Sony Group Corporation
Q2 2022 Earnings Call Transcript

Published: 1 Nov 2022

[Operator:]

We’d now like to begin Sony Group Earnings Announcement. I’ll be serving as the Moderator. I’m from Corporate Communications, my name is Okada. First, Executive Deputy President and CFO, Totoki will present the FY 2022 second quarter earnings and FY 2022 forecast followed by Q&A. In total we are scheduling for 70 minutes. With no further ado Mr. Totoki, please.

[Hiroki Totoki:]

Today, I would like to start by talking about the business environment surrounding Sony. We recognize that the risk of the global economy slowing down is increasing further due to factors such as rising tensions between the U.S. and China, soaring energy prices and expanding inflationary pressure, as well as rapid interest rate hikes in various countries. We are taking steps to prepare for further deterioration of the business environment in each of our businesses, especially in Entertainment, Technology & Services, ET&S and Imaging & Sensing Solutions I&SS, which are relatively more sensitive to an economic recession. Now I would like to explain the following

[Operator:]

That was the presentation by Totoki. From 4

[Kentaro Tsutsumi:]

This is Tsutsumi from Nikkei. Can you hear me?

[Hiroki Totoki:]

Yes, we can hear you.

[Kentaro Tsutsumi:]

About game and semiconductor. First, about the game segment. About the sales forecast, can you give the breakdown, software, hardware? And can you give me the breakdown -- specifics of your sales forecast? I think major titles, I think you have a very good lineup. But including the year-end sales for the third quarter, the GameSoft sales, compared to the previous year, how much of a level are you aiming towards year-on-year? And there is a slowdown of the economy, et cetera, these external factors. So including those factors, can you answer? And PS5, will the price increase have an impact on the demand? That's my first question. The second question about semiconductors. Earlier you said that China and the high-end, especially low-end decline is within your expectation. But going forward, I think there are some additional risks that you have factored in. But about the high-end, there is a possibility that the sales would drop. Did you factor in this possibility? And especially North America customers, high-end forecast, can you explain whether the high-end models are doing well now? And we have a lot of news about the problem at the production factory, et cetera. So can you explain how much of these factors have been included in your forecast? And what is the outlook?

[Hiroki Totoki:]

Thank you for the question. The first about Game & Network Services question about the sales forecast and the breakdown of the forecast. As for specific numbers, I cannot disclose them here. But as a trend, I will say, software -- and first-party software, I think -- so I think it will be high and thanks to God of War. And about third-party, the overall game trend will impact. But I think there will be less year-on-year, so we'll see a decline year-on-year slightly. And about the hardware, I cannot give a specific unit numbers. But as I mentioned in my speech, the second quarter production, it reached 6.5 million already. And we want to use this to supply for the year-end sales. I think there's a lot of expectation here. And PS5 price increase impact. Well, so far, due to the price increase, we have not seen any dampening of the demand, but we have to monitor what will happen in the market going forward. And I&SS. Well, the China mid and low-end models, the slowdown declined. This is something that we have already factored in. About high-end, I think that is doing relatively well. But to a certain extent, it will, along with the economic slowdown, experience a slight decline. So this risk has been factored in. Including that in our forecast, we have come up with these numbers. So please take it to be that way. And about customer information, we cannot disclose any of such information. Thank you.

[Operator:]

We'd like to move into the next question. Kyodo News Agency Mr. Yamasaki.

[Yamasaki:]

My name is Yamasaki of Kyodo News Services, and I think I have two questions. First one is for the -- your performance forecast. Due to yen's depreciation, what extent of upward the effect do you expect because of the yen's depreciation? And in addition to that, there are so many areas that might be difficult for you to answer, but that's for upward, the revision -- what are the main factors for the upward revision? Is it possible for you to name a few? Second is for semiconductor trend. And October, you talked about U.S., the more stringent restrictions on to a China export. So what is the impact on to your business and the U.S. restrictions on China?

[Hiroki Totoki:]

Thank you for your questions. First is for the business performance outlook and because of foreign exchange and some potential impact on to the revenue, and probably Hayakawa-san will answer the questions.

[Sadahiko Hayakawa:]

Thank you for your questions. And as for -- your question is concerning of foreign exchange impact on to our future forecast. And dollar, euro, if there is any difference by JPY1, we have already indicated some extent. But other than dollar and euro, we have some other currency. And we have the foreign exchange hedging. And there might be some difference between the sensitivity to ForEx fluctuations and especially in the gaming industries. And we have the -- based on the dollar cost and that's -- we have to see a negative impact. But that's the year-on-year basis for the future forecast. And we have a downward focus, and almost 50% are the impact by the ForEx. And I&SS, we have the positive effect because of the ForEx rate fluctuation. And we have the positive profit. And as for the Game & Network Services and in the final consolidated, the settlement, and we have the limited impact, that's my opinion. And as for some other few, the main factors are for upward revision. One is the contribution by the music segment and the growth in the streaming business and due to ForEx impact. Those are the main drivers for upward revision. And I&SS, another factors. And of course, we have the impact by the foreign exchange rate, but we have the quite steady sales in the Q2 and a record high revenue and sales, and that's why we came up with the upward revision for the forecast. And I&SS segment and the U.S. export restriction onto the Chinese market and what extent of the impact we have to foresee, that's announced back in the October 7th. We have witnessed a minimal effect impact. We have already embedded for our future forecast. But the tension might be intensified between U.S. and China, so we would like to carefully monitor the situation, what's going on. Thank you.

[Operator:]

So we would now like to accommodate next question, please. From NHK, Mr. Shimai, please.

[Shimai Kenta:]

So this is Shimai from NHK. I hope you can hear my voice. So I have two questions, so first is about yen's depreciation and looking at the business, there is a positive impact of weaker yen. However, please, for example, cost increase, there could be a negative impact. So what kind of impact is there? And also in comparison to competitors, for example, due to the weak yen, so they are going to review once again their production capability. And for Sony, are you going to review once again your production capability? Another question is about Sony relationship to the semiconductor, so for the PS5. So there was 6.5 million units and therefore, not only the PlayStation, however, for the production of the semiconductor. So do you think this kind of impact of the semiconductor production have been already weeded out?

[Hiroki Totoki:]

So talking about the exchange rate, so because positive, negative and also the segment, as Mr. Hayakawa had mentioned, there are both impacts. So for the time being, so looking at the sensitivity for the JPY1 -- weaker yen, so there will be a positive of $1 billion. For the euro, it's EUR7 billion impact. So for the Game & Network Services, ET&S and for the I&SS. So this applies to all three segments. So talking about the projection, so because due to the exchange rate, we don't decide based on the exchange rate. And well, because looking at the condition with our supply chain and also the geopolitical risks, therefore, we need to take in consideration those environments. So however, it is important to have a flexibility. And for example, I mentioned about the automation and also the DX. So I have included in my speech. Therefore, well, because it's going to have a standardization in the production, and therefore, if there is a standardization, we are able to produce everywhere. Therefore, we are going to take proactive action for that. Talking about the G&NS for the semiconductor and the parts and also looking at the logistics, there aren't too much pressure on that. And therefore, in the second quarter 6.5 million units, we are able to produce that amount, and sales of the PS5 have been according to the plan. And therefore, for the production, we are able to have a more speedy production, and therefore, 18 million target can be achieved, and therefore, we are going to have a positive impact on that on units sold.

[Operator:]

We'll proceed to the next question. Toyokasei, Sasaki-san, please.

[Sasaki:]

Can you hear me?

[Hiroki Totoki:]

Yes. Thank you.

[Sasaki:]

Sasaki from Toyokasei. I have two questions. First, about PS5, the outlook of next fiscal year. Well, you said about the logistics and the component supply recovering. But next fiscal year, will you be able to produce and meet all the demands? When about will you be able to surpass the demand? And second, about Music. Earlier in the explanation, you said that the virtual media platform accounts for about 10%. But this ratio is it growing? If so, what are the reasons for the growth? And anime within the segment profit, how much does anime account for?

[Hiroki Totoki:]

Thank you. About your first question, PS5 and the outlook for next fiscal year, you're asking about the unit sales, I believe. At the presentation we gave in May, we said PS5 in the fourth year -- 2023 after PS5 was introduced. At this timing, PS5 would have surpassed PS4. And so this is the challenge that we have set out for ourselves. So if we can manage 18 million this year, so we next year, do some 23 million-plus then. And next year, we will be able to surpass PS4 next year. So this will be the target for the time being. And about Music. Well, the virtual -- visual platform is about 10%. But FGO is the largest part. It’s quite some time since it launched. And in the mid to long-term, there will be a decline. But like Lasengle acquisition, there is the vertical acquisition. So it will -- it has exceeded last year. So we want people to enjoy as long as possible. We want to make it into such an IP. Now as the ratio goes down, for example, the Demon Slayer anime and the new IPs to follow, we want to develop them so that we can grow this business. As for anime, the profitability, I think it's very good. That's all. Thank you.

[Operator:]

Time is running out, and we'd like to take the one final question. [Operator Instructions] There seems to be no questions, and I would like to adjourn the Q&A session for the media attendants. And as for investors and analysts, the Q&A session will start at the quarter to 5. 16

[Unidentified Company Representative:]

Thank you for waiting. And we'd like to start the Q&A session for investors and analysts. And my name is [Shinichi] (ph) of our Financial IR Group. I'm going to take the chair of this session. And as for the media session, we have three representatives on the podium to answer the questions. [Operator Instructions] So we'd like to start Q&A session. [Operator Instructions] And from Morgan Stanley MUFG, Ono-san.

[Masahiro Ono:]

My name is Ono of Morgan Stanley. Do you hear me? I think I have two questions on ET&S and the game and respectively, one question. On ET&S, and as for cameras, the sales and the business has been performing quite well, not only for Sony, but to the market as a whole seems to be quite promising. But as for the ET&S overall, the operating profit now JPY180 billion. And that might be because of ForEx impact and the camera business with a higher margin. And I feel a bit the awkward for those figures. As for smartphones, and the new Xperias 1 IV are now on the release. And many of the communication carriers started do a discount of the sales. So what is your take for that move? And I'd like to know why you didn't change guidance and mainly because of that. And the second is, and we have the 118 million production is now on the scene. But as for MAU figures has been slowing down gradually. And you are going to have the first-party release for the next period. And do you expect some of the recovery in the Q3 period because of that?

[Hiroki Totoki:]

Thank you for your question. And as for ET&S and as for camera business, in the first half, our business has been quite excellent and almost a record high. But as for pent-up demand since the last period because of a supply shortage, that might be the contributing factors. And the second half concerns for economic slowdown should be incorporated. So we have some inflations that the camera business is now gradually going to slow down. So we should be more conservative. So that is why we came up with that guidance. And as for TV. As you know quite well, and the panel supply and the excess and DSPs are declines. And we do not follow too much because we like to pursue the interest as much as you can make on the profit, as much as you can make in the first half. And we will be more selective in the second half to secure the profit. And we will be ready for the recovery of the economic cycles of the next fiscal year, and we will be -- we will get ready for that notably. That's our policies. And the Game & Network Services and the production itself has been quite well. But according to the previous period, and we have the decline of the MAU and the other indices. And the second quarter, and more people are now going outdoors. And we have still -- we have yet to get out of the negative cycles. And PS4s and third-party software sales has been rather sluggish. And the catalog title and historical titles has been declining. And against that, PS5 engagement is quite high. So the Q3, we expect some recovery. And we have the strong titles from the first-party, and we have some seasonal effect. And Q3, we can see some of the recovery from the downturn trend. That's our expectations.

[Operator:]

Thank you very much, Mr. Ono. So we'd like to move onto next question from JPMorgan Securities, Mr. Ayada, please.

[Junya Ayada:]

From JPMorgan, Ayada. I have two questions. So I have two questions for the game. The first question is, as you have mentioned about the third-party sales there have been a deterioration. And therefore, I would like you to explain in detail, well, because there hadn't been good, kind of, title sales. So thinking about the new titles and talking about the current situation, there had been a hurdle in comparison to the last year. However, looking at the other platforms, including the consoles and PCs, the users have been taken by other players. So do you have any perspective on this point? And just one question is about -- talking about the PS Plus members, there had been a decline. And for this quarter, there have been a huge decline. So in order to recover the membership, how -- which area are you going to focus for the third quarter, including the first party, you're going to release the large titles? So you expect more members to come back or -- so talking about the attach date PS4 and PS5, and therefore, you are going to focus on the hardware by leading the PS5, you're going to increase the membership. So I think you're going to take both ways. So if there is any perspective on these points?

[Hiroki Totoki:]

Thank you very much for the question. First -- for the first question, so there have been a weakness in the third-party software. Well, because our initial forecast was too strong. And therefore, that is a point that we need to reflect for the second quarter. So there had been more expense. For example, I think the users are going out from home, and therefore, that had given up an impact to our sales. In addition talking about the new titles, the large titles, for example, the third-party AAA titles, we are able -- we are going to maintain our strength. So for example, the Call of Duty, we are having a good release. And therefore, for the third quarter, we do have a very high expectation. And talking about the membership, and there have been a decline for the PS Plus. And there have been a decline in number of members with the PS Plus. However, in the second quarter, we had renewed our services. And also, there hadn't been a great momentum as a whole, and also, we didn't make aggressive promotion during the second quarter. And therefore, in the future, we are going to have more penetration on PS5, and we are going to have a very good titles, and in addition, we are able to make a good -- better promotion, and we think we are able to recover.

[Operator:]

Thank you very much. And next question, UBS Securities, Mr. Yasui, please.

[Kenji Yasui:]

Thank you very much. Two questions. First, about Music. Looking at the market and the streaming market is very strong. And you have a lot of hits. And I think the top 10 hits are generating a lot of profit. So I think you are in a very good position. But if there is a negative about your business, I think you might be scared that things are going too well. But is there any possibility of a risk in Music? The second, about semiconductors, I&SS. You say profitability is 20%. There was -- when you had 30% -- when you had a Chinese major client. But I'm looking at the utility rate -- utilization rate, I was hoping that it would be higher, including the foreign exchange hedge. Do you have the power to exceed 20%, please?

[Hiroki Totoki:]

Thank you very much. About Music, thanks to you and everyone. I think we are doing extremely well. Streaming is very successful. And well, we really don't have that much of a concern, but if there is going to be a change, that would be emerging service. TikTok, these new platforms, how we can try to compete against these newcomers. But meanwhile, different types of music, I think, can be delivered in different channels. So it could be a risk, and also it could be an opportunity. But what's important is that music -- it's very easy to provide music through new technology. And due to technology disruption, it could occur easily. The industry tells us this is the case, so we have to capture the trend in the world as soon as possible and quickly and swiftly respond, that’s the first answer. And about I&SS and the profit ratio, you say that it should be higher or could be higher? Well, I think that we do have the capability to increase profitability. But if we think of the short-term for the time being, we have to increase our capacity. Sales and increasing share is what we're focused on right now. And we have to really do what we plan to do. For R&D, we, from a competitive point of view, are not trying to reduce R&D budget, but instead, rather than trying to reap the results in the short term, we want to win in this market. And so we want to invest in future solutions. And therefore, we want to achieve and have a good balance between growth and profit in thinking -- managing our business mid to long-term. I also think that we should try to aim for a margin that is higher than 20%. But as for the timing, it will be influenced by the external situation amongst others.

[Operator:]

Thank you. And we would like to move on to the next question. SMBC Nikko Securities, Katsura-san.

[Ryosuke Katsura:]

Thank you. My name is Katsura of SMBC Nikko Securities. And I&SS and strategic investment, I have two questions. As for I&SS, as you have already talked about. And some of the inventory investment and the capital investment, how they are related? If there is any update for your development strategies? For the capital investment, and you have raised the amount that might be because of the ForEx and the semiconductor? Is there -- has there been any change for the prospects for semiconductor business? And as for JPY900 billion for the next period, and what is the peak period? And probably you need a flexible response and because the industry itself is now a bit more restraint. So including adjustment, and if you have any comment for the capital investment? And the second is for strategic investment, as for the year-end financial announcement, and you talked about more than JPY1 trillion or JPY1.06 trillion, and you talked about Pixomondo and what the other on the second half prospects? So if you have any plans for strategic investment and the Bungie, the investment on the Bungie and because of interest rate hike and some of the background factors, if there is any impairment in the early period. And is it in your judgment? Or will it be -- impose any change for the macroscopic policies?

[Hiroki Totoki:]

And as for I&SS and update for the inventory investment and the capital investment. And as for capital investment, and as of July, and you talked about JPY350 billion, and that was raised to JPY353 billion. And this is for the investment for the improved productivity. And that content is image sensor, the demand hike for the mobile phones and the shift to a higher-end product. And Nagasaki Fab 5 and the extension is one of that move. That's the capital investment. As for inventory investment. And compared to a year-on-year basis and second half of ’21 and the second half of ‘22 and 39% of the revenue increase, and the inventory increased by 33%. So I think it is well aligned and no particular supplies and those figures are as expected. And as for this quarter, and we are going to continue full capacity of production so as to accumulate other inventories to be ready for the next fiscal year. And there has been no change of our initial plannings. So by the end of this fiscal year, and the inventory level will be raised a bit more. And as for strategic investment and what's going on. And as for Q2 and the financial announcement, and we have already realized the items. And including some of the share buyback, and that's about JPY1.23 trillion. And that investment amount is almost aligned with our initial planning. As for Bungie and as for impairment, it's not intentional. But that's up to the environmental changes. And as for Bungie itself and if there is any change in the macroscopic, the context, there seems to be no change. So the investment, as for investment, we do not have any particular concerns, including investment to Bungie. So that's it. Thank you.

[Operator:]

Thank you very much. So it's time. Therefore, we would like to conclude earnings announcement. So thank you very much for your participation. Thank you.