Sony Group Corporation (NYSE:SONY) Q1 2023 Earnings Call Transcript

Sony Group Corporation (NYSE:SONY) Q1 2023 Earnings Call Transcript August 9, 2023

Sony Group Corporation beats earnings expectations. Reported EPS is $1.28, expectations were $0.94.

Unidentified Company Representative: Good afternoon, ladies and gentlemen. It is now time to start Sony Group’s Q1 FY 2023 Consolidated Financial Results Presentation Meeting. I am over the Corporate Communications. I would like to first introduce the speakers today, President, COO and CFO, Hiroki Totoki; and Senior Vice President in charge of the Corporate Planning Group DE&I promotion, also support Financial Service and Entertainment segment, Naomi Matsuoka; and then Senior Vice President in charge of Finance and IR, Sadahiko Hayakawa. So those 3 will present the Q1 FY 2023 consolidated financial results also the outlook throughout the FY 2023. And there will be a question-and-answer session, and we plan to have a 70 minutes session. Thank you. First speaker is Mr. Totoki.

Hiroki Totoki: So the speakers today are Matsuoka and Hayakawa. And then toward the end, I’d like to make a summary comments. So first speaker, Hayakawa-san. Matsuoka and Hayakawa will present the consolidated results. Starting from FY ’23 Q1, Sony has adopted a new accounting standard, IFRS 17 new standard, pertaining to insurance contracts, the annual results for the same quarter of the previous fiscal year. And previous fiscal year that we’ll show today are presented after recalculation based on the new standard. We will explain the details later in the Financial Services segment part. Consolidated sales for the quarter increased a significant 33% compared to the same quarter of the previous fiscal year year-on-year to JPY2,963.7 billion.

Consolidated operating income decreased JPY111.8 billion year-on-year to JPY253.0 billion, primarily due to an JPY84.7 billion decrease in operating income of the Financial Services segment. This decrease in operating income on Financial Services segment was primarily due to the impact of the recalculation of the previous weaker years’ results, resulting from the application of the new standard and absent of a gain on the sales of real estate recorded in the same quarter of the previous fiscal year. Adjusted EBITDA decreased JPY90.6 billion year-on-year to JPY406.2 billion. Income before income taxes decreased JPY73.2 billion year-on-year to JPY276 billion. And net income attributable to Sony Group Corporation shareholders decreased JPY43.5 billion to JPY217.5 billion.

Result per segment for the quarter are shown on this slide. Next, I will explain the full year consolidated results forecast for FY ’23. The forecast for the full year is JPY12.2 trillion for sales, an increase of JPY700 billion from the previous forecast. JPY1.170 trillion for the operating income, no change from the previous forecast. And JPY1.750 trillion for adjusted EBITDA, no change from the previous forecast. The forecast for the consolidated operating cash flow, excluding the Financial Services segment, is unchanged from the previous forecast. The assumed exchange rates have been revised to approximately JPY135 billion to the U.S. dollar and approximately JPY146 to the euro. The FY ’23 results forecast by segment is shown here. Now I will move on to an overview of each business segment.

First is the Games & Network Services segment. FY ’23 Q1 sales increased, a significant 28% year-on-year to JPY771.9 billion, primarily due to an increase in sales of third-party software and increase in sales of PlayStation 5 hardware and impact of foreign exchange rates. Operating income decreased JPY3.6 billion year-on-year to JPY49.2 billion, primarily due to an increase in expenses including the acquisition-related expenses of JPY16.6 billion. Despite the positive impact of higher third-party software sales, adjusted OIBDA increased JPY5.7 billion year-on-year to JPY75.9 billion. FY ’23 sales are expected to be JPY4.170 trillion, an increase from the previous forecast of JPY270 billion. Operating income is expected to be JPY270 billion, no change from the previous forecast.

And adjusted OIBDA is expected to be JPY375 billion, an increase of JPY10 billion from the previous forecast. Although we upwardly revised the sales forecast for third-party software, which is performing well, we have incorporated the deterioration in the profitability of PS5 hardware, mainly due to the changes in promotions by geographic region and the sales channel mix. Primarily due to the release of the appealing third-party software and expansion of PS5 penetration, software sales for the quarter reached JPY46.2 billion, a significant 27% increase year-on-year. While there was also positive on the exchange rates, this was 14% higher than the first quarter of the fiscal year ended March 31, 2022, when there was stay-at-home demand. Total gameplay time during the quarter was only 2% higher year-on-year, and we see the year-on-year growth in software sales has been driven mainly by a considerable increase in spending per play hour by the expanding PS5 user base.

PS5 hardware sales were 3.3 million units, a significant increase of 38% year-on-year. This amount is somewhat less than the expected progress toward our fiscal year sales target of 25 million units. But due to the promotion began in July, we are seeing an improvement in the momentum of sales. We have positioned the accelerated penetration of PS5 hardware as one of the highest priorities in this fiscal year, and we will try to work steadily to implement necessary measures to achieve hardware sales target of 25 million units. Towards the end of the calendar year, the first party title, Marvel Spider-Man 2, and major third-party titles are scheduled to be released as well. And we expect that the entire gaming industry and the PS platform will be greatly energized.

Next is the Music segment. FY ’23 Q1 sales increased a significant 16% year-on-year to JPY358.2 billion, primarily due to the increase in streaming sales and impact of foreign exchange rates. Operating income increased a significant JPY12.4 billion year-on-year to JPY73.4 billion, primarily due to the impact of the increased sales and the recording of a remeasurement gain of 6 point — JPY60 billion from making an equity method affiliate, a consolidated subsidiary. Adjusted OIBDA increased JPY8.2 billion year-on-year to JPY82.9 billion. Profit contribution from visual media platform was just under 10% of the operating income of this segment. FY ’23 sales are expected to be JPY1.490 trillion, an increase of JPY80 billion from the previous forecast.

Operating income is expected to be JPY280 billion, an increase of JPY15 billion the previous forecast. And adjusted OIBDA is expected to be JPY335 billion, an increase of JPY10 billion from the previous forecast. Streaming revenue for the quarter continued to grow, up 12% for Recorded Music and 18% for Music Publishing on a U.S. dollar basis. In Recorded Music, we are continuing to deliver hits at a high level. During the quarter, 38 of our songs on average ranked in the Spotify Weekly Global Top 100 songs. More than 70% of songs listened to in the music streaming market in the U.S. are catalog songs that were released more than 18 months ago. So creating continuous hits in the short term simultaneously leads to an enhancement of future catalog and increase in sales and market share over the mid to long term.

At Sony Music Entertainment, we have doubled the number of creative personnel in the last 5 years and the number of artists producing songs for streaming worldwide has increased 35%. As a result, current market share in the U.S. over the 4 years through the last fiscal year has risen from 21% to 27%. And sales and operating income for the Sony Music Group, which includes Music Publishing overseas, have increased significantly CAGRs of 17% and 24%, respectively. In addition to this continuous investment in artists and labels, we aim to achieve stable growth that outperforms the market by expanding our business in new areas such as rapidly growing emerging markets and social media. In the domestic music business, YOASOBI’s TV anime theme song, Idol, surpassed 300 million streams, the fastest song to reach this total number of streams in history according to Billboard Japan study.

It held the #1 spot for 16 consecutive weeks in the total domestic song chart. This momentum is spreading overseas, and the song has become a global hit and the biggest J-Pop hit reaching #7 on Billboard’s Global Hits chart. With the expansion of the global anime market as a tailwind, we expect that overseas expansion of artists, which SMEJ has been focusing on, will accelerate further. Next is the Pictures segment. FY ’23 Q1 sales decreased 6% year-on-year to JPY320.4 billion, mainly due to a decrease in deliveries in television productions and the impact of fewer releases of tent-pole films in the previously — in the previous fiscal year in Motion Pictures. Operating income decreased a significant JPY34.7 billion year-on-year to JPY16 billion, primarily due to the impact of the decrease in sales and impact increase in marketing expenses in Motion Pictures.

Adjusted OIBDA decreased JPY33.4 billion year-on-year to JPY28.5 billion. FY ’23 sales are expected to be JPY1.470 billion, down JPY50 billion from the previous forecast. There is no change to the forecast for operating income and adjusted OIBDA. Spider-Man: Across the Spider-Verse, which was released theatrically in June, has become a huge hit with box office revenue exceeding USD 680 million worldwide as of August 7, making it our highest grossing animated film ever. With regard to bringing PlayStation IP to video, the live-action drama, Twisted Metal, was launched on the Peacock streaming service in the U.S. in July. And the new movie, Gran Turismo, is scheduled to be released in theaters in the U.S. on August 25. Regarding Crunchyroll, the number of paying subscribers surpassed 12 million in July, driven by the exclusive distribution of the television animation, Demon Slayer: Kimetsu No Yaiba Swordsmith Village Arc, which started in April.

And our anime business is steadily growing in a multifaceted way with overseas distribution of the anime film, Suzume no Tojimari, and the strong sales of mobile game, Street Fighter: Duel. Although it is unclear when the strikes in Hollywood will end, we aim to work with alliance of Motion Picture and television producers to negotiate a resolution with the unions as soon as possible so that we can restart normal production activity. Next is the ET&S segment. FY ’23 Q1 sales increased 4% year-on-year to JPY571.8 billion, primarily due to impact of foreign exchange rates despite a decline in smartphone and television sales. Operating income was JPY55.6 billion, an increase of JPY2.1 billion year-on-year, primarily due to the cost reductions in televisions despite the impact of decreased smartphone sales.

Adjusted OIBDA increased JPY3.9 billion year-on-year to JPY80.9 billion. FY ’23 sales expected to be JPY2.430 trillion, an increase of JPY50 billion from the previous forecast. There are no changes to the forecast for operating income and adjusted OIBDA. The market environment for major product categories in the current quarter continued to be the same as the previous quarter with televisions and smartphones facing severe condition while the market for digital camera, headphones and other products remain strong. In each category, we are running our operations so as to respond to changes in the market environment, and we were able to secure stable profits across the entire segment. Inventory levels have improved significantly year-on-year, mainly for television due to the thorough management from production to sales.

And we are managing them at the profit level. As the business environment for televisions and smartphones is expected to continue to be severe, we will pay close attention to costs and inventory control. We also plan to proceed with — early the reaping of income in additional camera space by keeping up with recent strong demand. We have introduced the appealing new products that you see here, and we are focusing on securing the stable profits by continuing to enhance our profit — product appeal. Next is I&SS segment. FY ’23 Q1 sales significantly increased 23% year-on-year to JPY292.7 million, mainly due to high sales of image sensors for mobile products and the impact of foreign exchange rates. Operating income decreased JPY9 billion year-on-year to JPY12.7 billion, primarily due to an increase in expenses such as depreciation and amortization expenses despite the positive impact of foreign exchange rates and the effect of increased sales.

Adjusted OIBDA increased JPY2.7 billion year-on-year to JPY70 billion. For FY ’23, sales are expected to be JPY1,560 billion, down JPY40 billion from the previous forecast. Operating income and adjusted OIBDA expected to decrease JPY20 billion from the previous forecast to JPY180 billion and JPY425 billion, respectively. Recently, the smartphone product market is worsening compared with our expectations due to a delayed market recovery in China, a prolonged slump in Europe and a slowdown in North America. In our previous forecast, we assumed a gradual market recovery from the second half of the current fiscal year, but we have postponed that to the beginning of the next calendar year or the next fiscal year and have incorporated this revised timing into our sales forecast.

In addition, in light of such product market conditions, smartphone manufacturers are making even greater — further adjustment to their parts procurement. And this is having a significant impact on the second quarter following on the first quarter. In addition to smartphones the impact of the slow economic recovery in China, primarily in image sensors for industrial and social infrastructure, is noticeable. And we have lowered our forecast. With respect to the increase in costs associated with the launch of mass production of new products for smartphones, we have reflected the latest production situation and have incorporated additional costs. However, production is gradually stabilizing, and we do not think that costs will continue to increase significantly going forward.

On the other hand, the trend towards larger die-sized image sensors being adopted by Chinese makers in their new smartphone products in the second half of the fiscal year is becoming noticeable, not just in flagship and high-end phones but the middle range phones as well. There’s no change to our view that the trend towards larger mobile image sensors will drive the overall growth of the sensor market, which will grow at average annual rate of around 9% until FY 2030. We plan to continue to implement measures from a mid- to long-term perspective as well, such as strengthen technology development capabilities and securing production capacity so that we can steadily capture growth opportunities when market condition recovers. Last is Financial Services segment.

As we said at the beginning, Sony has adopted the new accounting standard IFRS 17 starting this fiscal year. First, I will explain the impact of the adoption of the new standards, focusing on the important points. For details, please refer to Page 15 of the handout. Under new standard, Financial services revenue decreased primarily because the portion of insurance premium revenue amounting to surrender value that used to be recorded as revenue is no longer recorded as revenue. In addition, under the new standard, the amount of liability increase or decreases depending upon market fluctuations due to insurance contract liabilities being reevaluated based upon financial variables, the latest financial variables, such as interest rates at the end of each quarter.

The increase or decrease of such liabilities related to minimum guarantee of variable life insurance is recognized as profit and loss and impact operating income. Next, I will explain the full year results of the previous fiscal year recalculated based upon the new standard. Financial Services revenue decreased by 39% from the previous standard to JPY889.1 billion, mainly due to nonrecognition of surrender value. Operating income increased by JPY94.2 billion from the previous standard to JPY318.1 billion as a result of a significant decrease in insurance policy liabilities after recalculation, primarily due to the rise in ultra long-term interest rates in the previous fiscal year and the recognition of profit due to that decrease. Because hedging operations meant to continue, the impact of profitability of market fluctuation were undertaken in the previous fiscal year.

In accordance with the previous standard, a significant difference arose as a result of the recalculation from this fiscal year. We have transitioned to hedging operations in accordance with the new standards. Now I will explain this segment’s performance in the current quarter on a year-on-year recalculated basis. Financial Services revenue increased a significant 215% year-on-year to JPY681.4 billion, mainly due to a significant improvement in net gains and losses in the separate account at Sony Life, which benefited from a rise in stock prices in and outside Japan. There is no difference between the new and previous standards when it comes to the impact market fluctuations have on gains and losses in the separate accounts. Operating income decreased a significant JPY84.7 billion year-on-year to JPY54.5 billion, mainly due to the fact that the impact of market fluctuation was controlled as a result of transitioning to hedging operations based on the new standard and due to the fact that there was a gain on the sales of real estate in the same period of the previous fiscal year.

Adjusted OIBDA decreased JPY84.2 billion year-on-year to JPY61.4 billion. The FY ’23 Financial Services revenue forecast is JPY1.320 trillion, an increase of JPY450 billion from the previous forecast, reflecting the result of the current quarter. There are no changes to the forecast for operating income and adjusted OIBDA. As has already always been the case, the forecast does not reflect the impact of market fluctuations from the second quarter onwards. In addition, we expect insurance service revenue result of Sony Life to continue to stably grow in line with the expansion of policy amount in force. Finally, I would like to summarize everything. Business areas such as entertainment and image sensors, which we have positioned as growth areas, are reaching opportunities for growth over the mid- to long term.

And we aim to grow through the unique competitiveness each business has in its area. On the other hand, since the operating environment this fiscal year is uncertain and there are many risks, we are operating the businesses with an emphasis on risk management. In the hardware business of ET&S, I&SS and G&NS, we are responding primarily to the stagnation of the Chinese economy, the slowdown of the economy, mainly in Europe and the United States and geopolitical risks, while in the Pictures business, we plan to focus on various issues such as the strikes in Hollywood. We have reincorporated the expected impact of these factors and countermeasures into our current forecast. Inside Sony, we have begun to discuss the next mid-range plan, which begins next fiscal year, while looking to the potential market recovery from next fiscal year as an opportunity and preparing to reach our next stage of growth.

That’s all for my presentation.

Unidentified Company Representative: Thank you very much. Totoki, Matsuoka and Hayakawa made a presentation. Now at 16:25, we would like to entertain the questions from the media. At 16:50, we’d like to intertie questions from the investors and analysts. And each session consists of about 20 minutes. And some people have already pre-submitted questions so that the pre-link your phone to that registered phone number. And then as to this way to ask questions in some of the matters of consideration, please refer to our invitation letter. So please wait for a few minutes before we resume the session. Thank you.

Unidentified Company Representative: Thank you very much for waiting. We will now like to have the session to entertain questions from the media. The speakers are the same as the previous presenters, the 3 people on the screen. So let us start to entertain questions. [Operator Instructions]. The first question is from [indiscernible] from Nikkei.

Unidentified Analyst: I hope you can hear me. I’m of Nikkei newspaper. I have 2 parts of questions. The first question is that about your financial results. As Mr. Totoki explained to us that — so the situation is maybe leveling off, like games and semiconductors and other issues. But from the Q1, of course, you are in the middle of that phase. But Mr. Totoki, what is your vision for the growth? To which area and segment are likely to grow more? Do you have a vision on this growth scenario? That’s my first part of the question. And my second part of the question is about the situation on the strikes. To what extent that the movie new film release might be delayed because of the U.S. strikes of actors and others. So that in the generative AI is linked to this problem because that might have adverse impact upon music and films and pictures.

Some of the content assets might be undermined by the — potentially by the AI. So what do you think of that the potential impact there?

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Q&A Session

Unidentified Company Representative: Thank you very much for your question. As to your first question, so in the next fiscal year in the growth scenario that I have in mind, actually, in this mid-term business plan that the Content IP, DTC as a technology investment as well as some of the diversified business segment should have intergroup collaboration. Those are promoted. As a result, in the last 3 years, the cumulative — that JPY1.9 trillion of capital investment in equipment imaging led to JPY1.8 trillion for that strategic investment. So gradually, we made progress. For the mid- to long term, we have already planted the seeds for the future growth potential. That’s the first point. As to the collaboration within our group companies and segments, PlayStation game IP will be used.

[indiscernible] HBO, that the actual — the drama TV production, but that became a big hit in 2022 in February. Unchartered was released in the theater, and those were success. Following those successes, numerous projects are ongoing, therefore, so that there’s a strong momentum now like together with the music business. This kind of entertainment business, the 3 segments of the entertainment business, in the next mid-term plan that we expect a big growth, a sufficient growth to be achieved. As with I&SS segment, for this fiscal year, of course, there could be maybe some stagnation or we are levering off the growth to a certain extent. Of course, the revenue sales are going up. In terms of profitability, there’s slightly some areas where we are not fully satisfied.

So we must secure the profitability in a growth scenario. That’s something we have to implement in the mid-term, the plan, and that’s our challenge and priority. In 2024 and afterwards, semiconductor market situation and mainly the market situation improves, especially in China, like a recovery in Chinese smartphone market is expected. But we have to be prepared fully so that we will be ready for the next term. As to respond to your second part of the question about the strike-related issues. It’s not directly just linked to the strikes, but of course, the generative AI has an adverse impact. And I think that’s something I’d like to respond to you. It’s not only affecting these films and pictures. The game of production, the music production and creator support already for anime, that the multilingual, the translation and so forth could be supported by AI.

So the stakeholders have the rights and copyrights, and that should be respected in introduction of AI. Like music copyright, it might be violated. So we have to protect the IP as well as the artist and content. Related issues must be solved, just not by Sony stand-alone, but we have to have the entire interest involved in order to discuss to identify the future solution. That’s my thought on this.

Unidentified Company Representative: So we would like to move on to the next question. , who is a freelancer. Very difficult to hear your voice. I’m very sorry, but I can not hear your voice. Can you repeat your question once again? Can you hear me? Your voice is not clear. Your voice is not clear, unfortunately. Can you just put the microphone a little bit more distantly? I am very sorry, since the voice is not clear, for the time sake, we would like to move on to the next person to ask question. [Indiscernible] from Toyo Keizai.

Unidentified Analyst: Can you hear me?

Unidentified Company Representative: Yes, I can hear you. So please go ahead.