Sony Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 3 speakers on the call.

Operator

The time has come to begin the announcement of consolidated financial results of Sony Group Corporation. I'll be serving as Master of Ceremonies, Okada of Corporate Communications. First, Mr. Totoki, President and COO and CFO, will explain to you the FY 'twenty two consolidated results and FY 'twenty three Consolidated results forecast followed by Q and A. We are scheduled to have a total of 70 minutes.

Operator

Now Mr. Totoki, Please. Today, I will explain the following. Consolidated sales for FY 'twenty two were 11539,800,000,000 yen And consolidated operating income was 1,208,200,000,000 yen both reaching record highs. Income before income taxes was JPY 1,180,300,000,000 and net income attributable to Sony Group Corporation stockholders was JPY 937,100,000,000.

Operator

Consolidated operating cash flow excluding the Financial Services segment was JPY 415,500,000,000, primarily due to an increase in working capital. Results for FY 'twenty two by segment are shown on this slide. The cash flow results by segment are shown here. Next, I will explain the full year consolidated results forecast for FY2023. We have decided to disclose the actual results and forecast for adjusted EBITDA on a consolidated basis, which is a group KPI for the current mid range plan and adjusted OIBDA by segment, which is a metric that adds back a portion of depreciation and amortization expenses to adjusted operating income.

Operator

Please see Page 24 of year material for the methods of calculating these metrics. For FY 'twenty three, we forecast sales of 11,500,000,000,000 yen operating income of 1,170,000,000,000 yen and adjusted EBITDA of 1,750,000,000,000 yen The consolidated operating cash flow forecast excluding The Financial Service segment is expected to increase significantly year on year to JPY 1,250,000,000,000 mainly as the result of a decrease in working capital. The FY 'twenty three results forecast by segment is shown here. Now I will move to an overview of each business segment. 1st is the Game and Network Services segment.

Operator

FY 'twenty two sales were 3,644,600,000,000 yen mainly due to the impact of foreign exchange rates and increased sales The PlayStation 5 hardware operating income was JPY 250,000,000,000, primarily due to an increase in software development expenses and the recording of acquisition related expenses despite impact of increased sales of 1st party software and improved profitability of hardware. For FY 'twenty three, we forecast sales to be JPY 3,900,000,000,000, operating income to be JPY 270,000,000,000 and adjusted OIBDA forecast to be JPY 365,000,000,000 Expenses related to acquisitions since FY 2022, including Banji Inc, that will impact operating income for the current fiscal year are expected to increased approximately 20% year on year to be JPY 65,000,000,000 Last quarter, PS5 hardware sell in reached 6,300,000 units, a record high for PS console for the 4th quarter and 19,100,000 units for the full fiscal year of FY 'twenty two. Distribution inventories have also normalized and we are now able to deliver PS5 to customers without waiting almost all over the world. In addition, The positive impact of increased PS5 sell in has begun to appear in engagement metrics with dollar based 3rd party software sales exceeding the same month of the previous fiscal year in February March.

Operator

Moreover, The number of monthly active users for PS as a whole increased 2,300,000 accounts year on year in March. Since it takes about 1 to 2 months from the time hardware is shipped until the effects of improved engagement becomes apparent, We will pay close attention to the engagement metrics for this quarter and reflect the results in our future forecast as appropriate. We aim to continuously accelerate penetration of PS5 and aim for PSI sell in units for the current fiscal year to be 25,000,000 units, the highest ever for any PS console in history. As for software, we are continuing to strengthen and expand our first party titles. God of War Ragnarok, which we released in November last year won the most award in 6 Categories at the 2023 BAFTA Games Award and with this huge hit, sales of first party software for the full Fiscal year of FY 2022, including Banji, grew significantly with dollar based sales increasing by 41% year on year.

Operator

We're also planning to release a major title, Marvel's Spider Man 2, this fiscal year. We aim to continue creating new IP, rolling out catalog titles for PC and strengthening live game service development. Next is Music segment. FY 'twenty two sales were 1,380,600,000,000 yen mainly due to the impact of foreign exchange rates and an increase in streaming revenue. Operating income was JPY 263,100,000,000.

Operator

In addition to the recording the highest ever operating income for this segment, Operating income was the highest of all 6 business segments. In FY 2022, the profit contribution of Visual Media and Platform was mid teens percent of the operating income of this segment.

Speaker 1

For FY 2023, sales Forecast is JPY 1,410,000,000,000 operating income, JPY 265,000,000,000 and adjusted OIBDA to be JPY 325,000,000,000. Streaming revenue in the 4th quarter increased 23% year on year for recorded music and 29% for Music Publishing, 8% and 13% increase on dollar basis. In recorded music and music publishing, we aim to continue to grow faster and maintain a higher Gross rate and profit margin with influential artists, discover and nurture new talent, expand our lineup through OTAR and AWOL and grow business in emerging markets. And we have improved our ability to be continuously create Hits in recorded music, an average of 43 songs ranked in the Spotify Weekly Global Top 100 in FY 'twenty two, increasing our market share significantly year on year. MylHyderas released flowers in January and it has become a huge hit, recording the highest number of Streams in a week on Spotify.

Speaker 1

Next, the pictures. Primarily Due to the ForEx impact, FY 'twenty two sales were JPY 1,369,400,000,000. Operating income was JPY 119,300,000,000 compared to the previous fiscal year in which A JPY 70,000,000,000 gain from the transfer of business for FY 'twenty three, sales forecast is JPY 1,520,000,000,000 Operating income, JPY 120,000,000,000 adjusted OIBDA to be JPY 165,000,000,000. Sales increased mainly due to an increase in the number of theatrical releases and growth In Crunchyroll and our businesses in India, despite higher sales in Media Networks, operating income is expected to increase only slightly primarily due to increased marketing costs and from the lower sales from having fewer tentpole films. To maximize IP value over the long term as an independent studio, our business structure could JetBlue generated operating income on the segment above JPY 100,000,000 In the U.

Speaker 1

S. Since March, other studios and major video distribution service providers have been releasing large scale movies And theaters is expected to be revitalized. In TV productions, with increased demand for low budget product, We are strengthening our production capabilities by establishing SPT Nonfiction led by Industrial Media, which was acquired in April last year, which has 9 production companies. On March 4, Crunchyroll Anime Awards were held in Japan and about 18,000,000 votes were cast from fans in more than 200 countries and regions. In 2021, 48% of the 2 point 7 preview yen global Japanese anime market was outside of Japan, and anime is growing into a global form of entertainment.

Speaker 1

Amid this growth, the number of paying subscribers of Crunchyroll, our world's leading anime only DTC surpassed 10,700,000 yen as of the end of March. Growth potential comes from the high growth of our business in emerging markets, and we are deepening engagement with fan community such as the overseas distribution of anime movies and through the sales of merchandise. Business performance of Crunchyroll has grown significantly by Media Network Sales and is contributing to the profits despite amortization of costs with acquisition. Next is the ET T and S segment. FY 'twenty two sales were JPY 2,476,000,000,000, mainly due to the impact of ForEx.

Speaker 1

Despite a decrease in TV sales, operating income was JPY 179,500,000,000, primarily due to the impact of decreased TV Sales. For FY 'twenty three, we expect sales to be JPY 2,380,000,000,000 operating income JPY 180,000,000,000 Adjusted OIBDA to be JPY 280,000,000,000 in FY 'twenty two. Despite the severe business environment, We achieved profit almost in line with the initial plan for the entire segment through operations and controlling costs. For end of fiscal year inventory, we further narrowed down our January plan, mainly in TV and Finished at a level almost on par with the end of FY 'twenty one. In FY 'twenty three, risks such as a more Severe economic slowdown are expected, so we have lowered our sales forecast.

Speaker 1

As for operating income, we expect to maintain the level of previous fiscal year by reducing fixed costs in TV and smartphones. Demand continues to be trending well for digital cameras and primarily through the introduction of competitive products. We plan to maximize profit opportunities. In order to strengthen the business structure, we are promoting to access management to promote Growth and maintain profitability of existing business. And therefore, we disclose the actual annual Sales of the profit growth access in the supplemental information, we plan to explain the initiatives in the growth access at the next Business segment meeting.

Speaker 2

Next is the INSS segment. FY 'twenty two sales were JPY 1,402,200,000,000,000, mainly due to Impact of ForEx and increased sales of image sensors for mobile devices. Despite increased Expenses, operating income was JPY 212,200,000,000, mainly due to the favorable impact of ForEx and increased sales. For FY 'twenty three, we forecast sales to be 1,600,000,000,000, operating income to be 200,000,000,000 yen and adjusted OIBDA to be JPY 445,000,000,000. The smartphone product market in the 4th quarter, mainly in China, has deteriorated slightly from the forecast at the time of our previous earnings, and we have to anticipate that the forecast for demand for sensors this fiscal year will start at a lower level than anticipated.

Speaker 2

Based on the recognition that the business environment for the current fiscal year will be extremely unstable, We have factored into the operating income forecast for this fiscal year, the continued slump in demand in the first half of fiscal year and the risk of increased costs from the mass production of new products. On the other hand, even in such a severe environment, our company is driving the trend toward large Larger sized mobile sensors, higher image quality and performance and flagship models of Chinese manufacturers equipped with our large Format 1 inches sensor are being released to the market continuously. Our image sensor business has significantly outperformed our competitors And our global market share on a value basis has grown significantly from 44% in FY 'twenty one to 51% in FY 'twenty two. By launching sophisticated, highly differentiated technologies, we aim to further solidify our leading position in high value added products. By doing so, we aim to steadily build a business foundation that will accelerate growth again when the market for final product recovers, which is expected in FY 'twenty four and beyond.

Speaker 2

Next is the Financial Services segment. In FY 'twenty two, financial services revenues were JPY 1,454,500,000,000 due to a decrease in net gains and losses on investments into separate accounts at Sony Life Insurance. Operating income was JPY223,900,000,000, primarily due to the recording of gains on the sales of real estate at Sony Life and the impact of recovery of funds associated with the unauthorized withdrawal. From this fiscal year, We will apply the new accounting standard IFRS 17, which pertains to insurance contracts. We plan to show the detail Impact on results associated with the change at the next earnings announcement.

Speaker 2

Financial Services revenue is expected to decrease significantly primarily due to the impact of the surrender benefit of insurance premium income no longer being recorded as revenue, whereas the entire amount was recorded as revenue in the past. Concerning this impact, financial services revenue for FY 'twenty three is expected to be 870,000,000,000 yen. The operating income forecast is 180,000,000,000 yen and adjusted OIBDA is forecasted to be 205,000,000,000 yen. Lastly, I will explain the progress of the 4th mid range plan. 3 year cumulative adjusted EBITDA, which is the 4th mid range plan's KPI, has progressed significantly beyond the initial plan, mainly in the Music and Pictures segments and is currently expected to be 5,000,000,000,000 yen or 16% higher than the target of 4,300,000,000,000 yen.

Speaker 2

As you can see, we continue to see steady growth every fiscal year since FY 2020. Regarding capital allocation, we have lowered our forecast for operating cash flow for the cumulative 3 years, the primary source of capital to 2,500,000,000,000 yen from the original plan of 3,100,000,000,000 yen mainly to reflect an increase in working capital in the G and S and INSS segments. Capital expenditure is expected to increase for the initial plan to 1,900,000,000,000 yen with JPY 400,000,000,000 mainly allocated to image sensor capital expenditure and server investments in corporate R and D and GNNS. In terms of strategic investments, since we decided to increase working capital and capital expenditures and in consideration of the current M and A Market environment, we decided to reduce the amount from the initial plan of 2,000,000,000,000 yen to 1,800,000,000,000 yen. To grow over the mid- to long term, We will continue to invest.

Speaker 2

However, in the short term, we aim to carefully assess the valuations and timing investments Given the recent changes in the market environment, we plan to compensate for the decrease in operating cash flow due to the increase in working capital, mainly through short term borrowing and to maintain a total allocation of 4,000,000,000,000 yen We have positioned this fiscal year as a year to achieved targets of the current mid range plan while emphasizing the management of immediate risks at a time when the business environment is unstable. In the next Mid range plan, we aim to achieve a balance between strongly emphasizing mid- to long term business growth and profit growth during the period of the plan. We aim to prepare for this during this fiscal year and show the content at the beginning of the next fiscal year. Together with the Sony Group's management team and the employees around the world, we aim to create a positive spiral of growing our business, attracting talented people, increasing corporate value and giving back to society. That is all from my explanation.

Operator

There was presentation by Mr. Totoki. After this, from For 20, we have Q and A from the media, from 445, Q and A from investors and analysts And we allocate about 20 minutes each for Q and A sessions. Those of you who have made registration for questions in advance, Please be connected to the designated telephone number. Also as to the way of asking questions and matters Be paid attention to please confirm with the invitation letter in advance.

Operator

Those of you who have not registered for questions in advance, You can listen to the Q and A session via webcast. You are kindly requested to wait for a few more minutes before we start the Q and A session. Thank you for waiting. We will now begin Q and A session with media. So those people who respond will be Mr.

Operator

Hiroki Totoki, President, COO and CFO Ms. Naomi Matsoka, Senior Vice President Mr. Sadahiko Hayakawa, Senior Vice President will begin the Q and A session. The first question is Mr. Tsutsumi from Nikkei Shimbun.

Operator

Mr. Tsutsumi, the floor is yours. I have two questions if I may. The first question about the growth going forward In the short term and medium term, this fiscal year, ROIC For each business, it's going to the ROIC going to come down. There is the increase in inventory and other factors are there.

Operator

So when would you expect to see increase in ROIC again? For each business, there may be differences, especially for games and entertainment. Can you explain what is the prospect and going forward? And specifically, what will be the drivers for improving ROIC. Can you please elaborate on that?

Operator

That's my first question. Secondly, in the medium to long term Growth, Mobility and Metaverse are the key in this area. Possible risks And the hurdles and challenges, how do you look at risks and hurdles, for example, competitive environment? What is your outlook? That's my first question.

Operator

And second question, Short term, you will be financing with borrowing. Excluding financial services and net debt, Is this a temporary measure or Totoki san became present and Are you going you will be changing the rules for the discipline and you'll be using more of the debt borrowing. What is the direction going forward? Thank you for your questions. Well then, first your first question, ROIC Entertainment, Mindy, about entertainment, that's your question.

Operator

With regards to ROIC, FY 'twenty two, as you know, especially in game, PS5 inventory has increased, working capital increased as a result which resulted in deterioration of ROIC, that is a major point. Basically, PS5 hardware sales increased, which resulted in decrease in inventory. So this will be working positively for ROIC. And especially acquisition related expenses In FY22 and FY23, JPY50,000,000,000 to JPY60,000,000,000 of expense. So that impact will be much less in FY24 and onwards which will also be a factor to increase ROIC.

Operator

And then for Music, M and A and catalogs acquisition had impact upon deterioration of ROIC. But in the medium to long term, M and A is sure to contributes to growth and the catalog having catalog is indeed enhancing and strengthening our position in the industry. Therefore, for ROIC, we look at medium term perspective and I believe that it is going to come to optimum level. As for the pictures, recovery from the COVID-nineteen and reopening of the economy, So theatrical release will increase and production will also be increased, production expense increases. ROIC will go down, but then with the theatrical release, profit will be generated and ROIC will go down again.

Operator

So we will be growing in the medium term. And then Mobility and Metaverse, What possible risks are there and what are the hurdles was your question. With regards to Mobility, We are in the mid of development. So at this point in time, we do not We are not at a stage where we should be discussing risks or concerns, but opportunities are huge. Industry is transforming.

Operator

It is a time of transformation. So we take advantage of this time and with joint venture with Honda Motors, we are going to show results. And then with regards to Metaverse, the expectation is higher than no one is expecting. But in the medium to long term, with the evolution and development of technology At some point in the future, the market will blossom and more than anything else, We are a company which is centering around entertainment and 3 d CG rendering related metaverse, We have technology which is our strength. So in line with the growth of the market in a timely fashion we are going to maximize our technology.

Operator

And then net debt, excluding Financial Services, Net debt situation, debt equity balance is basically the balance with the rating. So on that point, I would like to invite Mr. Hayakawa to make some supplementary comment. Thank you for your question. 1st, balance sheet net debt you mentioned.

Operator

As of the end of March, The consolidated excluding financial services JPY 590,000,000,000 as Toktoki san explained In short term, PlayStation 5 production increased, which resulted in increase in working capital. And this is PS5 is to be penetrated widespread for growth and with the intention we are increasing working capital. As Tataki said in his speech, for these, we finance with a short term borrowing. Next fiscal year or this fiscal operating cash flow is 1,250,000,000,000 yen And from Q3 this fiscal year, we are going to convert inventory into cash and manage cash. Now about fiscal discipline, basically our fiscal discipline remains unchanged.

Operator

We have a strong financial basis. For example, one of the discipline, the ratio of capital to the shareholders is 50 point 3% we have stronger financial foundation. So while maintaining fiscal discipline, we are making investment for growth. So the growth investment and the fiscal discipline and the efficiency of balance sheet, we hit the right balance and come up with a fiscal the financial capital financial policy. Thank you.

Speaker 1

So we would like to invite next question please So from Toyo Keita, I hope you can hear my voice. Yes. So I have two questions. The first question is due to the macroeconomic So for the AT and S, I think you have referred. So in the European country, there have been a slowdown in the economy.

Speaker 1

And therefore, due to the reason, there are lots of companies providing conservative forecasts. And therefore, How it's been incorporated in FY 'twenty three forecast? So that is my first question. And the second question is that the outside From the financial results, because there have been changes in the top management of the financial company. And therefore, could you make a comment on this?

Speaker 1

So thank you very much for the question. For the first question, talking about the macroeconomic condition being changed And looking at the whole, so the business environment will be here. There have been a financial Restrained and also there due to this Ukraine issue and also the global economy disruption. And those Conditions have not changed from the last year, and therefore, I don't have any optimistic forecast. However, In advanced countries and especially in the European countries, I believe there will be a slowdown.

Speaker 1

And also for the emerging countries like China, So because due to the reopening of the pandemic, there is a forecast for the recovery. However, my gut Feeling is that there is still transparency, and therefore, that is a global condition. However, for our business So from our business perspective, so the U. S. Economic condition is going to give a direct impact.

Speaker 1

And also, there is The great impact to the global economy. And therefore, we fore focus on that U. S. Economy. And talking about the so there have been a change of CEO, and our intention For this change is that Mr.

Speaker 1

Endel is going to assume the CEO position Starting from the next term because he had worked in the Finance Ministry and also the FSA. And therefore, he had contributed to the smooth operation of the monetary market, and he has a great knowledge. And therefore, Utilizing his know how as well as knowledge and experience, we would like to utilize in the corporate governance sustainability and also in the Global Economic Creation. And therefore, he has this great knowledge. And therefore, since FY 2020, So he had been serving as a senior advisor giving us advice.

Speaker 1

And this time, so we Thank him to contribute to this leadership. And therefore, from the overall decision, we had asked him

Speaker 2

Let us move on to the next question. Nakajima san from Kyoto Tsushin, please. This is Anna Kaguma from Kyoto Tsushin. Can you hear me? Yes.

Speaker 2

I have two questions. Regarding PlayStation 5, This fiscal year, JPY 25,000,000 is the target, which is the highest ever. Compared to PS 1 and two, Is it the highest ever compared to those units? If that is the case, smartphone games is recently very popular and The hardware costs have been going up. Prices have been going up.

Speaker 2

With such a severe environment, Is PS5 really popular? What is your take on that? And for smartphone Games being really popular, the game consoles, what is the What is going to be the changes in the existence of that? In FY2023, On a profit basis, this part is going to go down for software. So you talked about the increase in software development costs.

Speaker 2

What is the background of that? Can you specifically share that information with us? Thank you very much for the question. So this is about the games. For this fiscal year, the target for PS5 is 25,000,000 units.

Speaker 2

The reason is because compared to the past PES generations, compared to them In a single fiscal year, 25,000,000 units, if we can achieve that, it will be the highest level ever. The reason why we believe that this is possible, PS4 customers exist now and The PS4 usage use them and they switch to PS5. And we looked at how much would be switching. And also, there are customers new customers Also, and we've been looking at that as well. And based on the data, we have put together this forecast.

Speaker 2

And based on this forecast, We believe that 25,000,000 units within this fiscal year is something that we would be we believe that we can achieve. And also regarding the second question or rather, what would be the meaning of having These game consoles in the future and regardless of the times, having some kind of hardware at hand is necessary. The computing power will be at hand or it would be it could be in the cloud. So in the future, that change could happen. But in any case, some kind of a client would be necessary to enjoy different games.

Speaker 2

So with the evolution of technologies and the hardware that matches the times, providing that type of hardware will create value. And also regarding your second question, even though the Revenue is going up. Why is the profits going down? 1 is The game development costs are going up. And also from a technical standpoint, the acquisition related costs is increasing this term.

Speaker 2

The game development cost is going up because of the following reasons: the first party software development is going to be strengthened And the live services will be launched. And intentionally, we are enhancing this part. So that is why the expenses are increasing. That's all.

Operator

Now we'd like to move on to the next question. Asaka san from Nikkei Business, please. Asaka from Nikkei Business. Can you hear me? Yes, we can hear you.

Operator

Thank you. About the decrease of operating cash flow, Earlier, you said that the working capital has increased. Can you elaborate more specifically what Other factors which resulted in increase in working capital? Secondly, is this impact temporary or This will be continuing into this fiscal year, please. Thank you.

Operator

On that question, first, FY 'twenty two operating cash flow was low level and the reason for that And is it going to recover? The conclusion is it is going to recover next year and the details I would like to ask Hayaka san to explain. Thank you for your question. Your question about operating cash flow, FY 'twenty three result, JPY 415,500,000,000 increase in working capital is mainly from Game Business and Image Sensor Business increase in the inventory. Game business, as I mentioned earlier, PlayStation 5 Production, There are constraint in production, but the constraint was removed.

Operator

So which increased production, which resulted in increased working capital. Secondly, the movie production Cost and cash outflow is there with the production. Under COVID-nineteen, the film production was not as much as possible in the past and in production, marketing experience is incurred, but the theatrical release is not done. So cash flow outflow was not there during pandemic, but from next last fiscal year Normalization occurred, so increase in working capital and the normalization resulted in increase in theatrical release. As Mr.

Operator

Totoki said earlier, for this fiscal year, PlayStation 5 will be sold when the Operating cash flow of JPY 1,250,000,000,000 we are expecting. That's all from me.

Speaker 1

So due to the time constraint, we would like to invite the last question. So please So I think we have no more questions. Therefore, we would like to conclude So from the freelance, Nishida san, please. So are you able to join Nishiro san, please? So we would like to conclude this Q and A session.

Speaker 1

So we are going to have the Q and A Session with the investors and analysts from 44, 45. Thank you. So we are going to Thank you very much for waiting. Now we would like to start Q and A session with investors and analysts. So I'm going to serve as a moderator.

Speaker 1

My name is Shinichi from IR Group. And the respondents are Those three people. And please refer to the instruction that have been already sent. Now we would like to start Q and A session. If you have any question, From BOFA Securities, Hirakawa san, please.

Speaker 1

Thank you very much. So this is Hirakawa from BOFA Securities For the sensors and games and today, so according to the presentation, ISS has been risen to 53%. And therefore, so I think This kind of changing to the large scale has contributed to the improvement to 51%. And are you going to improve more. And also talking about the development roadmap with the club partners.

Speaker 1

And the second is about the gaming. And there have been an increase of the cost for the games and also for the MA cost, So 20% increase, so increase of JPY 10,000,000,000 so game development cost. And how much increase was there for the game development cost? Those are the two questions. Thank you very much for the question.

Speaker 1

For the first, for the I and SS market share. So as I have mentioned in my presentation, so currently for the smartphones, cameras And for the sensors, so the large scale centers and that's driving so we are driving. And for the Chinese OME, and there have been 1 inches sensors. However, thinking about that, in the mid term, We are able to increase our market share in the future. So this is the first point.

Speaker 1

And for the second Point for the game and network services, the game development cost and how much increase was there. So Matsuoka is going to explain. Matsuoka san, please. So talking about the development cost for the And cost for the games and how much increase was there? So actually speaking, So HR costs and also the development costs.

Speaker 1

So and also due to the increase of M and A Cost was there. And talking about the HR costs and also the development costs. So for the within that, the development cost in comparison to previous year, we expect an increase. However, we are going to so I think we are able to offset the costs. And for the M and A cost, So the Banji Inc.

Speaker 1

For this year for the full year, we are going to be consolidated and therefore, that is JPY 12,300,000,000 increase and therefore JPY 65,000,000,000. So talking about the sales cost and for the PS5, So we expect more sales of PS5 and therefore, there will be the increase of that cost. Thank you very much.

Speaker 2

Moving on to the next question From JPMorgan Securities, Ayada san please. Thank you. This is JPMorgan. I also have two questions. First question regarding games.

Speaker 2

This term, the operating profit is JPY 20,000,000,000 It's going to increase by JPY 20,000,000,000. On Page 15, there are several items listed up. So can you elaborate a little more on them? Mainly, there are 3 points. The hardware Loss is going to improve.

Speaker 2

Right now, the yen is $130 to the dollar. So is it based on that or are memory and parts cost going to go down? So Are there any factors that would drive the improvements? And for the software, The first party software is going to decrease according to your forecast. How about 3rd party software and other types?

Speaker 2

And for SG and A, you talked about that just now. Last year, It was not really included. So what is the difference between this term and last term for games? Secondly, for image sensors, for Q4 and Q1, if you compare The wafer introduction was slowed down. From your perspective, the smartphone market situation, Depending on the regions or North America, depending on the models and channels And if there's any periods that will we see recoveries, please let us know.

Speaker 2

Thank you very much for your question. Regarding your first question regarding the gains, this term compared to before It will the profits will go up by JPY 20,000,000,000. And what is the breakdown of that? First of all, regarding the hardware, There is the foreign exchange situation and also the material cost is also a factor. So it's a combination.

Speaker 2

And with that, we believe that the profit will improve And also regarding the software, it's a slight increase, but basically it will be flat. The add ons is not Going to particularly go down with in our assumption regarding the 3rd party software, maybe we are a little bit careful. In the Q1, we will look at the performance of the Q1 and then review it once again. So that was about the software. And also Regarding how it is recognized, from this term, For some software development costs will be lifted up.

Speaker 2

The Life Services is a new service that we will develop and provide. And along with that, the development process has been revisited And a part will be included in the capital or it will be capitalized. That's all. And regarding INSS excuse me, the smartphone market situation. Regarding China, we are not optimistic.

Speaker 2

If we look at the logistical inventory levels,

Speaker 1

in the

Speaker 2

Q4, at around February, it went down slightly. But in March, it went up again. So we believe that we should not be optimistic. And also the mid to low Camera sensors, the inventory levels of our competitors are quite high. So we believe that the price will be going down rapidly.

Speaker 2

So again, we're not optimistic about that. And in North America, in Asia, the smartphone markets there, especially for the high end Smartphones. In the Q4 compared to the Q4, the situation has weakened slightly. So for FY2023, that is our assumption. So overall, For the smartphone market, we believe that we should not be optimistic.

Speaker 2

So currently, that is what we believe. Personally, I believe that the recovery would come in, in FY 2024. That's all.

Speaker 1

Thank

Operator

We'd like to move on to the next question. SMBC Nikko Securities, Katsura san please. Thank you. Katsura from SMBC Nikko Securities. Two questions.

Operator

The first question, Cash flow excluding finance service, you said JPY 1,250,000,000,000 operating cash flow. Investment cash Can you please explain as well? Semiconductors CapEx plan, You are exerting break as compared to last year. So maybe the background as you have explained. Other than that, if there is key points about the cash flow please, investment cash flow.

Operator

And secondly, related to the operating cash flow, inventory, Q3, Q4, you maintained high level. This year, the inventory control, how do you control inventory Procurement of Materials and Forecast, what kind of level of inventory do you have in mind? These are my two questions. Thank you very much for your questions. Now about cash flow, Hayakawa will be responding.

Operator

Thank you. About investment cash flow, Last fiscal year, investment cash flow, operating cash flow is JPY 400,000,000,000. Cash outflow has increased and the investment cash flow a bit more than JPY 300,000,000,000 increase. Strategic investment With acquisition of Banji Inc. Increased and also CapEx was also increased, which resulted in increase in investment cash flow.

Operator

For this fiscal year, strategic investment of course for future growth, we take opportunity, we are exploring opportunities. On the other hand, in view of the current market environment, as Mr. Totec said in his presentation, we look at valuation and timing, But more recently, we are to be more conservative and cautious. That's all from me. About CapEx, as has been explained, INSS CapEx is reflected.

Operator

And then inventory control, by each business segment, There are ways of management. With regards to games, for the year end So we'll be increasing inventory in the first half and toward the end of the year, this will be more normalized. And then ET and S, this fiscal year or the last fiscal year, the result, There were some concerns, but it ended up that we are able to control the inventory very well. So for this fiscal year likewise, we are going to have the conservative sales plan and appropriate level of inventory is to be maintained and controlled and will continue to do so. IANSS, Logic and SENSAR strategic inventory will be reduced from the Q2 onwards.

Operator

Amount of inventory, The sales size will increase. So end of FY 'twenty three as compared to the end of FY 2022 is going to be higher. However, the turnover month on a forward basis, Then it's going to be appropriate level. We are calculating that it is on appropriate level and we are going to bring it to the appropriate level. That's all from me.

Operator

Thank you.

Speaker 1

Thank you very much. So we'd like to move on to next question from the Citigroup. Ezawa san, please. From Citigroup, Uzhawa. So I have two questions.

Speaker 1

The first one is about OIBDA. You're going to start disclosure. And therefore, this is in comparison to EBITDA. So what is the difference? And therefore, why you are Going to start the disclosure of OIBDA.

Speaker 1

And also going forward, EBITDA And OIBDA, will there be differences or rather a larger gap between the 2? And if that is the case, Please explain the logic. And the second question is about the semiconductor for the new fiscal year operating Profit. So there have been the reason for the changes of operating income. And however, increase of the sales and increase of revenue, however, because I think you have listed according to the value of absolute value.

Speaker 1

And therefore, the sales is JPY 20,000,000,000. However, the absolute value in comparison to others is rather small. So is there any reason behind? Those are the two questions. Thank you very much for the question.

Speaker 1

For the first one, for the OIBDA disclosure. So in comparison to EBITDA, because it doesn't include outside of the sales And therefore, for the 6 segments, so outside of the sales Well, because we don't distribute the material. And therefore, looking at the segment OIBDA, So in comparison to what? Because it's much similar to the EBITDA. And whether The GAAP is going to increase.

Speaker 1

That's not going to happen in the future. So for the time being, for 3 years, As an important KPI, the consolidated EBITDA, so obvious, the cumulative 3 years figure. So that had been outlined in the 3 year business plan. However, looking at each segment, So therefore, naturally so I think it is necessary to explain. And therefore, we at this Timing, we decided to disclose the OIBDA.

Speaker 1

And therefore, Because this will be an access with the external in basis of the external communication. So talking about I and SS. So with the increase of Sales and the impact to the revenue is slightly small. So that was a question. However, talking about this point, Well, because, of course, there will be an increase of revenue.

Speaker 1

However, well, because with the mass production of the new product, there will be more costs required. Therefore, The profitability for FY 'twenty three will go down. And therefore, Taking into this consideration into our forecast.

Speaker 2

Yes. Thank you. Yes. We only have a short time left. So the next question will be the last one.

Speaker 2

From Mizuho Securities, Nakane san please. This is Nakane from Mizuho Securities. Thank you very much. I have two questions. I would like to understand the assumptions that you're using for this term and the ones that you did not Explain.

Speaker 2

Regarding our end assets, at the end of the fiscal year, the production capacity assumptions And the inventories are going to increase. What is the operations or movements after Q2? And Totoki san talked about this earlier. You have the mid to low Inventories, until the last term, the mid to low was also something that you were going after proactively. And I'm sure that you still have some inventory left.

Speaker 2

Last term and this term, you will be focusing on high end this Term for the remaining inventory, how about the risk of the valuation? And is that also Something that you have already reflected and is that something that we should not be concerned about? 2nd question is about H and S. The TV is improving and R and D costs are going to go up. The TV and audiovideo and cameras, mobile and others, If we look at these categories, TV is going to go into the black from red.

Speaker 2

How is it going to improve or how is it going to deteriorate? It could be qualitative, if you can. Thank you very much for the questions. Regarding INESIS, at the end of the fiscal year, What is the assumption for the production capacity regarding this? One moment please.

Speaker 2

It's in the handouts. For FY22, in the 4th quarter, average Capacity for the facilities would be 133 ks per month and in the It will be 160 ks per month in terms of the introduction end. For FYA 'twenty three first quarter, 137 ks and then 127 ks for what will be fed in. And also focusing on the high end, that part is not going to change. Regarding the mid to low inventory valuation reduction risk, as of now, We don't think that we will go to that point where we would have to reduce the valuation.

Speaker 2

Regarding the strategic Inventory, the general purpose items can be stably sold. So we don't believe that it would go to that point. Regarding ASP, mid to low, for this term, The situation is going to become severe. We believe that there is a possibility of that. So that's the overall big picture.

Speaker 2

And also regarding ATS, In each category, regarding the profits, To talk about this qualitatively, for the digital cameras, In FY 'twenty three, the revenue will go up and the profits will slightly go down. And also for TVs, the revenue will go down Significantly, the profitability situation will improve. And In the latter half of last year, we struggled. So this term, it is a conservative sales situation. And also And for other categories, headphones, the revenue will go down, profits will go up.

Speaker 2

The high end high value Models, added value models is where we're going to focus on. And also for mobile, the revenues will go down and profit The stability situation will improve. The units will be narrowed down and fixed costs will be will go down And we will try to improve profitability. For the different categories, from a qualitative basis, that is what we believe would happen. That's all.

Speaker 2

Thank you very much, Mr. Nakane. With this, we would like to end The financial result announcement for the Sony Group. Thank you very much.

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Earnings Conference Call
Sony Group Q4 2023
00:00 / 00:00
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