Sony Group Corporation (NYSE:SONY) Q1 2026 Earnings Call Transcript

Sony Group Corporation (NYSE:SONY) Q1 2026 Earnings Call Transcript August 7, 2025

Sony Group Corporation beats earnings expectations. Reported EPS is $0.2904, expectations were $0.2505.

Unidentified Company Representative: [Interpreted] It’s now time to begin the Sony Group Corporation’s consolidated earnings announcement meeting. I’ll be serving as the MC. I’m Ishii from Corporate Communications. Today, the financial results for the fiscal ’25 first quarter and the full year forecast will be presented by Lin Tao, Corporate Executive Officer and CFO. Then an overview of the Financial Services segment, which is scheduled for partial spin-off and listing at the end of September will be given by Toshihide Endo, President and CEO of Sony Financial Group, Inc. That will be followed by a Q&A session. The entire session is scheduled to last about 70 minutes. Please note that Ms. Tao wishes to deliver her remarks directly in English to the global audience. So a prerecorded video will be streamed on the English channel.

Lin Tao: Hello, everyone. Today, I will explain the content shown here. After that, Mr. Endo will explain the financial results of Sony Financial Group. Sales of continuing operations for the quarter increased 2% compared to the same quarter of the previous fiscal year to JPY 2,621.6 billion, and operating income increased 36% to JPY 340 billion, both of which were record highs for the first quarter. Net income increased 23% to JPY 259 billion. The financial results by segment are shown here. Next, I will explain to our full year results forecast. Our sales forecast is unchanged from our previous forecast of JPY 11,700 billion, and we have upwardly revised our operating income forecast from our previous forecast by 4% to JPY 1,330 billion and our net income forecast by 4% to JPY 970 billion.

We raised our forecast for operating cash flow by 2% to JPY 1,270 billion. The forecast for each segment are shown here. Now I will provide an update on the impact of additional U.S. tariffs. Although there have been significant developments in the past few weeks regarding the situation surrounding the additional tariffs, there are still some fluid aspects such as product-specific tariffs. We plan to carefully assess the impact and our response throughout this fiscal year based on multiple scenarios. Furthermore, we need to carefully consider the impact on each business of the product and pricing strategies we aim to undertake in response to the additional tariffs. Taking this into consideration, we have decided to present the impact of the additional tariffs as an estimate for all of our continuing operations, as was the case in the previous forecast.

We expect the impact on operating income for FY ’25 to be approximately JPY 70 billion, which is a decrease of JPY 30 billion from the previous forecast based on the tariff rates announced as of August 1. We had nearly completed the diversification of the production locations of our main products by the end of the quarter, and we expect to complete the measures we are planning by the end of the first half of the fiscal year. We intend to continue to monitor the situation and take actions to minimize the impact. Now I will turn to an overview of each business. First is the G&NS segment. FY ’25 Q1 sales increased 8% year-on-year to JPY 936.5 billion, primarily due to an increase in third-party software sales, partially offset by the negative impact of foreign exchange rates.

User engagement continued to increase year-on-year with the number of monthly active users across all of the PlayStation in June, increasing 6% compared to the same months of the previous year to 123 million accounts, and total play time for the quarter also increased 6% year-on-year. Operating income increased approximately 2.3x year-on-year to JPY 148 billion, a new quarterly record high for the segment, primarily due to the impact of the increased sales of third-party software and increase in network service revenue. As a consequence of the recent strong user engagement trend, we have upwardly revised our FY ’25 forecast for sales slightly from last time to JPY 4,320 billion and our FY ’25 forecast for operating income by 4% to JPY 500 billion.

Q&A Session

The improvement in operating income for FY ’25 compared to the previous fiscal year is expected to be driven primarily by an increase in our strong network service revenue, cost reduction and an increase in first-party software revenue. In our Studio business, our live service game revenue is steadily growing, thanks to the MLB The Show series, Destiny 2, and Helldivers 2, and it contributed more than 40% of our first-party software revenue during the quarter. In the single-player AAA title space, we plan to release Ghost of Yotei in October, following the release in June of Death Stranding 2: On The Beach, which received a Metacritic score of 90. We look forward to many game fans enjoying these titles. We decided to postpone the release of Marathon to further improve the quality of the game play.

Based on community feedback, we think we can further enhance the overall gaming experience by deepening game play and elevating narrative immersion. So we are working hard to do that. MAU in June, 4 years and 7 months after the launch of PS5 increased 32% from the 93 million MAU accounts in June 2018, the same period after the launch of PS4, and they continue to consistently grow. Content and Service revenue is expected to grow approximately 50% on a U.S. dollar basis in the current fiscal year forecast compared to the level recorded in the fiscal year ended March 31, 2019, exceeding the MAU growth. This indicates that in addition to the increase in the number of users, an increase in spending per user is contributing to revenue growth. We expect Content and Service revenue to continue to grow steadily from next fiscal year onwards as well, thanks to the user community we have cultivated to date.

Next is the Music segment. FY ’25 Q1 sales increased 5% year-on-year to JPY 465.3 billion, primarily due to higher revenue from streaming service and increase in revenue from a mobile game, partially offset by the impact of foreign exchange rates. Operating income increased 8% to JPY 92.8 billion. On a U.S. dollar basis, streaming revenue for the quarter increased 7% year-on-year in Recorded Music and 8% in Music Publishing. We have upwardly revised our previous FY ’25 forecast for sales and operating income slightly to JPY 1,870 billion and JPY 360 billion, respectively. In Recorded Music, albums from Sony Music Entertainment owned and distributed labels claimed 42% of weekly top 10 global albums on Spotify during the quarter with Bad Bunny’s new release taking the #1 spot for 6 consecutive weeks.

The contribution of catalog products to our revenue continues to increase, and we remain committed to acquiring catalogs in both the Recorded Music and Music Publishing business since we believe that the opportunity to increase the monetization of these assets by acquiring more of them will continue. In Visual Media and Platform, Demon Slayer: Kimetsu no Yaiba – The Movie: Infinity Castle, which was released on July 18 in Japan, has been a massive hit attracting 12.55 million people to theaters and generating JPY 17.6 billion in box office revenue as of August 3. We plan to release the film in the U.S., Europe and certain countries and territories in Asia, Central and South America, distributing it along with Crunchyroll and Sony Pictures, and we look forward to it being a major global success.

Next is the Pictures segment. FY ’25 Q1 sales decreased 3% year-on-year to JPY 327.1 billion, and operating income increased 65% to JPY 18.7 billion. On a U.S. dollar basis, sales increased 4% year-on-year and operating income increased 76%, primarily due to higher series deliveries in Television Productions. There is no change to our forecast from the previous forecast. In Television Productions, the second season of the Last of Us, which was renewed for a third season, received several Emmy nominations. In Feature Films, 28 Years Later has become a box office hit after crossing $150 million globally, and K-pop Demon Hunters produced by Sony Picture Animation has achieved massive success, becoming the most-watched Netflix original animated film of all time.

Crunchyroll is steadily growing its paying subscribers and is expanding the global anime community through such activities as hosting the Crunchyroll anime awards in Tokyo in May. Now I will explain our strategic partnership with Bandai Namco, which we announced on July 24. Through this partnership, we plan to accelerate our collaboration with Bandai Namco even more than before, working to do such things as co-create new IP, collaborate on video production, distribution and merchandising in the anime and manga fields as well as strengthen marketing through the sharing of data. Additionally, in the field of experiential entertainment, we aim to create new Kando experience by bringing together the strengths of both companies, such as Bandai Namco’s knowledge and venue and Sony’s technology.

Next is the ET&S segment. FY ’25 Q1 sales decreased 11% year-on-year to JPY 534.3 billion, primarily due to a decrease in unit sales of TVs and the impact of foreign exchange rate. Operating income decreased 33% to JPY 43.1 billion, primarily due to the impact of decrease in sales and the impact of foreign exchange rates. There is no change to our forecast from the previous forecast. Except for televisions, where competitors engaged in more aggressive pricing than we had anticipated, market conditions during the quarter progressed generally in line with our expectation across the other major product categories. The Imaging business performed well, essentially in line with our original projection, supported by the continued tailwind of the subsidy program in China.

Last June, at the largest Hollywood film production equipment exhibition, Cine Gear Expo 2025, we exhibited a system that links XYN’s spatial reproduction display with the VENICE Extension System Mini as a form of new content creation. It attracted strong interest from the film production creators in attendance. In this segment, we aim to accelerate the expansion of our creation centered business through these products and solution services. Next is the I&SS segment. Despite the impact of foreign exchange rate, sales for the quarter increased 15% year-on-year to JPY 408.2 billion, primarily due to increased shipment of sensors for mobile phones and digital cameras. Operating income increased 48% to JPY 54.3 billion as the impact of the increase in sales significantly exceeded the negative impact of foreign exchange rate.

There is no change to our forecast from the previous forecast. The market for smartphone continued to recover gradually on a global basis. Excluding the impact of foreign exchange rate, mobile sensor sales for the quarter grew steadily due to an increase in sensor shipment volume and an increase in unit price on a U.S. dollar basis. Although recent shipment volume is increasing year-on-year, taking into account the possibility that customers are bringing forward orders due to the additional tariffs, we expect the annual shipment volume to be on par with the previous fiscal year. From FY ’25 Q2 onwards, we expect sales to steadily increase due to rising unit price resulting from further progress towards larger- sized sensors and higher added value despite an expected deterioration in foreign exchange rate compared to the previous fiscal year.

In the consumer camera space, in addition to robust demand for single-lens camera, the growing demand for video is driving demand for sensor used in new video camera, such as handheld cameras. We aim to benefit from this market expansion and create new revenue opportunities. To summarize, we believe that during the quarter, we made steady progress toward achieving the numerical targets we established in our fifth mid-range plan as profit continued to increase, primarily in the G&NS, Music and I&SS segment. On the other hand, we expect that uncertainty in the business environment, such as additional tariffs in the U.S. will have a greater impact from FY ’25 Q2 onwards, and we will focus on conducting business operations that anticipate change while preparing for risks.

This concludes my remarks.

Unidentified Company Representative: [Interpreted] Now Mr. Endo will provide an overview of the Financial Services segment performance. Mr. Endo, please.

Toshihide Endo: Now I will explain the financial results of the Sony Financial Group. On an IFRS basis, adjusted net income for the quarter increased JPY 0.3 billion compared to the same quarter of the previous fiscal year to JPY 23 billion, primarily due to the improvement in the loss ratio at Sony Assurance. Adjusted net income of Sony Life decreased JPY 1.0 billion year-on-year to JPY 15.6 billion, primarily due to the impact of rising interest rates, partially offset by an improvement in the funding cost as a result of the decrease in repo transaction. Insurance and accounting under IFRS requires an amount prepared for the future uncertainty be recorded as a risk adjustment liability. As interest rates rose during the quarter, the risk of mass cancellations increased from an accounting valuation perspective, which reduced adjusted net income through the recognition of a loss and a decrease in the contractual service margin amortization.

The new business acquisition at Sony Life continued to trend at the high level of the previous fiscal year with the annualized premiums from the policies enforced during the quarter increasing JPY 16.1 billion to JPY 1,313.6 billion, demonstrating strong growth, especially in the corporate insurance sales channel. The recruitment of life planners and an agency supporter is progressing well, and our sales channels are continuing to expand. Next, I will explain the progress of our measures to strengthen our financial foundations. As I explained at the Investor Day in May, the interest rate sensitivity of our assets exceeds that of our liability, resulting in an overhedged position at Sony Life. To address this, we are selling bonds and undertaking reinsurance over the course of 2 years, including this fiscal year.

In the quarter, we accelerated the sales of bonds that we had planned to sell over the course of the full fiscal year. As a result, the ESR level at the end of the quarter improved 3 percentage points, mitigating a significant negative impact of rising interest rates. Our consolidated ESR was 184% and Sony Life’s stand-alone ESR was 163%. Loss on sales of securities is deducted as an adjustment item from the adjusted net income. Going forward, we aim to further strengthen our financial foundation by accumulating economic value-based capital through the acquisition of a high-level new insurance contract and our efforts to reduce risks. There is no change to our full year forecast of JPY 60 billion in income before income taxes. Our forecast for adjusted net income has been reduced by 9% to JPY 98 billion.

We downwardly revised the forecast because we have revised our long-term interest rate assumption this time from the previous 2.7% to 3.3%, the average interest rate level in July, and because we have incorporated additional risk adjustments. However, going forward, we will continue to make every effort to bring adjusted net income as close as possible to our initial plan by accelerating the acquisition of new policies and reviewing expenses. Lastly, preparations for the listing on September 29 are progressing smoothly, and we plan to submit the final application for the listing to the Tokyo Stock Exchange tomorrow, August 8. Additionally, at the Board meeting of Sony Financial Group, Inc., which will be held on the same day, we plan to officially approve the establishment of a share repurchase facility with a limit of JPY 100 billion effective from September 29 of this year through August 8 of the following year.

There is no change to the JPY 25 billion we plan to pay at the fiscal year-end dividend. Heretofore, we have announced our financial results at the Sony Group’s earnings announcement, including when we were a listed company in the past. From the second quarter onward, we will hold our financial results briefings as an independently listed company. We are fully committed to becoming a financial services group that is truly valued by a wide range of stakeholders, including shareholders and investors. We sincerely appreciate your continued support after the listing.

Unidentified Company Representative: The presentations were given by Mr. Tao and Mr. Endo. We will begin the Q&A session for media representatives at 4:25 p.m., followed by the Q&A session for investors and analysts at 4:50 p.m. Each Q&A session is scheduled to last approximately 20 minutes. For those who have registered in advance to ask questions, please click the join webinar link and remain on standby in the session. Please kindly make sure to review the guidance document sent in advance for details on how to ask questions and important notes. We will be resuming shortly. [Break]

Unidentified Company Representative: Thank you for waiting. We will now start the Q&A session. First, the officers on stage, Corporate Executive Officer and CFO, Lin Tao; Senior Vice President in charge of Finance and IR, Sadahiko Hayakawa; Senior Vice President, in charge of Corporate Planning and Control, Disc Manufacturing Business and Storage Media Business, Naoya Horii; President and CEO, Sony Financial Group Inc., Toshihide Endo.

Unidentified Company Representative: [Interpreted] We will now take the questions from the members of the media. [Operator Instructions]. So the first question will come from [ Toda-san ] of Yomiuri Newspaper.

Unidentified Analyst: [Interpreted] About tariffs, 2 questions. So initially, tariff outlook was JPY 100 billion. Now that’s been reduced by JPY 30 billion to JPY 70 billion. Can you explain in a little more detail why the decline? That’s one. The other thing, the Trump administration in the U.S. talking about 100% tariff rate for semiconductors. I don’t know how it will be applied for Japan, but what will be the risk if that becomes 100%?

Lin Tao: [Interpreted] Thank you for the question. Let me respond. The JPY 100 billion tariff impact that we explained previously and the difference this time. For Q1, for semiconductors, there’s no impact. And for G&NS, Games and Sony Electronics, total of JPY 100 billion plus impact. That’s according to assumptions. So there was some postponement and there was a strategic inventory. And this was smaller than in Q2 onwards. And based on the assumptions and the measures, Q2 onwards, the decline is lower compared to expectation in May. So G&NS, ET&S, I&SS, JPY 20 billion to JPY 30 billion each. So that’s a total of JPY 70 billion impact from tariffs. That’s now factored into our forecast. So you asked about the Trump administration’s semiconductor tariffs.

Today, we announced our forecast. That’s based on the tariff rate that was officially announced 1st of August. So there’s a lot of information coming out about tariffs and the situation is shifting daily, but we rely on the officially announced numbers. And based on that, we will evaluate the direct and indirect impact that we will continue to do going forward. One additional thing. In our business, semiconductor components itself, direct export to the U.S. is very limited. So I would just like to make that point.

Unidentified Company Representative: Let’s move on to the next question. From Nikkei, Yoshida-san.

Unidentified Analyst: [Interpreted] This is Nikkei, Yoshida speaking. Sorry about that. I do have 2 questions. The first one is about animation. So current evaluation of the titles in pictures and Demon Slayer got off to a really great start. And then also National Treasure has been hugely successful. How are you evaluating the box office performance of these 2 titles compared to your initial estimate? And with regards to Demon Slayer, it is expected that the box office revenue will continue to increase. And do you think that this will be good enough so that it would cause you to revise upward your forecast, including merchandising? And then also your investment in Bandai Holdings. So you have been aggressively investing in IP content creation. So how are you evaluating the result of the investment so far? And is there any specific investment that caused you to upward revise your forecast?

Lin Tao: So the first question, I will take that. And then second question will be answered by Hayakawa-san. With regards to anime titles, and as you said, the Demon Slayer and National Treasure have been quite successful and we are getting a really positive feedback. And these titles, whether they are in line with our expectation? Demon Slayer, because they are our previous release, which was loved by many users, and that was a really successful IP, so we had a really high expectation for this IP. So that has been factored in our forecast. But as for the National Treasure, under the umbrella of Aniplex and Median Studio was producing this title, and this was the first title which has met with a really positive response. And this significantly outperformed our expectation. But in terms of the overall impact on our revenue and profit, the impact is not that sizable. And so that has been already included in the forecast for our outlook.

Sadahiko Hayakawa: [Interpreted] Thank you very much for the question. So the investment in Bandai, and of course, we have been shifting to creation. So for example, the entertainment 3 businesses basically account for 60% of our consolidated revenue. So basically, our business portfolio is shifting more to the creation. And then as for the Electronics business and TV, compared to output devices, we are now shifting to creation devices that include digital camera. So as a result, we are seeing more stability in profitability and in revenue, and also the productivity of our performance is increasing. And against such backdrop, and for example, in the Music business, Music Streaming and EMI Music Publishing has been acquired, and then we increased the music catalog.

And as I mentioned in the speech, in gaming business and moving away from a hardware-centric business to more to the community- based engagement business, and then that has been increasing. So now as we make more transition to entertainment creation, the stability and the productivity, our performance is increasing. So this upward revision might not have been a direct result of these. However, the Music Publishing and also acquisition of a music catalog and also the acquisition of Crunchyroll, these are the areas where we are seeing growth. And as a portfolio, we have been expanding our businesses and also improving our profitability.

Unidentified Company Representative: Moving on to the next question. Nishida-san, freelance reporter.

Unidentified Analyst: This is Nishida. I have 2 questions about the Semiconductors business and Electronics business. First, about the Semiconductors business. Today, it was reported in the news that Apple investing in the U.S. as partner. So it is possible that they will have production facility in the U.S. So this type of risk might not appear this year. But towards the end of this year to next year, how would you mitigate this risk, like risk hedge? Number two, within the Electronics, I have a question on smartphones. In the first half, Xperia VII, there has been a risk of recall. And what would be the impact on the sales and impact on the smartphone business itself?

Lin Tao: [Interpreted] Thank you for the question. I have received two questions and I would like to respond to the smartphone questions on ET&S, and I&SS question, Horii-san will respond later on. About the defect of Xperia smartphone. So we are very sorry that we caused inconvenience to the users. I would like to apologize. About identifying the defect and the countermeasures have already been completed. The malfunction itself was coming from the production process. The impacted loss, so we have exchanged the parts which have been impacted. And about the quality. So this is a big management agenda for Sony. So we will work so that this will not happen going forward. The smartphone business itself is an extremely important business for us.

The telecom technology is a technology that we have been nurturing for a long time. And also, this is used to other areas other than smartphone. So we will continue to grow this business. The first question about the Semiconductors, Horii-san, please.

Naoya Horii: [Interpreted] Thank you for the question. So I cannot respond to questions pertaining to a particular customer; however, about the risks and countermeasures. On overall risk, I would like to respond. As you have indicated in the U.S., we do not have any semiconductor production facilities in the U.S. In the short term, it is not really feasible to produce in the U.S. in the short term. However, where the source is and offering very high-quality devices to the customers and how to make the final product deliver to the customers as attractive as possible, this is what we have been working on from before. And we will make sure that we will provide devices that even exceed that of competitors. And this type of risks always exist. And as a device manufacturer, the competitiveness and quality of the product. With this, we would like to get involved in this market. Thank you.

Unidentified Company Representative: [Interpreted] We’d like to move on to the next question. Taruno-san from NHK, please.

Taruno Akira: [Interpreted] About the U.S. tariffs, I want to ask about the impact. In the last announcement, the President said that there is no major change occurring in the short term, but there’s time lag about the economic sentiment and so you look carefully. So about your views about the economy? What’s the current situation with the U.S. consumers? And also for this fiscal year, when you talked about the earnings, and you said that there are uncertainties, and you’ll be watching carefully. But in terms of the performance forecast, if you can also talk about that, please?

Lin Tao: [Interpreted] Thank you. I’d like to respond to that question. About the U.S. economy, it’s slightly decelerating, slowing down a bit, but a rapid deterioration, we expect, can be avoided. However, we need to carefully monitor the situation is what we think. Q2, so April to June, U.S. GDP was 3% growth, higher than expectations. Personal consumption starting to show recovery. But compared to last year, the strength is less. And concerning our business, as a portfolio, we have hardware, and we have to carefully watch the situation for hardware. On the other hand, for entertainment business as a whole, they can withstand the impact of the economy. Their business is less impacted by the economic situation. That’s the nature of that business. So those impacts have been already factored into our forecast that we announced today. Thank you.

Unidentified Company Representative: [Interpreted] We are running out of time. So the next question will be the last one. [ Hirata-san ] from Nikkei Business.

Unidentified Analyst: [Interpreted] This is [ Hirata ] from Nikkei Business. And I do have one question. During the presentation, you talked about the partnership with the Bandai Namco. And then also last year, you forged a partnership with Kadokawa. So what will be the timeline of seeing the result in terms of the performance? And I know that Kadokawa and then Bandai Namco you already have the partnership before your decision to investment. So what are the changes that we can expect after the investment?

Lin Tao: [Interpreted] Thank you for the questions. You are right, in Bandai Namco and Sony Group are already collaborating through partnership on the ground, and in especially game, music and in anime areas. And before our investment, we treat them as a really important partner for collaboration. So with this recently announced investment, we can go deeper and wider in terms of collaboration. We are seeing a possibility of that. More specifically, the game and anime IP using us as access so that we can really expand the community. And then also, the Bandai Namco is really great at creating venues. And we believe that Sony’s technology can really shine in the venues by Bandai Namco, so that we can really collaborate together to deliver Kando experience.

And we believe that that’s something that we can do. And in terms of timeline, and this is kind of difficult to say, but I think there are longer term collaborations or there are immediate collaborations, including IP community building, and there are some low-hanging fruits that can be achieved within 1 year. And looking at the overall collaboration at the group level, we want to produce the appropriate output and then to see if we are producing returns, and we will regularly consider and assess the situation going forward. That’s all.

Unidentified Company Representative: [Interpreted] So that concludes the Q&A session for the members of the media. So the Q&A session for investors and analysts will start at 4:50 p.m. [Break]

Unidentified Company Representative: [Interpreted] Okay. Thank you for waiting. We will now begin the Q&A session with investors and analysts. I’m [ Kondo ] from IR Group, and I will be moderating this session. As with the media session, the 4 individuals here will be responding to the questions. Now let’s begin the Q&A. Each person may ask up to two questions. [Operator Instructions] Mizuho Securities, Nakane-san.

Yasuo Nakane: [Interpreted] So this is Nakane from Mizuho. I have two questions. The first question is about finance, and the second question is on games. So you are trying to improve the asset overhedge in finance. So the progress from the first quarter and the business environment is changing. So please tell me if there has been any changes from the first quarter. The second question is on gaming. About Marathon. In the profit, you have factored in some negative in the profit. So how have you incorporated that, the sales and profit as well as the timing of launching Marathon. So please give us hints. And about Bungie, so it seems like an autonomous region. So we would like to hear about the governance of Bungie. And also, you can say if this is not probable, but the worst-case scenario, if you are not going to launch it, if there are any risks such as impairments? So I have such two questions here.

Lin Tao: [Interpreted] Okay. Thank you for the questions. Endo-san will respond to the first question. And the second question, I will respond.

Toshihide Endo: [Interpreted] Okay. I will respond to the first question. About asset sales, improvement of finances. In the Investor Day, in FY ’25 and FY ’26, we have explained and announced the measures for FY ’25 and ’26. And the partial sale of assets, what was scheduled for this fiscal year, has been advanced. So these were sold in advance. And thanks to this, this is done to improve the ESR and selling bonds. And through these activities, Sony Life’s ESR improvement, it has improved by 3 percentage points. This fiscal year, the interest has risen significantly. So there has been lots of downside pressure on ESR. But overcoming that, we have been able to prevent ESR from slumping. Group consolidated was 189%, but that was end of FY ’24.

But now, this quarter, we have kept the ESR to 184%. So that is within the ESR target range. So this is thanks to advancing our initiatives to improve our finances. So these advanced initiatives were carried out. And about selling U.S. bonds, as I said in the Investor Day, the losses — the liabilities, so we are trying to sell the bonds as reinsurance. So these are still remaining, and we will be working on that going forward. Beyond that, in FY ’25, ’26 and beyond, we don’t have any plans as of now.

Lin Tao: [Interpreted] Second question, I would like to respond to the question on Marathon. First, about Marathon, how we factored in the forecast? We expect the launch to happen within this fiscal year. But having said that, this is not a commitment. We cannot — no official announcement has been given yet. So we are expecting this to be launched within this fiscal year. However, the sales is very small compared to the overall sales and the timing of launch. So we are now doing modification development. And based on the progress, in the autumn time frame, we believe we can communicate when we will be launching that. We can launch that, either from Bungie or PlayStation. And about governance of Bungie, as you have said, when we — the governance, at the time of acquisition, we were offering a very independent environment.

So that was one way of thinking. However, thereafter, we have gone through structural reform as we have announced last year. So from this type of independence, this independence is getting lighter. So Bungie is shifting into a role, which is becoming more part of PlayStation Studio. And integration is also proceeding. So in the long term, if you can see this as an ongoing process, so the direction is to become part of PlayStation Studio. And about the launch of Marathon, we are now fixing the problems. So we believe this launch will happen. And if this launch is canceled, so we need to do the revision of the valuation. However, as of now, this is not expected.

Unidentified Company Representative: [Interpreted] From Goldman Sachs, Munakata-san.

Minami Munakata: [Interpreted] Munakata from Goldman Sachs. I also have two questions about the games. First, improvement of margins. Y-o-Y, it seems that the margin has improved quite substantially. But what will be the mix between hardware and software? And what is the gross margin of hardware and what is inside software? I think there’s also contribution from network services. So can you talk about this in more detail? Also, second quarter onwards, tariff impact will be larger than Q1 is what’s expected. So this high margin, is that something that you’ll be able to sustain? That’s the first question. Second question, about Marathon, I also want to ask. So it’s a title that’s attracting a lot of attention, strengthening live service games.

So how do you look at the current status of your strategy to strengthen that? So you look at the quality before launch and you’re making a decision and you’re postponing. So I think you’re making a flexible decision. I think that’s a good thing. But on the other hand, it’s a negative thing that the title doesn’t appear. So how do you look at the current situation in terms of strengthening live service games? Where do you see the issues, please?

Lin Tao: [Interpreted] Thank you for the questions. So I’d like to respond to those questions. First, about the game margins. For Q1, mainly what drove the margins was third-party software and network service and also decline in acquisition costs and decline in SG&A cost. So the margin as a whole, going forward, the factors that will drive the margins, there are 2 major parts. One is network service and the other is first-party studio contents. Structurally, those should lead to improvement of margin. For network service, the number of subscribers increasing and ARPU rising and shift to higher tier and optimization of content acquisition costs. These are things we’re working on diligently. So structurally, they should contribute to the margin.

The other thing is about the first-party content. And as you point out, not everything is going well. But this fiscal year, well, compared to fiscal ’24, first party is seeing higher revenue and profit, and that will contribute to higher margins. Our first-party portfolio, if that should stabilize, then we think that margin increase will be sustainable. Second question about Marathon and also live service game, the overall status. Last year, Concord, and this year, Marathon was postponed. So somewhat the negative news has been coming out. But if you look at the past 5 years, 5 years ago, live service games was almost nonexistent for the PlayStation Studios. We have held Driver 2 MOD, NGT7, and Bungie’s Destiny 2. So we have these 4 live services contributing to sales and profit in a stable manner.

For Q1, live service ratio was about 40%. For the full year, it’s a little less, probably between 20% to 30%. So in terms of the transformation, it’s not entirely going smoothly. But from a longer-term perspective, if you look at the changes over 5 years, you see that there has definitely been a change. Of course, we recognize that there are still issues, many issues. So we should learn the lessons from mistakes and make sure that we introduce live service content where there’s little less waste and it’s more smooth. So that’s all for myself.

Unidentified Company Representative: [Interpreted] SMBC Nikko Securities, Katsura-san.

Ryosuke Katsura: [Interpreted] This is Katsura from SMBC Nikko Securities. I do have two questions, tariff related and also your revision to the forecast for this fiscal year. With regards to the first question about the tariff, this is just a confirmation, in 1Q, I mean, the quarter 1, basically JPY 110 billion. And then so this has been already factored in by each segment. So basically, in all segments, I think the negative impact has been reduced. And so I just want to confirm that. And then also the second question is about the full year forecast. And the gaming is improving JPY 20 million, and then also tariff impact has been reduced by JPY 30 billion. And I think those are the main changes that you have made. But for game area, and there is an upward performance in Q1.

But compared to that, I think the revision is smaller than the outperformance, but maybe that is not limited to Q1 or the full year. And also for Music area, FGO and then also Demon Slayer are positive profit drivers, but it seems that you seem to be more conservative and cautious in terms of the full year forecast. So can you talk to me about your thinking about the revision from the macro perspective?

Lin Tao: [Interpreted] So the first question, Horii-san will take that on. And then second question will be answered by me.

Naoya Horii: [Interpreted] Thank you very much for your question. So with regards to tariff, and then your understanding is correct. In Q1, basically the impact was already included in the actual performance and the P&L of each business for the full year, and JPY 70 billion is basically its view at the company level. And as we continue to see a progress in the actual performance, I think it would be more difficult to really — for the head office to really observe that impact. But for the Q1 announcement, and yes, you are right about that and in terms of thinking, and that’s all I wanted to say. The second question for the full year forecast and then thinking behind that. And for game in Q1, we see a really outperformance in profit.

And for the full year, basically, we made upward revision by JPY 20 billion. And thinking about the positive drivers, network service and then also the positive impact of the ForEx. And also, as was mentioned, the first-party game, because of the delay of the launch of Marathon, which had a negative impact on the profit. And then that is also partially offset. So that’s why we made an upward revision by JPY 20 billion in profit. And then for Music, there are a number of hits, fortunately. But again, the impact on the overall business has been rather limited. And the blockbuster like Demon Slayer, we basically expected that will be a huge hit from the beginning of the year. So that’s why that is not a factor for the revision this time. And also, in Sony Group overall, from Q2 onward, the U.S. tariff impact will be felt more pronouncedly.

And then also there will be more uncertainties. So in Q1, we had a really good performance. But from Q2 onward, we are more conservative and we need to take a more cautious approach.

Unidentified Company Representative: [Interpreted] So we have a little time remaining. So we would like to accept one question each from 2 people. Okazaki-san from Nomura Securities.

Yu Okazaki: [Interpreted] So this is Okazaki from Nomura. I have a question on game. To the revision of production basis to respond to U.S. tariffs, you said you have completed this within this quarter. So where are the games sold in U.S. produced now? And also the cost, I think, will influence the sales. So I would like to hear about the pricing strategy of game consoles.

Lin Tao: [Interpreted] Okay. I would like to respond. So about gaming consoles, so we are diversifying our supply chain. As for consoles, we have already transformed the production. And if we include peripherals, so the transfer to outside China, we will be completing that by the end of the first half. Hardware sold in the U.S. are now sourced outside China. About the pricing strategy of hardware, so that really pertains to our future competitive strategy. So it’s very difficult to comment on this. But the overall thinking is our annual profit and lifetime value and also the sell-in volume and the expected content sales going forward, so all these factors will be considered as well as the receptiveness of the consumers to prices. So we would like to flexibly decide on the prices.

Unidentified Company Representative: [Interpreted] Final question from JPMorgan Securities. Ayada-san, please.

Junya Ayada: [Interpreted] Ayada from JPMorgan. You say one question. So maybe it’s a difficult question for you to respond to. And it overlaps with the previous question, but I want to come back to this. For I&SS, for North America, this is biggest customer. And as a part of its effort to increase procurement from the U.S., they’ve officially made a comment that they’re going to procure chips from a Korean supplier. In that context, as a general matter, in enhancing product competitiveness, you’re going to try to maintain your positioning. But that context itself may not be valid. Just by your competitiveness, you may not be able to absorb those changes. So what I want to ask about is inclusive of those things. This kind of situation, has it been considered as a risk?

And have you been making preparations or simulations that this could happen as a risk? In terms of timing, it may be somewhat more into the future. Maybe you have some preparation period of several years. And during that time, you will be able to come up with countermeasures. So I think this will relate to capital expenditure plan. So please respond to the extent possible.

Lin Tao: [Interpreted] Thank you for the question. So Horii will respond.

Naoya Horii: [Interpreted] Thank you for the question. Yes. this situation. Had we foreseen this and taken measures? Well, partly, we had considered this and assumed this, but it’s not that we have answers to all parts of this. Now it’s just this morning that this was reported. So we have to check about the accuracy of the reporting and we’ll be debating internally based on that. This is an issue of that kind of nature. So as of now, I’d like to limit my comment to that extent.

Unidentified Company Representative: [Interpreted] So with that, we’d like to conclude Sony Group earnings announcement meeting. Thank you so much for joining us today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]