SoftBank Group Corp.
Q3 2019 Earnings Call Transcript

Published: 6 Feb 2019

[Operator:]

So thank you very much for waiting, ladies and gentlemen. Now we would like to start of the SoftBank Group Corp. earnings results announcement for the 9-month period ended December 31, 2018. First of all, I would like to introduce today's participants. On the front, from left, we have Masayoshi Son, Chairman and CEO of SoftBank Group Corp.; Yoshimitsu Goto, Senior Executive Corporate Officer and Head of Finance Unit, and CFO; Kazuko Kimiwada, Executive Corporate Officer and Head of Accounting Unit. This meeting is live broadcast over the Internet and can be heard by telephone. Now I would like to invite Mr. Son, Chairman and CEO, to present to you the earnings results and business overview. Mr. Son, please.

[Masayoshi Son:]

I am Son. Thank you very much for joining today. In the world, especially for the nature world, there are variety of things, some complicated things, strange things, some miracle things happening in the world. And if you put it into the mathematic equation, what that can be expressed for each one of the phenomenon? So there is one quite interesting photo that I would like to share with you here. Can you tell what this equation express? Very complicated, too much things on the screen, so you cannot really tell what it is saying. I understand that -- I don't understand that neither. This person is not that. Very complicated things he can put in into very simple way and also put it in one aspect, so he's a genius. For example, this is one of the equation he expressed

[Unidentified Company Representative:]

Thank you very much. Now we'd like to open the floor for questions. If you have any question, please raise your hand and wait for microphone. And please begin your question by stating your name and affiliation. We'd like to take up to 3 people.

[Unidentified Company Representative:]

Three people? That's too few. They -- they'll get mad. So we can extend hours. But maybe keep the question one per one person, please. One question per one person rather than 3 people, too many questions. But one question per one person, please.

[Q - Naotaka Owada:]

Owada from Nikkei Computer. About the formula equation, 25 less 4 equal 9, you mentioned. You talked about wallet, you talked about golden goose eggs and you were very good at explaining very simply and easily in 25 minus 4 equal 9. And how would you like to improve the perception? That's the timing difference. That's magic of timing difference. That's it.

[Masayoshi Son:]

Time will tell. In the past, people associate the SoftBank Group with too many debts, too much debt and too much discounting. That's the perception people may have in the past. And some arguments were reasonable, but time will tell the truth. And time will tell the truth, and all noises will be cleared. And companies invested by Warren Buffett against the sum of the parts, I think that Warren Buffett is now enjoying a premium on top of sum of the parts. If you are earlier than others, you have to wait for some time. And we are advancing. I am advancing, always advancing, going ahead, and soon or later, time will tell. So next question, please.

[Minoru Satake:]

My name is Satake from Nikkei Newspaper. So Huawei in China, that's my question. In U.S. and China, there is a battle going on in digital field and it becoming more serious. As for Huawei, that also has some relations to business of SoftBank Group. And also when it comes to U.S. government, you are looking at the merger, potential mergers between Sprint and T-Mobile. How do you see the situation?

[Masayoshi Son:]

U.S. and China, there is a trade wars or political friction is happening these days. In the long run, friction is not a good thing, I believe, and there is nothing good for both parties. But in the past, U.S. was taking #1 position, and China is making a rapid growth. So I assume that there should be several frictions in any way. But with the full communication and with full understanding of each other's complaints and once we can find a compromise points with those deep understanding, sometime soon, I believe, this will be solved. That's how I believe, and that's the way it should be, I believe. I will say, before, there was such a trade war between Japan and United States, but now it's not that. And we were -- rather bigger relationship. So when you're making big growth, those traditional idea or traditional concept may cause some trouble in relationship. So I believe two parties needs to talk in deep and convince each other, then that can be settled in -- when time comes. That's how I see.

[Minoru Satake:]

How do you look at market? You mentioned about NVIDIA. You took a risk, broad measures. And going forward, how do you look at the market?

[Masayoshi Son:]

Well, interest rate in U.S., interest rate in Japan, from big vision perspective, those are, again, margin of errors. That's how I put it. In the short term, I'm not interested in selling and buying in short term in big picture, in a big region where the market goes up and down, the stock goes up and down next month or not. There are some experts who are discussing with them, who are working on them. So I hope they do the good job, but that's a day-to-day ups and down. It's not something I'm looking at. And whether it's good or bad, well, again, it's just a margin of error for me. But as a vision, what will happen in 20 years and 30 years and 40 years? That's how I look at things in my vision. Talking about NVIDIA, that's the companies that would lead AI revolution. We highly evaluated NVIDIA as one of the companies that lead AI revolution, and we invested in NVIDIA as a public company. And at the start -- beginning of every evolution, NVIDIA should play a big role. That's why we put investment in NVIDIA. But it -- we hedged with a collar transaction. We put some protection measures in place for NVIDIA, but there are a lot of unlisted unicorn companies. We are going to invest more in those unlisted unicorn companies. So that's why for NVIDIA, we are liquidated every investment we have made in NVIDIO -- NVIDIA, sorry.

[Unidentified Analyst:]

My name is Takeda [ph] from TV Tokyo. I would like to ask you about -- in relation to IPO SoftBank KK. So at SoftBank Group, you just mentioned about buyback of shares of SoftBank Group. So I believe the source of the capital is from IPO proceeds. But the SoftBank KK, the share price is still below the offered price, which means for the shareholder of SoftBank KK, it's sacrificed. And SoftBank Group is using those proceeds for the buyback of the share. Also, relates to that, which is very close relationship in earlier questions also mentioned that SoftBank KK, because of the trade conflict between Japan -- U.S. and the China and the Huawei may cause more CapEx on SoftBank KK and that was also the same time it happens at the time of IPO, so how do you see the situation as all those?

[Masayoshi Son:]

IPO SoftBank KK, ¥1,500 the offered price, which was fully discussed with experts of securities firm and also with the management team of SoftBank KK, and we came up with the appropriate price for the offered price. And of course, we believe that we have enough demand with that price. So after the several and serious discussion, we came to these results. Unfortunately, that we still see the share price below the offered price, and at the time of the IPO, there was unfortunate incident occurred, and we still see the share price go below. But yesterday, as you may saw, that there was earnings results announcement by SoftBank KK, and actually, 19% increase in operating income. Net income also increased just about the same size. So company itself, business itself is making good growth and steady growth. So actually, free cash flow is bigger than net income. So about 85% of net income is going to the dividend, meaning only 15% is going to be remain in the company. But actually, ¥400 billion of net income was the number, if I recall correctly. But the free cash flow was about -- over ¥500 billion, so cash-wise, actually, more than net income. So our dividend yield -- speaking of dividend yield, but actually, the cash, it still remains in company because we have already built the big towers in the past few years, and that has already completed. However, as accounting expense-wise, that depreciation still remains. So depreciation expense still remains on the accounting side, but the cash is coming back to the company. So the 85% I mentioned earlier, but still, that's making a good accumulation of cash in the business. So it's making a steady and distributing steady dividend, and also, they may be able to consider increasing in dividend. So 5% or 6% or 7% dividend yield, those kind of discussion, we believe that they're in higher lever amongst all the public company in Japan when it comes to the stable distribution of dividend. And I believe that will be very good base to talk about this ¥1,500 of the offered price. Of course, management of SBKK, they will be continuously put every effort to run the business. Huawei issue, right before IPO, there was news that SBKK is using lots of equipment by Huawei. And because of this trade -- friction between U.S. and China, SoftBank KK has to face replacing those equipments. It's going to cost a lot, and of course, I question to the management. But those equipments needs to be replaced will be about ¥5 billion level. That's going to -- that is going to be the core facilities of network. If there is any attack and if there is any risk to the network, it is regardless of Huawei equipment. But if there's any attack to the core network, then there will be a potential information leak in logical way. But that's not necessarily to Huawei equipment but any other equipments. And assume they haven't decide to the final decision yet, but assuming they're going to replace those equipments, but still it's going to be onetime expense of ¥5 billion spending. So Huawei equipment has been questioned as a burden on operation of the business, but that's not really true. And when it comes to 5G, they are looking into the requirements and the technical requirements, safety requirements and the cost side. So those are the factors that the management of SBKK will come to the conclusions to decide which equipments to choose, but I don't expect the big burden because of that to the business of SoftBank KK.

[Unidentified Analyst:]

Hateburak [ph] from Wall Street Journal. You have made investment at significant pace. Looking at the SoftBank Vision Fund numbers, I would say more than half is used or paid. In fact, you may have to collect money more because your investment pace is so fast. So I wonder if you're considering further fund-raising. If that's the case, are you going to get some contribution from Saudi Arabia or not?

[Masayoshi Son:]

Well, you not use up all fund pretty soon. So Vision Fund 1 continues for some time. But at certain point, we need to seek another round. And at that point, which investor we want to seek investment from, how much, should be determined based upon the negotiation on the terms and conditions at that time. Now it is too early to make a presumption. So due to time constraint, our next questionary -- no, no. We can't take more questions. I'll make executive decision.

[Mayumi Negishi:]

My name is Negishi from Wall Street Journal. So if Saudi Arabia -- Saudi Arabia made a positive comment about additional commitment. But do you like to avoid the additional commitment? And also ¥2 billion additional investment in WeWork, I believe that you studied more -- much bigger size of the investment in WeWork. But why did you reduce -- scale down to ¥2 billion?

[Masayoshi Son:]

From the team of Saudi Arabia, they've been giving us a kind commitment and also we being -- having good relationship between investors and the fund managements. But when it comes to next fund from [indiscernible] with what kind of term we go in to raise money, it's still too early to discuss. So there are terms to be discussed, conditions to be discussed. So that's how I see the situation. When it comes to WeWork, this is a company, one of the very good and excellent company amongst those invested portfolio we have. So on top of what we have invested, we decided to make additional investment in this business. And whenever they need -- and along with their growth speed, we would like to continuously keep a good relationship and sometimes led to enhanced relationship.

[Kosuke Shimizu:]

Shimizu from Nikkei Automotive. In 2035, New York Fifth Street will be all about autonomous vehicles. And it sounds like you are relaxing or lax-ed. So anyway, GM and Toyota and Google are leading the autonomous vehicle sector. So what's your outlook for this sector in the future, in the near future?

[Masayoshi Son:]

In the near future, well, AI-driven autonomous vehicles, who would be the first to buy such vehicle? I think companies that use those vehicles for -- they are industrial purposes or business purposes will be the first buyer, not consumer because such a new vehicle will be expensive, and it's just supercomputer. Even though it's a car, but it's essentially supercomputer. It's far expensive than traditional car. So I don't think that consumers would buy AI cars earlier than other. Rather, I think companies that would use those costs or business, like taxi business or ride-sharing business, those businesses and companies would be the first buyer of those autonomous vehicles. And ride-sharing companies, 90% of the global customers are supported by our group ride-sharing companies, 90% of the global demand. In other words, our group will be the biggest buyer of the autonomous vehicles. Then there will be a lot of opportunities to tie up with companies that deliver technology to us or we might invest in those companies that has a great technology. I mentioned Ford Model T before. And Ford, as of now, is the biggest profit earner or biggest seller in the world. Maybe Ford is not the #1 anymore now. So autonomous vehicle and autonomous vehicle technology, competition has just started. And a company that would buy those vehicles more than others and a company that would take advantage of those vehicles more than others will have better chance of success, so maybe partnership or commercial arrangement I would like to capture all opportunities and chances in that space. Next question, please.

[Unidentified Analyst:]

My name is Kadota from Kyodo Tushing [ph]. So Uber Flex, they -- I heard they are preparing for IPO. So likewise, NVIDIA, are you going to sell all those shares that you hold of those portfolio companies after they go public? And I see some contradictions of such an exit if you are going to sell all of those holdings after the IPO. How do you see?

[Masayoshi Son:]

So as long as we focus on investment, once we invest and when appropriate time comes, we will be sell in phase-ly manner. That's the ordinary operation. If you are the operating company, once you get -- or invest, you may need to hold on to it. However, because we pursue the Cluster of No.1 AI Strategy, when they're growing, we would like to hold on to it. But once we see some matured phase of those companies and if they can raise enough from the ordinary -- other investors, institutional investors, they can graduate from Vision Fund. That time comes sometime in the future. Of course, our investment partners agreed and take it natural to exit those portfolio companies. And that's the way the Cluster of No.1 AI Strategy is. We don't have any intention to control the company by holding 50% or more than 50% ownership. So we would like to become the majority in holding 20%, 30% and create synergies among -- for those portfolio companies. As a major shareholder, we would like to influence proactively. However, we don't control. And in each segment, we only pick up those #1 companies. That's the Cluster of No.1 AI Strategy. Because we have a lot of clusters, so when it comes to hundreds, we may want to see the graduation 2 or 3 or 5 companies and doesn't really changes our big picture or big structure.

[Takahiko Hyuga:]

Hyuga from Bloomberg. And at the last part of your presentation, you said that you're seeing AI Cluster of No.1 Strategy for next 20 years. So does that mean Mr. Son will stay on top for next 20 years? About successor, what do you think about your succession plan?

[Masayoshi Son:]

Well, as a CEO up until 69 years old. I think I'll be staying on CEO until the age 69 years old. After 69 years old as CEO or as a Chairman, even though active but delegate day-to-day operation to CEO, well, I will decide at that point. But when -- if a group center, a core business is investment and if you're not busy every day, then I will pass the baton to next generation. Recently -- well, evolution of medicine is amazing, and I am pretty much a healthy person. And I am energized, and I have fully a dream. And I will do my best as much as possible and as long as possible. But the -- until the age of 69 years old -- well, I made the decision when I was 19 years old, until I get 69 years old, I want to make a decision who'll be my successor, and maybe I will be Chairman, not CEO. Currently, I am Chairman and CEO. But after 69 years old, I may be just a Chairman. Who knows? Any more questions?

[Mayumi Negishi:]

Negishi from Wall Street Journal. In Vision Fund speed, are you going to maintain the speed? And to keep the speed, when do you need to raise in the next round?

[Masayoshi Son:]

We will keep the same speed. I think we will be more proactive. We are doing very good. Vision, it just about started. AI revolution, it just about started. Of course, we're going to continue. Timing for the fund-raising, size, structure, those are under discussion. Sometime when time comes, then probably it will come. But I don't need to rush. So many consideration, study, preparations are going on. Any other questions? If no more question, I think we had just a simple discussion today. Thank you very much.

[Unidentified Company Representative:]

Thank you. This concludes the SoftBank Group Corp's. Earnings Result Announcement for the Nine-Month Period Ended December 31, 2018. Thank you very much for your cooperation. The video footage of this meeting will be distributed on demand...