Sony Group - Q1 2024

Transcript

Akishige Okada (Director of Corporation)

Good afternoon, ladies and gentlemen. It is now time to start this, Sony Group's Q1 FY2023 Consolidated Financial Results presentation meeting. I am Okada of the corporate communication. I would like to first introduce the speakers today. The President, COO and CFO, Hiroki Totoki. Senior Vice President, in charge of the Corporate Planning Group, D&I Promotion, also support financial service in entertainment segment, Naomi Matsuoka. Then Senior Vice President in charge of Finance and IR, Sadahiko Hayakawa. Though those three will present the Q1 FY2023 consolidated financial results, as well as the outlook throughout FY2023. There will be a question and answer session, and we plan to have a 70 minutes of the session. Thank you. First speaker is Mr. Totoki.

Hiroki Totoki (President, COO and CFO)

The speakers today are Matsuoka and Hayakawa, and then, toward the end, I'd like to make a summary comment.

First speaker, Hayakawa-san. Matsuoka and Hayakawa will present the consolidated results. Starting from FY23Q1, 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 will 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 JPY 2,963.7 billion. Consolidated operating income decreased JPY 111.8 billion year-on-year to JPY 253.0 billion, primarily due to an JPY 84.7 billion decrease in operating income of the financial services segment.

This decrease in operating income of financial services segment was primarily due to the impact of the recalculation of the previous fiscal year's results, resulting from the application of the new standard and absence of a gain on the sales of real estate recorded in the same quarter of the previous fiscal year. Adjusted EBITDA decreased JPY 90.6 billion year-on-year to JPY 406.2 billion. Income before income taxes decreased JPY 73.2 billion year-on-year to JPY 1,276 billion. Net income attributable to Sony Group Corporation shareholders decreased JPY 43.5 billion to JPY 217.5 billion. Results by segment for the quarter are shown on this slide. Next, I will explain the full year consolidated result forecast for FY2023.

The forecast for the full year is JPY 12,200 billion for sales, an increase of JPY 700 billion from the previous forecast. JPY 1,170 billion for the operating income, no change from the previous forecast, and JPY 1,750 billion 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 135 JPY to the US dollar and approximately 146 JPY to the euro. The FY2023 results forecast by segment is shown here. Now, I will move on to an overview of each business segment. First, is the Game & Network Services segment.

FY2023 Q1 sales increased a significant 28% year-on-year to JPY 771.9 billion, primarily due to an increase in sales of third-party software, an increase in sales of PlayStation 5 hardware, and impact of foreign exchange rates. Operating income decreased JPY 3.6 billion year-on-year to JPY 49.2 billion, primarily due to an increase in expenses, including the acquisition-related expenses were JPY 16.6 billion. Despite the positive impact of higher third-party software sales, Adjusted OIBDA increased JPY 5.7 billion year-on-year to JPY 75.9 billion. FY2023 sales are expected to be JPY 4,170 billion, an increase from the previous forecast of JPY 270 billion.

Operating income is expected to be JPY 270 billion, no change from the previous forecast, and Adjusted OIBDA is expected to be JPY 375 billion, an increase of JPY 10 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 JPY 406.2 billion, a significant 27% increase year-on-year.

While there was also positive impact from the exchange rates, this was 14% higher than the first quarter of the fiscal year ended March 31st, 2022, when there was still 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 as being 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. Due to the promotion begun 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. We will try to work steadily to implement necessary measures to achieve our hardware sales target of 25 million units. Towards the end of the calendar year, the first-party title, Marvel's Spider-Man 2, and major third-party titles are scheduled to be released as well. We expect that the entire game industry and the PS platform will be greatly energized. Next is the music segment.

FY2023 Q1 sales increased a significant 16% year-on-year to JPY 358.2 billion, primarily due to the increase in streaming sales and impact of foreign exchange rates. Operating income increased a significant JPY 12.4 billion year-on-year to JPY 73.4 billion, primarily due to the impact of the increased sales and the recording of a remeasurement gain of JPY 6.60 billion from making an equity method affiliate a consolidated subsidiary. Adjusted OIBDA increased JPY 8.2 billion year-on-year to JPY 82.9 billion. Profit contribution from visual media platform was just under 10% of the operating income of this segment. FY2023 sales are expected to be JPY 1,490 billion, an increase of JPY 80 billion from the previous forecast.

Operating income is expected to be JPY 280 billion, an increase of JPY 15 billion from the previous forecast. Adjusted OIBDA is expected to be JPY 335 billion, an increase of JPY 10 billion from the previous forecast.

Naomi Matsuoka (SVP of Corporate Planning Group and D and I Promotion, and Financial Service in Entertainment)

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.

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 five years, and the number of artists producing songs for streaming worldwide has increased 35%. As a result, current market share in the US over the four years through the last fiscal year has risen from 21% to 27%. Sales and operating income for the Sony Music Group, which includes music publishing overseas, have increased significantly at 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, a 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 number one 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 number seven on Billboard's global hit 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.

FY2023 Q1 sales decreased 6% year-on-year to JPY 320.4 billion, mainly due to a decrease in deliveries on television productions and the impact of fewer releases of tent-pole films in the previous fiscal year in motion pictures. Operating income decreased a significant JPY 34.7 billion year-on-year to JPY 16 billion, primarily due to the impact of the decrease in sales and impact increase in marketing expenses in motion pictures. Adjusted OIBDA decreased JPY 33.4 billion year-on-year to JPY 28.5 billion. FY2023 sales are expected to be JPY 1,470 billion, down JPY 50 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, theatrically in June, has become a huge hit, with box office revenue exceeding $680 million worldwide as of August 7th, 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 US in July, and the new movie, Gran Turismo, is scheduled to be released in theaters in the US on August 25th. Regarding Crunchyroll, the number of paying subscribers has surpassed 12 million in July, driven by the exclusive distribution of the television anime, Demon Slayer, Kimetsu no Yaiba, Swordsmith Village Arc, which started in April.

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 ET&S segment. FY2023 Q1 sales increased 4% year-on-year to JPY 571.8 billion, primarily due to impact of foreign exchange rates, despite a decline in smartphone and television sales. Operating income was JPY 55.6 billion, an increase of JPY 2.1 billion year-on-year, primarily due to cost reductions in televisions, despite the impact of decreased smartphone sales.

Adjusted OIBDA increased JPY 3.9 billion year-on-year to JPY 80.9 billion. FY2023 sales expected to be JPY 2,430 billion, an increase of JPY 50 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 continue 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 remains strong. In each category, we are running our operations so as to respond to changes in the market environment. 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 appropriate level. As business environment for televisions and smartphones is expected to continue to be severe, we will pay close attention to cost and inventory control. We also plan to proceed with early reaping of income in the digital 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 product appeal. Next is I&SS segment. FY2023 Q1 sales significantly increased 23% year-on-year to JPY 292.7 billion, mainly due to high sales of image sensors for mobile products and the impact of foreign exchange rates.

Operating income decreased JPY 9 billion year-on-year to JPY 12.7 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 JPY 2.7 billion year-on-year to JPY 70 billion.

Sadahiko Hayakawa (SVP of Finance and Investor Relations)

For FY2023, sales are expected to be JPY 1,560 billion, down JPY 40 billion from the previous forecast. Operating income and Adjusted OIBDA are expected to decrease JPY 20 billion from the previous forecast to JPY 180 billion, and JPY 425 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 cost associated with the launch of mass production of new product 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.

The trend toward 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 pro- 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 strengthening 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 the 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 re-evaluated 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 or loss and impacts 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 JPY 889.1 billion, mainly due to non-recognition of surrender value. Operating income increased by JPY 94.2 billion from the previous standard to JPY 318.1 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. Hedging operations meant to contain 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 JPY 681.4 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's 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 JPY 84.7 billion year-on-year to JPY 54.5 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 JPY 84.2 billion year-on-year to JPY 61.4 billion. The FY2023 financial services revenue forecast is JPY 1,320 billion, an increase of JPY 450 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.

Akishige Okada (Director of Corporation)

Thank you very much, Totoki, Matsuoka, and Hayakawa made the presentation. Now, at 16:25, we would like to entertain the questions from the media. At 16:50, we would like to entertain questions from the investors and analysts, and each session consists of about 20 minutes. Some people have already pre-submitted the questions, and so that please link your phone to that registered phone number. As to this way to ask questions and some of the matters of consideration, please refer to our invitation letter. Please wait for a few minutes before we resume the session. Thank you. 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 this, the previous presenters, the 3 people on the screen. Let us start to entertain questions. We'd like to ask you to keep your questions to just 2 questions per person. Please push the asterisk and then push number 1 after that, if you have a question. The first question is from Furukawa-san from Nikkei. Please go ahead and ask a question.

Speaker 15

I hope you can hear me. I'm Furukawa of Nikkei Newspaper. Thank you very much for this opportunity. I have 2 parts of questions. The first question is that about your, the financial results, as Mr. Totoki explained to us, that the situation is maybe leveling off, like games and semiconductors and other issues.

Akishige Okada (Director of Corporation)

From the Q1, of course, that you are in that, the mid of that phase. Mr. Totoki, what is your, the vision for the growth? 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. My second part of the question is about the situation, the strikes. To what extent that the, the movie, new film release might be delayed because of the U.S. strikes of doctors and others? 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. What do you think of that potential impact by AI?

Hiroki Totoki (President, COO and CFO)

Thank you very much for your question.

As to your first question, in the next fiscal year and the growth scenario that I have in mind, actually, in this midterm business plan, the content IP, DTC, as well as technology investment, as well as this, some of the diversified business segments should have a intragroup collaboration. Those are promoted. As a result, in the last three years, the cumulative, that JPY 1.9 trillion of capital investment in equipment, M&A needs a JPY 1.8 trillion for that, the strategic investment. Gradually, we made a progress. 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.

The Last of Us, HBO, that actual, the drama to be production, but that one became a big hit in 2022. In February, Uncharted was released in the theater, and those were success. Following those successes, numerous projects are ongoing, therefore. There's a strong momentum now, like, together with the music business, this kind of entertainment business, the three segments of the entertainment business. In the next midterm plan, we expect a big growth, a sufficient growth to be achieved. As to the I&SS segment, for this fiscal year, of course, there could be maybe some stagnation, or we are leveling off the growth to a certain, to a certain extent. Of course, the revenue, the sales are going up.

In terms of profitability, there's slightly some area where we are not fully satisfied. We must secure the profitability in a growth scenario. That's something we have to implement in the midterm, the plan, and that's our challenge and priority. In 2024 and afterwards, semiconductor market situation and maybe the market situation improves, especially in China, like a recovery in Chinese smartphone market is expected. 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 a link to the strikes, but of course, the generative AI has a adverse impact, and I think that's something I'd like to respond to you.

It's not only affecting this films and pictures, the game production, as the music, the production and creator support or for anime, that the multilingual, where the translation and so forth could be supported by AI. The stakeholders have the rights and copyrights, and that should be respected in introduction of AI and so... Like music, music copyright, it might be violated, so we have to protect the IP as well as the artists and content-related issues must be solved. Just not by Sony standalone, but we have to have the entire industry involved in order to discuss, to identify the future solution. That's my thought on this. Thank you.

Operator (participant)

We'd like to move on to the next question. Nishida-san, who is a freelancer, please go ahead. Nishida-san, please? Very difficult to hear your voice. I'm very sorry, but I cannot 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, in for the time's sake, we would like to move on to the next person to ask question. Umegaki San from Toyo Keizai, please.

Taku Umegaki (Senior Analyst)

Umegaki from Toyo Keizai. Can you hear me?

Operator (participant)

Yes, I can hear you, so please go ahead.

Taku Umegaki (Senior Analyst)

I have two questions. First question is that, as was already mentioned, the three areas of segments of enter- the entertainment, the total, the income that exceeds 54%, the three segments combined, it is still very high. You talked about next MLP. What the percentage you would like to reach for the total, the income of those three segments? Now, the China slowdown. You have already mentioned in I&SS. For other segment, what is the impact? For instance, for the consumer spending has been quite weak in China. What is impact on overall business of Sony Group?

Hiroki Totoki (President, COO and CFO)

Thank you very much for your question. I would like to answer the two questions.

As for entertainment, three segments combined, the operating income, what is our plan to reach the certain percentage? We do not have any target in terms of the percentage, but three segments, entertainment, the segments combined, and also I&SS, where the growth is expected. Comprehensively, I believe that the percentage or the portion of the profit earned by those segments will increase. The second question is, other than I&SS, what is the slowdown of Chinese economy on other segments? For the consumer spending, ET&S will be affected, the TV and smartphones are areas which is severely impacted.

Currently, as far as the FY2023 is concerned, the slowdown in China, since there is a great concern about that, so our plan is made quite conservatively, and therefore, management itself has been going quite well. On the other hand, as for the camera, the market, which is quite, performing quite well, and under COVID, the activities have been restricted in the past. There is a very good demand in this area, so we would like to reap the profit as early as possible in this area. That's all.

Operator (participant)

Now, we'd like to move on to the next question. If you have any question? Anybody? Please, press asterisk followed by number one.

Speaker 14

Abe San from Nikkanko, Industry Daily.

I'm Abe from Industry Daily, Nikkanko. Can you hear me?

Hiroki Totoki (President, COO and CFO)

Yes, I can.

Speaker 14

Thank you. Related to the question asked earlier, ET&S segment, digital camera is the area that I have question. The sales unit increased, which resulted in increased profit. About by regions, can you explain, for example, year-on-year basis growth rate? Can you enlighten me? In addition, in this area, Chinese market, you said that there is robust market demand in China. Going forward, do you expect robust demand will continue in the Chinese market? What is your view of the Chinese market and the demand in the market in China?

Hiroki Totoki (President, COO and CFO)

Thank you very much for your question. ET&S segment, digital camera, increase in the number of units sold, and what is the breakdown by regions, was your question. In the first quarter, camera body and lens, both are doing well. By regions, China and Asia, the sales has been very robust. Europe and US, full term, the competition with others is getting more severe. In some areas, there is some a slight decline in the share, but we are making additional investment, such as sales promotion, and we are expecting our share to increase. Going forward?

we should not be optimistic, and we have to be prepared for the possible slowdown of the market, and we have to invest for new products, and also we'll be controlling both production and sales. Thank you.

Atsuko Nishida (Equity Analyst)

We'd like to entertain next question. Kyodo Tsushin, Endo-san, please.

Speaker 12

Endo from Kyodo Tsushin. I hope you can hear me. I have one question about camera. The sales are going up because after the COVID-19, there's maybe the with the percussion after the for the people traveling again, they like to use some more digital camera. Is that a new demand? The link to the COVID-19 and the pandemic, how the demand is increasing after the COVID-19 pandemic?

Hiroki Totoki (President, COO and CFO)

Thank you for the question. As I said, there's a maybe reaction after the COVID-19 pandemic. That is, say, at one time, demand was down, that's a fact. People now have the pent-up demand. Last year, already that the people already bought lots of cameras after that. The strength of demand is still persistent, which is our great pleasure, and we have a continuing demand. From a macroscopic standpoint, that the traveling demand is going up, people spend more money on traveling, vacations, and so on, I suppose. That might have a good impact on that demand. Thank you.

Operator (participant)

We'd like to move on to the next question. The questions, please press asterisk and then press 1. Nishida-san, who is a freelancer, please go ahead.

Atsuko Nishida (Equity Analyst)

Can you hear me?

Hiroki Totoki (President, COO and CFO)

Yes, I can hear you. Please.

Atsuko Nishida (Equity Analyst)

I have 2 questions, the first point is about game business. The third-party application has increased. How do you assess this? Do you think that this trend will be here to stay, or do you think that you need more efforts to promote this? That is related to that. In your document, PlayStation Plus, the number of user, there is a change in the disclosure conditions. Is there any reason for that? Secondly, about pictures, particularly for drama, the streaming service overseas, is there any the impact of the fluctuation of the overseas market in this area? Thank you very much for your question. The Gaming Network Service, you are talking about, the increase of third-party titles, and, I think, your question is about our assessment on that.

Hiroki Totoki (President, COO and CFO)

During the first quarter, the new title from the third party, we have very strong ones. The, in a software, the overall, the year-over-year, there has been increased revenue from this. Of course, on our part, the strong titles, the third-party titles, should continue to prosper, and as a platformer, we are very happy about it. First-party titles and our new titles, because of the release timing, there has been the reduced sales year-over-year. Not only the third-party titles, but we would like to make greater efforts for the first-party titles. Your second question is about PS Plus and change of the assumption about disclosure conditions.

About PS Plus, we just ceased to announce, reveal, and the disclosure, and also there has been some expansion of ex- disclosure. Matsuoka-san will cover this point. FY2022, in June, there was renewal, and after that, the PS Plus, in addition to the greater number of subscribers and moved to the more attractive titles, with the increase in up. We have been expanding the PS Plus business, extra and premium. We would like to continue to promote the shift in order. In order to do so, we'd like to increase the service appeal. On this basis, we are able to confirm the growth through the network services expansion.

So, we stopped disclosing the number of subscribers as a result. What are included in others, that is, software sales other than PS Plus, they will be newly released. In this area, the multi-platform will be covered, including PC. We would like to promote this. With additional disclosure, I hope that we can give the update about our progress. About the pictures, in your second question, drama streaming, is there any impact of overseas market? In overall, the business environment surrounding this area is that in overseas theatrical market, there are many tent-pole films are released, so they become very active.

As a result of strike, then the major studios, the productions have been actually delayed in the major studios, and so there is some concern about advertising. The theatrical business, after July, we have to pay close attention. There is the competitive environment among the streamers. So the contents investment of those players may not decrease immediately, but as a result of the strike, there will be the change of the schedule about the production, and therefore, the future development, since impact will be will emerge. From now, we would like to pay attention to that. Thank you.

Akishige Okada (Director of Corporation)

Time is running short, so the next will be the last question. Because of the constraint of time, I'd like to ask the person to limit to 1 question. Tsutsumi-san from Nikkei Newspaper, please.

Speaker 14

Tsutsumi from Nikkei, can you hear me?

Hiroki Totoki (President, COO and CFO)

Yes, we can.

Akishige Okada (Director of Corporation)

Please.

Speaker 14

One question. PS5 sales, you said that the actual is lower than the forecast. What is the reason for lower than expected sales? The sluggish personal spending or other the users went to other game hardware? Can you please explain the reasons?

Hiroki Totoki (President, COO and CFO)

Thank you for your question. First quarter sales was 3.3 million units, slightly lower than the expectation. From last year, 38% increase. We also believe that the demand is strong, and promotion itself was rather limited. In view of the profitability, we limited the promotion activities, and slightly weak. Starting from July, in some regions, we have started a promotion on full-fledged basis. As the sales through, we are looking at the sales through, and we are seeing good signs already. In view of the seasonality of the sales, the first quarter, slightly less than the target, but it, on a fiscal year basis, especially calendar year, year-end, calendar year end, by that time, we believe that there is ample possibility for us to catch up.

Especially toward the third quarter, we will be increasing the number of sales. It's important to increase the sales. We will aim to achieve the target.

Speaker 14

Thank you.

Akishige Okada (Director of Corporation)

Thank you very much. Now it is time for us to end this media QA session. Thank you very much. The QA session for this analysts and investors will start at 4:50. We would like to soon start the QA session for the analysts and investors. Please wait for a few minutes. Thank you. Thank you very much for waiting. Let us now start this QA session for the investors and analysts. I would like to serve as the emcee. I am Kondo of the Finance and IR Group member. The speakers are the same as the media session. The photos are shown on this PowerPoint slide. We'd like to now entertain questions and comments from the analysts and so on. Two questions per person, please.

When you have a question, please push the asterisk and then push number one. From Morgan Stanley MUFG, Ono-san, please.

Speaker 13

Thank you for this opportunity. I'm Ono of Morgan Stanley. My question is about games, and the other one is I&SS. I have two questions. Throughout the year, you have the annual plan for Game & Network Services in JPY 207 billion. It's something that, 7, JPY 270 billion. It actually that it's only JPY 10 billion. Software, of course, the third party is the focus. You had an analysis of flat, but you have raised that the plan, there might be some impact, maybe the upside of this sales figure.

This is on-only that level of the profitability you achieved. Maybe hardware promotion was accumulated, and maybe that's the result. What is the size and scale you're expecting? Do you have some hint for the total scale you'd be achieving? The second part of the question is I&SS. Previously, that you show the outlook for the downward trend, lowered the revenue and income, so that the production costs are very high. Then that is a very challenging situation, which the expense is regarded as an estimated to be very high. On the other hand, China is another place where the mid to low range of the smartphones, that the price reduction had to be implemented in China.

The additional $20 billion, the downward adjustment was done. What is change? Is a change taking place to influence that balance? Those are two parts of the questions.

Hiroki Totoki (President, COO and CFO)

Thank you very much for your question. The first one, about the game and network service related question. Throughout the year, what is our annual plan? Annual plan, how should we interpret our annual plan? Maybe that's the gist of your question, but in terms of profit, profitability, what you said is right. Third-party software, the good sales in the first quarter reflect, is reflected in there. In the second quarter and afterwards, the sales plan was adjusted upward, that is one impact.

Speaker 13

The other one is the foreign exchange rates that, that we have revised it to the weaker yen situation, that would push up the sales. On the other hand, what about operating income?

Hiroki Totoki (President, COO and CFO)

The third-party software sales are going up, and then, of course, the profit will be pushed up by that. The first-party titles, their sales launch was delayed, postponed, and there's some postponement from this fiscal term to the next term. That was taken into account in that adjustment. Another factor is the promotion and other activities. There is no major change to the promotion plan. However, some part of that, of course, there was original channel mix that is direct sales versus the so-called other sales channels, and that kind of sales.

That the sales channel mix, compared to original forecast, rather than direct sales, the other one's going through the retail shops and then the dealers, that proportion is likely to increase more. You have to, we have to pay margin for that, so that margin has been taken into account in the change to sales channel mix. Overall, that part means this how to calculate the and estimate this expense there, we are quite conservative. The 15 million units is 25 million units is something that we have set as a target, and we would like to really achieve that target. Our intention is taking into account in this revised plan. Another factor, the second part of your question about I&SS related question.

Of course, that there is some, this, the production cost increase that was impacted. In China, the smartphone momentum is being changed. These are two factors which have to be considered and taken into account. That is to say, as of April, we announced the outlook, and there's a change. The production expense compared to the original plan has increased slightly, so that increased production cost was taken into account. Now I think we have considered fully all the potential increase. In China, as of April, compared to the April outlook, the current outlook in the smartphone market, the recovery is more likely to be delayed, so that was also taken into account. These are the factors which were again added to revise this current plan. Thank you.

Thank you.

Operator (participant)

Thank you, Ono-san. We would like to move to the next question. Hirakawa-san from BofA Securities, please.

Mikio Hirakawa (Senior Analyst)

Thank you very much. My name is Hirakawa from BofA. I have two questions. The first is about semiconductor. Previously, the announcement from January to March, at the end of this quarter, that will be higher than year-on-year. The market condition is worse than your April forecast. Is there any change about your strategy? The reason for the March FY2023, why you are quite optimistic? For pictures, because of negotiation, it's not easy for you to reveal your strategy about the pictures. Strike, how to deal with strikes from, of writers and the actors.

How to incorporate the impact into your the financial results at this moment?

Hiroki Totoki (President, COO and CFO)

Thank you very much for your question. First is I&SS. The first quarter, at the end of first quarter, the inventory level and about it, if I, I may explain, the... As a result of sales expansion, that has increased. Also, there is some downside of the downward revision of sales during the first quarter. For the future outlook, logic and sensor, strategic inventory will decline towards the end of the year. Inventory amount itself, the sales has been expanding. FY2023, at the end of FY2023, the, compared to the end of FY2022, it is expected to increase. There is no change in this forecast.

I should say that basically, as a result of sales expansion, this is increased as a result of sales increase, and so it is, does not mean that we have excessive inventory. We have to pay a close attention to quality of inventory, but to a certain extent, we'll keep inventory, the control. We have to, effectively utilize, the equipment and have appropriate timing for the investment. What is the reason we are optimistic about FY2024? The reason is that the demand for the image sensor, we do not think that we make wrong assumption about it. The issue is that pertains to the manufacturing cost or excessive inventory of our competitor's inventory in China, so as a result, decline of ASP. That has adversely impacts the profitability.

As for the business, the volume itself, our forecast is not quite incorrect, so that is the reason, we are quite optimistic about FY2024. Your second question about the pictures. About this fiscal year, under our assumption, we have actually incorporated our assumption into the forecast. For the details, very difficult for me to share the details with you. In terms of profitability, the impact on this fiscal year's business is relatively limited, because business turnover is long for the motion pictures industry, therefore, that is the reason that we forecast this way.

Mikio Hirakawa (Senior Analyst)

Thank you very much for your answers.

Operator (participant)

Thank you, Hirakawa-san. Moving on, JPMorgan Securities, Ayada-san, please.

Junya Ayada (Executive Director and Research Analyst)

Thank you. Ayada from JPMorgan. I have two questions, if I may. The first question about game. Earlier, full year profit increased, it was explained. The first quarter profit change, can you elaborate on the first quarter? Compared to last year, JPY 3.6 billion decrease, and excluding FX impact, about JPY 6 billion decrease. In your explanation, you talked about Bungie expense is -JPY 16.6 billion. Positive side, software increase, add-on point, about JPY 80 billion. The software increase and there's contribution to profit. The change of the sales channel was explained as well. On the other hand, the profitability of software seems to be deteriorating. In the current quarter, the sales of software is large, but mainly older titles are sold. The content of the software sales, can you explain that? That's my first question.

Sadahiko Hayakawa (SVP of Finance and Investor Relations)

My second question: I&SS, full year downward revision, JPY 20 billion. The breakdown of this downward revision with FX about JPY 50 billion positive, I believe. Negative side, around JPY 70 billion impact is there. On the negative side, the breakdown, the sales forecast is revised downside. This is about half of the total, about JPY 30 billion-JPY 40 billion. The increase in the expenses of mass production launch, about JPY 30 billion-JPY 40 billion. The magnitude of the increase in expenses, can you please elaborate? These are my two questions.

Hiroki Totoki (President, COO and CFO)

Thank you very much for your questions. Your first question, first quarter profit increase or decrease and the breakdown for that. Profitability itself basically is not changing so much according to our analysis.

First quarter, the factor for the first quarter, first, M&A-related expenses, acquisition-related expense, Bungie acquisition, and this is on a full consolidated basis now. The cost related to full consolidation of Bungie. The first quarter, the breakdown I have not explained on a fully about on the fiscal year, about JPY 68 billion. M&A related expense and expenses for full consolidation combined, we are looking at that number for your reference. Your second question, I&SS. As you pointed out, the impact of the reduced revenue and expenses related to launch of the mass production of new product, these are negative factors, and the positive factor is exchange rate, as you pointed out.

The breakdown, we are not disclosing the, the breakdown. It's very difficult for me to explain, but I would say, image sensor for mobile decrease in revenue and industrial, social infrastructure, image sensor decrease in revenue. Not only for the mobile, but sensor, image sensor itself is impacted by reduced revenue. That it can be a hint for you to understand. That's all. Thank you.

Akishige Okada (Director of Corporation)

Thank you very much. We have a short remaining time, so just 1 question per person from now on, please. From Citigroup, Aizawa-san, please.

Kota Ezawa (Managing Director and Senior Equity Analyst)

Thank you very much. I'm Aizawa of Citigroup Securities. I have a question, about semiconductor-related question that this to say. The inventory is to be lowered, reduced, and then the production expense, I think, related to this production yield, but I think that will be improved, I understand, in the future. Demand is likely to go up. There are 3 factors affecting the Q2 and later on, those are the important factors. If, when you separate this, the Q2 and the second half, I think the semiconductor is likely to improve markedly, but still the figure is still so low.

Despite this fact, maybe the improvement or recovery might be delayed slightly. During the second half, will that happen markedly? Could you please tell us the factors and background factors for your forecast and analysis?

Hiroki Totoki (President, COO and CFO)

Thank you for your question about I&SS. Of course, during the second quarter and the second half, when you split the two analysis, as to the second quarter, there's a seasonality influence. In other words, the demand is weak in Q2, so there is an emphasis on this second half, so that the second half, I think, is emphasized mostly. That's how to read it.

Thank you, Aizawa-san.

Operator (participant)

From Mizuho Securities, Nakane-san, please.

Yoshihiko Nakane (Managing Director and Chief Equity Strategist)

Nakane from Mizuho Securities. I have 1 question. For the game, PS5, the now, the sales is a bit weak, but in the US and Asia, and Europe, what is the situation? Can you just share with the promotion, 25 million is the target of unit sales, according to Totoki, current exchange rate is assumed to continue. There is some gap of exchange rate. I believe that for that portion, there is a deterioration of profit. If the exchange rate stays this way or further, this depreciation of yen, install base is important. You put more emphasis on install base than the current profitability. PS5, when you think about future profitability, if there is a major change in foreign exchange rate, you have a plan to change this.

Hiroki Totoki (President, COO and CFO)

Now, JPY 135 against the dollar, do you think that this is a conservative estimate?

Thank you very much for your question. For PS5, Game & Network Services segment, PS5, currently, it's a bit weak. What is the situation by regions, is your question. By regions, currently, in Japan, the sales is strong, and the same holds true for Asia. About North America, the response to the promotion is quite favorable. United Kingdom, it's a bit weak, but Europe as a whole has been performing quite well, and that seems to be the current response.

Our target of 25 million units, and so in light of the impact of foreign exchange rates, even we sacrifice profitability, whether we will put emphasis on install base, that seems to be the heart of your question. Currently, of course, expansion of install base is important, so we will continue to make efforts, but we do not make any extreme measures in order to achieve this. The strengths of demand and, of course, a certain level of profitability and expansion of install bases, so those three factors must be well-balanced. The extreme promotion, as a result of extreme promotion, even we acquired the subscribers are very difficult to follow that trend.

Therefore, we would like to use the data, driven, the method approach, to make it appropriate level.

Operator (participant)

Thank you, Nakane-san. Next person will be the last person. SMBC Nikko Securities, Katsura-san, please.

Ryosuke Katsura (Senior Analyst)

Katsura from SMBC Nikko Securities, can you hear me?

Hiroki Totoki (President, COO and CFO)

Yes, we can.

Ryosuke Katsura (Senior Analyst)

Thank you. I would like to ask a question on the consolidated operating cash flow, excluding financial services segment. Full year, JPY 1.25 billion remains unchanged, a significant improvement as compared to last fiscal year. First quarter, cash flow is negative, but as compared to last year, slight improvement. Going forward, how are we going to look at this? Can you please explain? That's the background. Inventory, ET&S, the inventory level is controlled, as you have explained. First quarter, GNS and I and SS, slightly heavy inventory. Other factors, full year operating cash flow is maintained, and as compared to 3 months ago, what are the plus and what are the minus, negative factors? Thank you.

Hiroki Totoki (President, COO and CFO)

Excluding financial, services, consolidated cash flow. Hayakawa-san, please.

I would like to respond to your question. First, the first quarter operating cash flow is minus JPY 80.7 billion. Year-on-year, you have made a comparison, as compared to year-on-year, positive by JPY 90 billion. The first quarter, it is negative. The key point, the PlayStation 5 inventory and I&SS, first quarter and second quarter inventory has built up slightly. Based upon these, cash flow level has come down. This is up the working capital, especially PlayStation 5, toward the third quarter selling sell-through, which results in cash returning. That is the assumption. Ultimately, this fiscal year, excluding financial services, JPY 1.25 trillion, and is our forecast, which remains unchanged. Basically, for the cash flow, working capital, especially game, PlayStation 5, and I&SS as inventory.

Sadahiko Hayakawa (SVP of Finance and Investor Relations)

In the first quarter, these will have impact. That's our analysis. Thank you. Thank you very much.

Akishige Okada (Director of Corporation)

This concludes this today's Q1 for 2023 consolidated financial results presentation. On behalf of Sony Group Corporation, I would like to again thank you all very much for your participation.