year on year to JPY 426,400,000,000 Income before income taxes decreased JPY 113,500,000,000 year on year to JPY 257,600,000,000 Net income attributable to Sony Group Corporation stockholders decreased JPY 81,600,000,000 to JPY 200,100,000,000.

Operator

Results by segment for the quarter are shown here. Next, I will explain the full year consolidated results forecast for FY 'twenty three. The assumed exchange rates for the second half of the fiscal year have been revised to approximately JPY 142 for the U. S. Dollar and approximately JPY 152 for the euro.

Operator

The full year forecast is for sales to be JPY 12,400,000,000,000, an increase of JPY 200,000,000,000 from the previous forecast for operating income to be unchanged at JPY 1 JPY170,000,000,000 and for net income attributable to Sony Group Corporation stockholder to be JPY 880,000,000,000, an increase of JPY 20,000,000,000 from the previous forecast. Adjusted EBITDA is expected to be JPY 1,785,000,000,000, an increase of JPY 35,000,000,000 from the previous forecast. The consolidated operating cash flow forecast, excluding the financial service segment, is expected to be JPY 1,160,000,000,000, a decrease of JPY 90,000,000,000 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 FY 'twenty three results forecast by segment is shown here. Now I will Move on to an overview of each business segment.

Operator

1st, G and NS segment. FY 2023 Q2 sales increased a significant 32% year on year to JPY 954,100,000,000 mainly due to increased sales of PlayStation 5 hardware and an increase in third party software sales. Operating income increased JPY 6,800,000,000 year on year to JPY 48,900,000,000 mainly due to the impact of increased sales despite a deterioration in profitability of PS5. Adjusted OIBDA FDA increased JPY 18,900,000,000 year on year to JPY 83,100,000,000 The FY 'twenty three forecasted for sales to be JPY 4,360,000,000,000, an increase of JPY 190,000,000,000 from the previous forecast. Operating income to be unchanged at JPY 270,000,000,000 adjusted OIBDA to be JPY 3 JPY 85,000,000,000 an increase of JPY 10,000,000,000.

Operator

The overall number of monthly active users for the Play Station in September was 107,000,000 accounts, an increase of 5,000,000 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 4,900,000 units, basically in line with our expectations and a 25% increase over the number of PS4 units sold in the 2nd quarter FY 2016 when we sold 20,000,000 units for the year. We have kept unchanged our high target of 25,000,000 units for PS5 sales this fiscal year.

Operator

To achieve this target, we plan to release a new PS5 model that is smaller, lighter and has expanded the data storage capacity. We also plan to introduce to the market PS portal through which users can enjoy remote play in combination with the PES5. These are 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 5,000,000 units worldwide as of October 30, and it has become a big hit.

Operator

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 in 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. FY 2023 Q2 sales significantly increased 14% year on year to JPY 4 100 and JPY 8,700,000,000 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 JPY 2,300,000,000 to JPY 81,000,000,000 compared to FY 2022 Q2, in which a onetime gain of JPY 5,700,000,000 was recorded due to the receipt of litigation settlement. Adjusted OIBDA DA increased JPY 9,600,000,000 to JPY 97,000,000,000 Profit contribution from Visual Media and Platform was approximately 20% of the operating income of this segment.

Operator

The FY 'twenty three forecast is for sales to increase JPY 70,000,000,000 from the previous forecast to JPY 15,600,000,000,000 and operating income and adjusted OIBDA to each increase JPY 15,000,000,000 to JPY 295,000,000,000 JPY 350,000,000,000 respectively.

Speaker 1

On a U. S. 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 1 for 4 consecutive weeks on the Billboard Global 200 chart. Moreover, the new album released In October, by We must entertainment artist, Bad Money has become a huge hit, debuting at number 1 on the U.

Speaker 1

S. 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.

Speaker 1

In Latin America, where the market size last year increased significantly 26% year on year to US1.3 billion 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 Somn Ghibli 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 EO. Next is the Pictures segment. Sales for the quarter increased significantly 15% year on year to JPY 399,600,000,000 and operating income increased JPY 1,800,000,000 to JPY 29,400,000,000 mainly due to an increase in the number of delivered works In television productions and the impact of foreign exchange rates, adjusted OIBDA increased 2,200,000,000 yen year on year to JPY 42,600,000,000. The FY 2023 sales forecast is JPY 1,460,000,000,000, down JPY 10,000,000,000 from the previous forecast, operating income is forecasted to be JPY 115,000,000,000, down JPY 5,000,000,000 and adjusted OIBDA to be JPY 165,000,000,000 no change.

Speaker 1

The Writers Guild of America strike ended on September 27, following an agreement with the American Association 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 promotion 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.

Speaker 1

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 1300 titles of anime content provided by Crunchyroll. This service has already been launched in the U.

Speaker 1

S, Canada, Sweden and United Kingdom, and we plan to further expand the service area in the future. Next is the ET and S segment. Sales for the quarter were JPY 613,500,000,000 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 16,800,000,000 yen year on year to JPY 61,000,000,000 mainly due to the impact of the lower sales of TVs. Adjusted OIBDA decreased JPY 15,000,000,000 year on year to JPY 87,600,000,000.

Speaker 1

FY 'twenty three sales are expected to be JPY 2,440,000,000,000, an increase of JPY 10,000,000,000 from the previous forecast and the forecast for operating income and adjusted OIBDA remain unchanged at 180,000,000,000 yen 280,000,000,000 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 sluggish 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.

Speaker 2

Next is the INSS segment. Sales for the quarter increased 2% year on year to 406,300,000,000 yen Operating income decreased significantly by JPY 27,600,000,000 year on year to JPY 46,400,000,000 mainly due to an increase in expenses, including depreciation and amortization expenses, despite the positive impact of foreign exchange rates. Adjusted OIBDA decreased by JPY 15,000,000,000 year on year to JPY 107,100,000,000 FY 'twenty three sales are expected to be JPY 1,590,000,000,000, an increase of JPY 30,000,000,000 from the previous forecast. And operating income and adjusted OIBDA are expected to be JPY 195,000,000,000 JPY 440,000,000,000 respectively, an increase of JPY 15,000,000,000 each. In the smartphone product market, although we see signs that the demand decline is bottoming out in China and Emerging Markets, the North America market shows a significant year on year decline.

Speaker 2

And at this point, there's 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.

Speaker 2

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 forecast for the current fiscal year. Furthermore, regarding the image sensor market for industrial and social infrastructure, We have further reduced our forecast for this fiscal year mainly due to the effects of the slow economic recovery in China. Despite these factors, by incorporating the positive impacts of foreign exchange rates and additional cost reduction measures, We have upwardly revised our operating income forecast for FY 'twenty three 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 pushing putting pressure on profits in the current fiscal year to recover, We believe that the improvement will progress slowly.

Speaker 2

Regarding the yield issue, which is another factor putting pressure on profits, We are reexamining 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 onethree. However, the production volume of the Sensor is expected to grow significantly as our main model. So we expect that the impact on profit for the next fiscal year will 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 midterm due to labor saving and automation.

Speaker 2

Last is the Financial Services segment. Financial Services revenue for the current quarter was JPY 103,900,000,000, 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 JPY 15,700,000,000, a significant JPY 64,300,000,000 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 JPY 22,100,000,000 recovery of an unauthorized withdrawal of funds recorded in the same quarter of the previous fiscal year. Adjusted OIBDA decreased JPY 41,800,000,000 year on year to JPY 22 JPY 7,000,000,000. Sony Life's new policy amount significantly increased 49% year on year to reach JPY 2,000,000,000,000 JPY507,900,000,000 and policy amount in force continues to steadily increase in the current quarter.

Speaker 2

Regarding the FY 'twenty three forecast, based on the results of the current quarter, we are forecasting financial services revenue to be JPY 1,210,000,000,000, a decrease of JPY 110,000,000,000 from the previous forecast. And operating income and adjusted OIBDA D8 to be JPY 155,000,000,000 and JPY 180,000,000,000 respectively, a decrease of JPY 25,000,000,000 each. Please note that this forecast does not take into account the impact of market fluctuations from the Q3 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.

Speaker 2

First, I would like to discuss the growth of the Sony Group. 3 year cumulative adjusted EBITDA, which is the KPI of our current mid range plan, is expected to be approximately JPY 5,100,000,000,000 or 19% above the target of JPY 4,300,000,000,000. This is an average annual growth rate of approximately 9% compared to the results of the fiscal year ended March 30 1st, 2021, the final year of our previous mid range plan. In particular, during the current quarter, the operating income of The 3 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.

Speaker 2

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 The duration of PS5 and expanding the PS5 user base is a result in the G and NS segment as well as an improvement of the product yield and measures for improving profitability such as operational efficiency in the I and SS 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.

Operator

Thank you for waiting. Now we'd like to entertain questions from the media. As for the case of the presentation, the people who will be responding to the questions are as shown on the slide. Now we'd like to begin the Q and A session. I'd like to ask each one of you to limit your questions to 2.

Operator

If you have any question, The first question, Toyo Kezai, Umegasai, Umegasai, Umegasai, please. Umegaaki from Toyo Keiza. Can you hear me? Yes, please. I have two questions.

Operator

About the game segment, Page 11, hardware loss increase is shown. Can you elaborate upon this more? Also another point. INSS, in the press explanation, share in the society will be increased by FY 2025 in a major way. If you look at the appendix, the current situation is not that good.

Operator

And in your presentation, ADAS, Its progress is not as much as expected. About the target, you are not going to change the target? These are my two questions. Thank you. Thank you for your questions.

Operator

1st, Game and Network Service, hardware loss an increase on loss was your question. 2nd quarter results, I think you are referring to the 2nd quarter results. There is some technical aspect to this. Last year, there was a temporary FX Gains occurred on the yen basis as compared to that the year before that, there was an increase in loss In the same period last year, from the purchase of parts to the completion, the lead time was long. And in the meantime, yen depreciated rapidly.

Operator

So there was such a special factor. That is a first that's my answer to the second question the first question. Second one, I and SS at the beginning, toward FY 2025, automotive share is going to be increased according to plan. And what is the current situation was your question. In the automotive market itself, it is getting more normalized.

Operator

So in the medium to long term, the growth target remains unchanged. In some OEMs, the circumstances of specific OEMs and changes of the share are the factors. And it doesn't change the medium- to long term trend. That concludes my response. Thank you.

Speaker 1

All right. So next question. Nikkei Newspaper, Mr. Tsumio, please. Yes.

Speaker 1

So I'm Tsumio of Nikkei Newspaper. DMJ, so I have 2 questions. So Page 5. So the target and So the figure is our target is rather high. But I'd like to ask, in this quarter was about the attainment of The SEK 17,000,000, how do you think that you can attain this goal in the unit terms?

Speaker 1

And the small models, Well, the size actually has been the bottleneck here, but the Skyama And how do you see this going forward? Can you elaborate on that, the Spider Man? And The second one is maybe not so related, but the current Here, the game subsidiaries and studios, And I think I have seen this in the mass media reporting, but the labor cuts has been talked about, Cutting personnel. So in the game, the cost control, have you changed the Management policy for cost control? Or are you being more severe about cost control?

Speaker 1

So if you have any particular thoughts on this, can you share with us? And then related to this, in mid- to long term, the live service games. So the life service games, well, I had heard last year about this, but to FY 'twenty six that it is going to be a 12 trillion. But have you ever changed the policy or thinking about changing the policy. So if you have any thoughts on this, please tell us.

Speaker 1

Okay. So from myself, I would answer your questions. About the first question, so PS5, about the target of PS5, Well, and 25,000,000 yen so it is rather high target. So it's not something that we can attain very easily. And we think that The year end sales is the most important sales period.

Speaker 1

And towards this year end sales. We want to have holiday sales season. We want to have the new models for the holiday sales. So the Spider Man is also aimed for the year end holiday sales. So 25,000,000 units we want to keep as a target.

Speaker 1

But in this holiday season, we will take a look at how much. So it's not that we want to increase the installed basis, But we want to have the profitability balance as well. So that's for the first question and answer. And the second question Here, so this is based on the reporting in the media, but I think it's about Banji. And Last year, July, we acquired Disbanji and SIE, the Banji management and distinct franchise to be strengthened and new game titles to be developed and studios, the life size games to support the development and also the studios to have the competitively increased and made more efficient.

Speaker 1

So those have been our attempts and initiatives. And as part of that, Banji, to have the efficiency throughout the company, so the indirect divisions. We had about 100 people. We had cut as the labor, so personnel cut. And the impact on the profitability is already incorporated into Current forecast.

Speaker 1

So PlayStation Studios, so the indirect System. We have reviewed on this and so we had personal cuts regarding this. In the live service Last year, in FY 2025, we have 12 titles. But this It's the 3rd question, I think, about the 12 titles. And then We are reviewing this.

Speaker 1

So the titles For the gamers' expectations, we have not been able to meet the gamers' expectations. But we are trying as much as possible that this would be played by the gamers and liked by gamers for a long time. So the 12 titles, So 6 titles would be released by FY 2025. That's our current plan. And then remaining 6 titles, As for Finturubu List, we are still working on that.

Speaker 1

And the live service games and mauchi play titles, That's the total of that. So in mid- to long term, we want to endow this kind of service, and that's the unchanged policy of our company. But it's not that we stick to certain titles, but for the gamers and gamer titles, Quality, it should be the most important. That's how I feel about it. Thank you.

Speaker 2

Next, we'd like to take the next question. The weekly diamond in Maida san, please. Hello. I hope you can hear me. Yes, we can hear you.

Speaker 2

Please go ahead. Thank you. I have two questions. The first question is about ET and S. Earlier in your presentation, you said that the demand on TV is going down.

Speaker 2

And as a result, you are working on the cost reduction effort. So which kind of cost are you trying to reduce? Please talk about this initiative. The second question is about Imaging and Sensing Solution, the Slide 15. FY 2023 forecast says that additional cost reduction.

Speaker 2

So more specifically, what is your cost reduction effort like? Thank you very much for your question. First on ETS. So the sales and market condition will continue to be So sales cost will be reduced and operation cost will also be cut down. So we have moved down moved up this initiative.

Speaker 2

The sales amount will go probably go down slightly, but in terms of profitability, we believe that we can maintain the same level. So with that in mind, we will work on the cost reduction. As for INSS, On this, the additional cost reduction that we are mentioning here, we have several points included here. The equipment, We are reviewing the equipment condition. So we are also reviewing the situation for next this year.

Speaker 2

And we are reviewing the outsourced work as well. These are the main things that we are working on. That's all.

Operator

Are there any questions? There seems to be none. So with this, I'd like to conclude and Q and A session for the media. Q and A for investors, analysts will start at 4.42. We'll begin the Q and A session for investors and analysts shortly.

Operator

Would you kindly wait until the Q and A session begins? Thank you very much for waiting. Now we'd like to entertain questions from the investors and analysts. I am Kondo of Finance and IR Group, I'll be serving guest master ceremonies. The people On the slide, 3 persons on the slide will be responding to your questions as was case of media session.

Operator

As for the operation of telephon set and attention points for attention, please look at the invitation letter in advance. I'd like to ask you to limit your questions to 2 per person. We set aside about 20 minutes for Q and A session. Now we'd like to begin the question and answer session. Morgan Stanley, MUFG Securities, Ono san, please.

Operator

Nono from Morgan Stanley. One question for game and one for The films: 1st, game network. FY 2024, The factors for increase or decrease of revenue and profit, can you explain These factors, for example, the smaller, lighter version will be launched, and they will have impact upon the result, The price increase of hardware and the planned change of the PlayStation Plus, About half of the year, there will be impact simply calculated. It will be in the latter half of JPY 20,000,000,000. What is your view on this?

Operator

And Banji's acquisition cost will be significantly decreased, you said. If you can comment on the size of impact. And 1st party titles, plural number of titles are pushed out to the next fiscal year, is that also a factor for increasing profit? Are there any other factors which might impact decrease in the profit for the game sector. As for the pictures, long last, Strikes are about to be completed to be ended, and we feel relieved.

Operator

Toward next year fiscal year pipeline and together with release, depreciation cost might occur as well. There may be pluses and minuses for this year and next fiscal year. In the Pictures segment, Is it possible to achieve increased income and increased profit? Or is that going to be difficult for next fiscal year? These are my questions.

Operator

Thank you for your questions. 1st, game and network services. Next fiscal year, What are the factors for pushing up or pushing down the income and the profit? First, Starting from PS Plus, as you pointed out, it will have full year impact from FY 2025. 12 year package, then that's how the impact will be.

Operator

12 month package, which means about 60% of the users. You can think in that way. And then Acquisition related cost, not only Banji, but Number of acquisition related costs occur. It the cost peaked in FY 2023. In FY 2024 On a dollar basis as compared to this year, about 20% decrease will be the level of acquisition cost.

Operator

That is about the acquisition. And then hardware related cost. This fiscal year, In terms of selling units of volume, it is going to be the peak this year. Sales promotion related cost and logistic related costs will be reduced. We are expecting that there will be reduction, and this will be a factor for increase in profit.

Operator

On the other hand, for contents continuing on, additional investment will be made, and this will be partially offsetting the increase in profit? That's my response to the first question. With regards to pictures, The news are there that strike has come to a close in the morning of Japan time. So How it is coming to a close, we do not know the specifics yet, but no doubt that it is going to come to an end. So for the fiscal year's forecast, what we are showing now, we are likely to come very close to that Or there may be a bit more upside opportunities, but we have to examine in more detail.

Operator

This year, the launching pad and comparing this with FY 2024, and is it possible to see increased revenue and increased profit? It's not that simple calculation. Strike ends, then there will be resumption of the theatrical release. And the windowing In FY 2024, there are more windows then for that marketing promotion cost will be incurred to be prepared for that. So we cannot just simply compare fiscal year one fiscal year to another fiscal year and say whether it's possible to see increase in both revenue and profit.

Operator

But the fact that the strike has come to an end is indeed a positive factor in the medium- to long term, and we'd like to increase the profit accordingly.

Speaker 1

Thank you. All right. So next question. From Citigroup, Ms. Eizawa, please.

Speaker 1

Yes. So my name is Eizawa from Citigroup Securities. Can you hear me? Yes. Thank you.

Speaker 1

And I want to ask 1 on game and 1 on semiconductors. And about games, this period, PlayStation 5 hardware, so 25,000,000 units target. So according to what Torik san told us, so 25,000,000 unit will be kept. But The profitability, we should look at the balance with the profitability and this EUR 25,000,000 target. So Specifically, how do you see it?

Speaker 1

How much profitability change would there be so that the 25,000,000 units would not be kept? Or to what extent can we tried to aim for 25,000,000 objective. So the selling cost, how much more would there be necessary? So how much profit would you like to see? So can you elaborate on that and tell us How you think about it?

Speaker 1

And the second question is about semiconductors. So the EOD and Next term, so there is going to be fruit, so the new products. And there's going to be having issues of yield, I think. So about the yield, can you Elaborate on this so that what's happening in the yield of semiconductor, so far it's not going quite well. So Now in the improvement phase, you say, but improvement, is it a structural improvement that's happening?

Speaker 1

Or That because you are changing to the different kind of products. So is it some kind of a more of a One time kind of a treatment, so just by changing the product. So and another additional question, if I may, But the impact of profit, so if you can review this, so 15% impact on the perfect. So it's JPY 35,000,000,000 in numbers. Is that right?

Speaker 1

So can you Tell us about it. Okay. Thank you for your question. So first of all, on the game network services, so 25,000,000 units and the balance with the profitability. So well, if I split it succinctly, as a company, We are having the guidance for this year.

Speaker 1

So this guidance, the operating profit, We are going to keep this operating profit according to the guidance for this year. And the profitability, it's not going to be Too much of a downside from the current estimated profitability. So we don't do such Discount sales or the promotion? That's my answer to the first question. And I NSS about the EOD.

Speaker 1

Well, technical content, it's really the activities. So it's going to be quite a detailed discussion. So I would like to refrain from going to that detailed discussion at this point. But generally speaking, for the semiconductor, so the new wafer, the new product And then the yield to stabilize will require a certain amount of time. So it starts from low yield.

Speaker 1

And then with the improvement, Then the targeted level can be achieved. That's how the new product of semiconductor would go. So I think It's taking more time than we first initially thought. So we are challenging new technology here. And it's not just one new technology, but we have several issues here.

Speaker 1

So that's keeping us from advancing. And our semiconductor is with a long touch, So that wafer in so the improvement situation, we cannot see the total picture very easily because the thought is quite long. And That is causing this yield issue, and that's at the bottom of the yield issue. So the improvement It's not structural, but we have to look at each phenomena, and we have to accumulate the solutions and to make it optimal. And if we have changed to a new different product, no, that's not what we are doing.

Speaker 1

That's my answer. And the impact on the profit, At the 15%, well, how much would that translate into amount? Yes. That's just as you said, JPY 35,000,000,000. Thank you.

Speaker 2

Thank you. We'd like to entertain the next question, SMBC Katsura san, please. SMBC Nikko Securities. Katsura san. Please go ahead.

Speaker 2

This is Katsura from SMBC Nikko Securities. And I have two questions as well, GNNS and INSS. First, On games, next year in March, Ryan san is going to leave and Atotokusanya are going to have this role concurrently. So the background has already been explained in the press release. But in the mid- to long term, Jan NNS, top management, what is your vision?

Speaker 2

That is what I'd like to ask as the first question. And second question on INSS. Next fiscal year, Looking at the supplementary sheet, wafer capacity is 154 ks already. And next fiscal year, the number of models will be expanded. So I think that is one of the reasons.

Speaker 2

But on the other hand, you will be reviewing the lines and also reducing the number of lines. So next fiscal year, the depreciation of the Investment, what is going to be the scale? And depending on that, Will it impact the improvement of profitability and to what extent? That is what I'd like to understand. Thank you very much for your questions.

Speaker 2

First on GNNS. This time, Starting October 1, I became Chairperson. And then in April on April 1, I will be the provisional CEO for interim. And this has already been published, but it will be for At maximum 1 year, I will be an acting CEO. And during this time, My most important mission will be to find the succeeding CEO and assigning the person and transitioning to the person smoothly.

Speaker 2

So game and networking services is a strategically important business for Sony. So of course, employees and other stakeholders have high expectation toward this business. So we want to address the expectation by selecting the appropriate CEO and transition to the person as soon as possible. That is the answer to the first question. And second question on INSS, FY 2024, our view, The investment has been continuing, and depreciation expenses will increase next fiscal year as well because we are moving to die size large size equipment.

Speaker 2

And as a result, the demand will be increasing, but the we will be discerning the market condition recovery. And So next fiscal year onward, we'd like to make decision on investments. I believe that next fiscal year, For the next mid range plan, I believe that we can talk about our next mid range plan thoroughly to you. So as we talk about that, I think that we can talk about the size of investments that we will be making in the next 3 years. That is all.

Speaker 2

Thank you.

Operator

Thank you. The time is running short. So from now, I'd like to ask questions to be limited to 1 question per person. Next, JPMorgan Securities, Aida san, please. Thank you.

Operator

Aida from JPMorgan. One question. Game, I have a question regarding game. 2nd quarter operating profit increased and decreased. The thinking behind that, Can you explain in a quantitative fashion?

Operator

Excluding FX impact, JPY 8,500,000,000 decrease in profit on an year on year basis. The factors for this: hardware negative was large and software was an increase and the promotion and others, S and G was large. So what's its impact for each of these factors? And if it's difficult to say in a quantitative manner, the profitability of software remains whether the profitability of software is not changing from the before. Thank you.

Operator

Quantitatively, we are not disclosing. So I would like to highlight the important points. First, operating profit and the factors for increase. The largest contributor is software. Simply, software sales was good.

Operator

1st party, slightly weak. 3rd party is strong. On a net basis, there will be contribution positive contribution. And then the second is the positive impact of the exchange rate. And next is network service.

Operator

Simply, Net work service revenue increased. And then negative factors are the following. There are 2 factors. 1 is hardware. PS5 sell in is increasing and related to that.

Operator

And then sales is increasing this much and SG and A is increasing accordingly. So these are the positive and negative factors. Thank you.

Speaker 1

Thank you. All right. So next Question and this will be the last question. So from Mizuho Securities, Nakane san, please. Yes, thank you.

Speaker 1

I'm Nakane from Mizuho Securities. The cash flow, I'd like to ask. And it's JPY 1,160,000,000,000,000, a little over JPY 1,160,000,000,000. So at the year end, The inventory level and the GNS and INSS, what kind of a level would that be? And for the next year onwards, so the working capital would be more pressurized.

Speaker 1

So OPMC would be better. So for the game and I and SS, would you tell us how it's going to be or how you view this? Yes. Thank you for the question. And as for the question, so Hayakawa san would answer this question.

Speaker 1

Yes. Thank you, Nakan san, for your question. And this issue that you raised, so JPY 90,000,000,000 for the cash flow is because of the foreign exchange impact and also the inventory and the working Capital, sorry, not inventory, but working capital for the debt we have. And the PlayStation 5 and also the Semiconductor, The Q2 and the Q3, the sales to be increased, so we have more inventory on hand. And as of March end, it's going to be normalized.

Speaker 1

And especially game, the inventory would be much less end March. Okay. And for the next year, so it's going to be a compressed inventory. So how is the Operating cash flow would be so midterm plan. We are reviewing this now closely.

Speaker 1

And about the working capital, it's going to come back. And here, the cash flow would be positively impacted. And what you had asked, the inventory level as of year end G and S and I and S, how different. So about the game, PlayStation 5 sell in would be increased so that inventory would be largely decreased. And iNSS, As has been explained, the revenue is increasing quite rapidly.

Speaker 1

In that case, the inventory is going to be at a level that's appropriate to that. Thank you. And that's all for me. Thank you. As such, we would like to close the Sony Q2 FY 2023 consolidated results meeting.

Speaker 1

Thank you so much.

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Earnings Conference Call
Sony Group Q2 2024
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