Sony Group - Q2 2025

Transcript

Speaker 4

Okay, it is time to start Sony Group Corporation's consolidated financial results announcement session. And my name is Okada. I'm with the Sony Group Corporate Communications. First, let me introduce the people on the stage. First, we have President, COO and CFO Mr. Hiroki Totoki. And we have Senior Vice President in charge of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation, Support for Financial Services, Business and entertainment area, Ms. Naomi Matsuoka. And the Senior Vice President in Charge of Finance and IR Mr. Sadahiko Hayakawa. And also Sony Financial Group Inc. Corporate executive officer and CFO Mr. Kazuhiro Yamada. These four will be presenting the second 2024 second quarter actual end full year forecast and then have the Q and A session in of 70 minutes. Mr. Totoki, please. Okay, thank you.

Hiroki Totoki (President, COO, and CFO)

Today, Matsuoka san, Hayakawa-san and Yamada-san will explain the contents shown here and I will give a general summary at the end. Hayakawa-san, please.

Sadahiko Hayakawa (SVP in Charge of Finance and Investor Relations)

Okay, thank you. Consolidated sales excluding the Financial Services segment for the quarter increased 9% compared to the same quarter of the previous fiscal year to JPY 2,973.4 billion. Operating income increased 57% to JPY 389.3 billion, a record high for the second quarter and the first half of the fiscal year. Consolidated sales including the Financial Services segment increased 3% year on year to JPY 2,905.6 billion. Operating income increased 73% to JPY 451.1 billion, a record high for the second quarter. Net income increased 69% to JPY 338.5 billion. The results by segment for the quarter are shown on the slide. Next, I will explain our consolidated results forecast for 4 full year.

Consolidated sales excluding the Financial Services segment have been increased slightly from the previous forecast to 11,800 billion yen. Operating income is unchanged at 1,165 billion yen. Operating cash flow has been increased 40 billion yen to 1,440 billion yen. Consolidated sales including the Financial Services segment have been increased slightly from the previous forecast to 12,710 billion yen. Operating income and net income unchanged at 1,310 billion yen and 980 billion yen respectively. The full year forecast by segment is shown here. Now I will move on to the explanation of the state of each business. The first is the G&NS segment. Sales for the quarter increased 12% year on year to 1,071.5 billion yen, primarily due to an increase in third party software sales. Despite a decrease in hardware sales, operating income increased 184% year on year to 138.8 billion yen, a new record high for this segment. In the second quarter.

Due to an increase in the profit of hardware, third party software and network services, we have increased the full year forecast for sales by 4% from the previous forecast to JPY 4,490,000,000,000. Taking into account the results of the quarter, we expect operating income to increase 11% to 355 billion JPY, a new record high for profit for this segment. Now I will discuss the state of the business starting from our platform business. The number of monthly active users across all PlayStation platforms in September increased 8% compared to the same month last year to 118 million accounts, making the eighth consecutive quarter of growth compared to the same period of the previous year.

The total playtime also increased 14% compared to the same month last year and 11% on a cumulative basis since the beginning of the current fiscal year compared to the same period of the previous fiscal year, demonstrating steady growth for the platform. PS Plus is providing a stable base of earnings as sales on a US dollar basis increased 18% year on year. This is due to an increase in ARPU, primarily resulting from the shift to higher tiers of service and the impact of price revisions. As for third-party software, sales significantly grew due to contributions from solid franchise titles as well as hit new IP including a new sports title and an action RPG title from China. Next is the studio business. Astro Bot, released on September 6, has received a Metacritic score of 94 and has garnered high praise from the gamer community.

It is a hit which has sold over 1.5 million copies in the nine weeks since its release. 37% of the users who purchased Astro Bot had not purchased a first-party title from us in the last two years. The percentage of younger age groups and families purchasing the title was much higher than other titles and the title is contributing significantly to a widening of the user base. Through the acquisition of new users and expansion of our title portfolio, we launched two new live service games this year. Helldivers 2 was a huge hit while Concord ended up being shut down. We gained a lot of experience and learned a lot from both.

We intend to share the lessons learned from our successes and failures across our studios, including in the areas of title development, management, as well as the process of continually adding expanded content and scaling the service after its release. So, to strengthen our development management system, we intend to build an optimum title portfolio during the current Mid-Range Plan period that combines single-player games, which are our strengths and which have a higher predictability of becoming hits due to our proven IP, with live service games that pursue upside while taking on a certain amount of risk upon release. As the quarterly results show, the platform business has strong momentum, and we expect to see stable expansion of user engagement and associated revenue growth in the second half and beyond.

In the studio business, we expect sales and profits to decline in the second half of the fiscal year compared to the same period of the last fiscal year when Marvel's Spider-Man 2 and Helldivers 2 were huge hits. However, we are making steady progress in the development of new titles and improving our live service game process starting with Ghost of Yōtei, which is a sequel to the smash hit Ghost of Tsushima. We plan to continue releasing major single-player game titles every year from next fiscal year onwards.

Next is the music segment. Sales for the quarter increased 10% year on year to JPY 448.2 billion and operating income increased 12% to JPY 90.4 billion, primarily due to an increase in live performance, merch, merchandising and license and streaming revenues. Streaming revenue for the quarter increased 9% year on year for both recorded music and music publishing, a 5% and 6% increase respectively on a US dollar base. The FY 2024 forecast remains unchanged from the previous forecast. We are expanding our business globally in markets where streaming is fast growing, such as emerging market, including through digital music distributions and artist services provided by The Orchard and AWAL. On the other hand, in countries and territories where streaming is more widespread, consumption of catalog music is increasing.

For example, the share of consumption of the catalog music released more than 18 months ago reached 73% in the recorded music market in the United States. Additionally, in the Spotify Global Top 200, the share of songs released more than 10 years ago has increased significantly from less than 5% in the calendar year 2020 to more than 20% through the end of July 2024. This is primarily due to a shift in the age demographic of users to more mature age group in those countries and territories as well as younger listeners having more opportunity to consume major hit songs from the past. Due to discovery on social media platform, we have carefully selected and acquired evergreen music catalogs through investment or the signing of a licensing agreement.

These music catalog assets serve as a stable earnings foundation for the long term, not only from the consumption of streaming but also from the use in the media such as movies and advertisement. Additionally, by also acquiring names and image and likeness rights related to the music artist for some catalogs, we are pursuing additional monetization opportunities like merchandising and experiential live events that use these rights. Next is the Pictures segment. The sales in the quarter decreased 11% year on year to JPY 355.8 billion, primarily due to a decrease in the number of television programs deliveries, in part due to the impact of the strikes in the previous years. Operating income decreased 37% year on year to JPY 18.5 billion, mainly due to the decline in sales.

For FY 2024, we forecast sales to decrease slightly from the previous forecast to JPY 1,510,000,000,000 and operating income to decrease 8% to JPY 115 billion. We have revised downward forecast for the operating income from the previous forecast, primarily due to a revision in the results forecast of our India business in the media networks in motion pictures. It Ends with Us, a film adaptation of the best-selling novel released on August 9th, generated box office revenue significantly exceeding our expectations and contributed to the result of the quarter. We are still recovering from the impact of the strikes, but the number of major films released after the end of the strikes has been increasing such as Bad Boys: Ride or Die released in June and The Last Dance released last month.

We expect the television and video streaming services licensing revenues to recover from the second half of this fiscal year through the next fiscal year. Crunchyroll is actively expanding its global user base, including partnering with the Amazon Prime Video Channels and then signing a distribution agreement with the YouTube Primetime Channels where the service is scheduled to launch towards the end of the year. Moreover, we have begun streaming many new anime titles from the second half of this fiscal year and aim to further increase engagement with anime fans around the world. Regarding our business in India, the operating environment is challenged primarily due to a softness in the ad market and a decrease in viewers over paid television.

However, under the new local management team that started in August, we are strengthening our operations and rebuilding our strategies to grow the business over the mid to long term, including continuing to improve viewership through restrengthening of our programming. Next is the ET&S segment. Sales for the quarter were 619.8 billion JPY, essentially flat year on year. Operating income increased 15% year on year to 70.2 billion JPY, mainly due to the favorable impact of foreign exchange rates and cost reduction effects. The 4 forecast remains unchanged from the previous forecast.

Major markets such as North America, Europe, China and Japan remain generally stable during the quarter and solid business operations enable us to achieve operating income exceeding the same quarter of the previous fiscal year. We continue to pay close attention to inventory control and while overall segment sales remained essentially the same as in the same period of the previous fiscal year, we were able to reduce inventory by approximately 10% at the end of the quarter. On the other hand, the imaging business which significantly grew year on year in the first quarter ended June 30, 2024 mainly in China, was essentially flat year on year in the current quarter.

As a result, we have incorporated into our forecast a proactive change to a more cautious production inventory plan in preparation for the year-end selling season in the sports business which is a growth area. We are working to further expand our business opportunity by collaborating with the partners in incorporating new technologies centered on Hawk-Eye which provides referee decision support solution based on the video data. On August 1st we announced technology partnership with NFL in the United States. Through this collaboration we aim to advance the practical application of a cutting-edge sports-related technology such as using Hawk-Eye to assist referee decision, improving the accuracy of measuring key game metrics such as yards gain through the video data analysis.

Also on October 15th we completed the acquisition of KinaTrax, a U.S. company that uses high precision motion capture technology and data analysis to provide support services such as those aimed at improving athlete performance. The company has a strong affinity with Hawk-Eye in terms of technology for acquiring highly reliable sports data. We expect great synergy in terms of maximization of data accumulation and use. Although the sports business is not large in scale, we expect it to generate stable and high profits and aim to continue to focus on expanding it.

Naomi Matsuoka (SVP of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation Portal, Financial Services, Business, and Entertainment)

Next is the I&SS segment. Sales for the quarter increased 32% year on year to JPY 535.6 billion primarily due to increased sales of image sensors of mobile products and the impact of foreign exchange rates. Operating income approximately doubled year on year to JPY 92.4 billion primarily due to the benefit of the increased sales and the favorable impact of foreign exchange rates. For FY24, we forecast sales to decrease 4% from the previous forecast to JPY 1,770,000,000,000 and operating income to decrease 9% to JPY 250,000,000. The global smartphone market continued its gradual recovery trend with positive YoY growth continuing in China and Europe and signs of recovery in the North America market. Mobile sensor sales during the quarter significantly increased due to an increase in unit prices resulting from larger die sizes and steady shipment of image sensors for new products to a major customer.

This led to the segment overall recording its highest ever second quarter sales. On the other hand, with regard to the second half, we have downwardly revised our sales and profit forecast for mobile sensors to reflect revision in the production plan of our major customer. The introduction of AI functionality and services into smartphones which is currently underway, may bring short term volatility to the high end market depending on the speed of rollout and initial reception. However, in the mid to long term we expect that convenience brought by AI will make smartphone functionality more attractive, revitalizing the market and encouraging a shift to high end products. On the production side, improvement in yields for mobile sensors are progressing as planned since the beginning of the fiscal year and we expect to achieve normal run rate in the fourth quarter ending March 31, 2025.

Last is the Financial Services segment. Financial Services revenue for the quarter decreased JPY 167.2 billion year on year to negative JPY 63.3 billion primarily due to the impact of market fluctuations at Sony Life. This was due to the significant appreciation of the yen during the quarter which led to a significant decrease in the yen-based valuation of the asset under management for the foreign currency denominated insurance. However, since the valuation of liabilities declined in a similar manner, this did not have a significant impact on profitability. Operating income increased JPY 50.1 billion year on year to JPY 65.7 billion primarily due to the impact of interest rate fluctuations at Sony Life Insurance. Results at Sony Life, which are the baseload of profitability for the business, continued their stable trend at JPY 49 billion. FY 2024 forecast remains unchanged from the previous forecast.

Sony Life's new policy amount continues to be strong with the cumulative first half growth of 14% compared to the same period of the previous fiscal year. Preparations for the partial spin-off and the listing of Sony Financial Group Inc., planned for October next year, are progressing smoothly. As a part of those preparations and in order to strengthen its governance and accelerate its decision-making, SFGI transitioned to a company with three committees corporate governance structure as of October 1st. Next, I will explain efforts to improve and stabilize our economic value-based solvency ratio, which is an important issue ahead of the listing. ESR is an indicator of financial soundness of Financial Services business. It shows the level of capital relative to amount of risk calculated based on conservative assumptions after assets and liabilities evaluated on economic value basis.

As shown on this slide, the ESR of SFG on a consolidated basis is within the target range. However, the high sensitivity of ESR to interest rate fluctuations is an issue for the life insurance business and we are implementing measures to reduce sensitivity in terms of both capital and risk amount with regard to capital which is the numerator of ESR. The assets held on the balance sheet such as JGBs and our bonds exceeded insurance liabilities, resulting in an over-hedged situation and a structure in which net assets decrease when interest rates rise. In order to correct this, we sold the portion of our yen-denominated bonds so as to mitigate over-hedging and we are currently undertaking transactions designed to curb capital fluctuations. The amount of risk which is the denominator also increases as interest rates rise.

We are working to refine our risk measurement methods and further improve our risk management. We have created a two- to three-year roadmap improving and stabilizing ESR and we will continue to report on our progress and results. Finally, I would like to give you an overall summary. The key performance indicators for the entire Sony Group in the first five-year Mid-Range Plan are the growth rate of the operating income of 10% or more and a three-year cumulative operating income margin of 10% or more, both on a consolidated basis excluding the Financial Services segment. The consolidated result forecast for this fiscal year announced today predicts a new record high operating income, a year-on-year growth rate of operating income of more than 10%. An operating income margin of 10%.

We believe that we have gotten off to a good start in the first year of this Mid-Range Plan. In the second half there will be no major first-party software title releases in G&NS and there will be an adjustment in demand from major customers in I&SS. As a result of these and other factors, consolidated operating income excluding the Financial Services segment is expected to be slightly lower than the same period of the previous fiscal year. However, business momentum is currently good, particularly in the G&NS and Music segment. We aim to produce solid results in order to achieve the targets of our Mid-Range Plan. Moreover, under the Mid-Range Plan we aim to strengthen shareholders' return and the cumulative amount of shares repurchased through the end of October out of JPY 250 billion authorized this fiscal year was JPY 237.1 billion.

Amid a rapidly changing business environment, we will continue to manage our business in a way that will enable us to achieve sustainable growth across the entire group and while addressing the various challenges that each business face. That's all for my explanation.

Operator (participant)

So that was a presentation by Mr. Totoki, Ms. Matsuoka, Mr. Hayakawa and Mr. Yamada. After this, from 4:25 P.M. we'll have Q and A session with media persons and the Q and A with investors. Analysts will start at 4:50 P.M. and each session will last for 20 minutes and those of you who have already registered to ask questions, please connect the designated telephone number and the method to ask questions and the other notes associated with that that has been informed to you by a separate invitation. Thank you for waiting. Now we'd like to start the Q and A. We'd like to respond to the questions from media people and as was the case with the presentations, we have these four people who have made the presentations responding to your questions. Now I would like to start the Q and A.

We ask you to limit your questions to just two questions and if you have a question please press on your phone * then number 1 and first we have Umegaki-san, Toyo Keizai.

Hayato Umegaki (Reporter)

This is Umegaki of Toyo Keizai. I have two questions. First, I&SS downward revision: the overall market is recovering but the I&SS is revising downward. What is the outlook for the next fiscal year and smartphone has been getting image sensor becoming larger and larger but isn't there any risk having a consolidated business with a large maker? And the next question is about the game business. Two years ago in 2022 Totoki-san mentioned about the issues and then you have became risk management and then the of the personnel and some studio closure as well and how much of the reform has progressed as of now?

Hiroki Totoki (President, COO, and CFO)

Thank you for your questions.

The first question about the I&SS. Second question was about game and network services. I will answer both questions. First, about I&SS, the market is said to be recovering, but it's very slow, so I think it is just provisional, and for this particular quarter, our customer has revised their production plan, and we followed our outlook revision downward, but there are different reasons for production adjustment, and so it is part of the business as you know, and so it is not to impact next fiscal year, so we have not changed any forecast for the, and also your comment about the risk of having a concentrated customer base, and that is not a new-found challenge, and we hope to continue to work on expanding our customer base, and about the gaming, and we are reforming. We are not only changing the business structure but also game development approach.

We are taking a new look and also portfolio concept to be introduced and regardless of the personnel we have different cost cut in different areas and also optimization of investment in sales and marketing we are doing all these and as a combination I think we got very good results. Now the question of to what extent this reform has progressed and this is kind of a Kaizen improvement we need to continue to do which we surely intend to.

Operator (participant)

So let's move on to the next questions, Iwato-san from Nikkei Business. Please go ahead.

Hisashi Iwato (Reporter)

This is Iwato from Nikkei Business. I hope you can hear me.

Operator (participant)

Yes, I can hear you fine.

Hisashi Iwato (Reporter)

So I have one question with regards to G&NS in live service game, the current status. What do you make of that? And you have the huge hit and also you discontinue certain services and basically how are you managing the portfolio in terms of development?

Hiroki Totoki (President, COO, and CFO)

Thank you very much for your questions, but currently we are still in the process of learning and basically with regards to new IP. Of course you don't know the result until you actually try it. So for.

For us, for our reflection, probably we need to have a lot of gates including user testing or internal evaluation and the timing of such gates, and then we need to bring them forward and we should have done those gates much earlier than we did, and also we have a siloed organization so going beyond the boundaries of those organization in terms of development and also sales and I think that could have been much more smoother, and then going forward in our own titles and third party titles we do have many different windows and we want to be able to select the right and optimal window and so that we can deploy them our own platform without cannibalization so that we can maximize our performance in terms of title launches. That's all I have.

Naomi Matsuoka (SVP of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation Portal, Financial Services, Business, and Entertainment)

Now, next we move on to the next question from Nikkei Omichi-san. Please,

Kyoka Omichi (Staff Writer and Correspondent)

Omichi from Nikkei, and can you hear me?

Naomi Matsuoka (SVP of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation Portal, Financial Services, Business, and Entertainment)

Well, can you just speak more loudly?

Kyoka Omichi (Staff Writer and Correspondent)

Oh, Omichi from Nikkei, can you hear me?

Naomi Matsuoka (SVP of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation Portal, Financial Services, Business, and Entertainment)

Yes, we can hear you.

Hisashi Iwato (Reporter)

Thank you. I have two questions, and the first question is that in the U.S. the election, Trump had a victory so for foreign exchange or the tariff there will be change. How do you perceive the impact of his election on your business? And this year you actually acquired Pink Floyd and Queen the rights and for the Michael Jackson the IP of his music has been acquired by you and so for those the music what is the role the long-term stable, the revenue or synergy effect on other businesses, what is your expectation about those new business?

Naomi Matsuoka (SVP of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation Portal, Financial Services, Business, and Entertainment)

First, the impact of the U.S. presidential election on our business. Second, with regard to music, Matsuoka-san will answer your question. And as regards the impact of the U.S. presidential election on our part, we respect the choice of the U.S. public so that means that election results how it impacts on the global economy or geopolitical situation. I'm not expert on that and there are many experts on those areas so we'd like to just depend on their analysis. But when it comes to the impact on our own business. The United States has a very broad impact on the global economy and also has a very large geopolitical impact. And so of course that will directly impact on our business. Therefore, we would like to observe the facts of the matter and make analysis about them.

We would like to look at the future and do what we are able to do. When it comes to the tariff issue that has been very often discussed recently, but that is just a general discussion. We have to have a very accurate prediction and we have to think about the optimum level of shipment, which country becomes a producer and in what way we conduct shipment and how we are able to optimize a plan and how we are able to look at the pricing for that. Of course we have been doing that. We have to once again look at this and study this carefully. The second question is about music. Matsuoka-san will answer your question.

Thank you for your question. Which catalog?

We haven't identified particular catalogs but those catalogs and our plan to acquire them will contribute to the stable source of recurring income, and so that may generate the stable return, and so we have many use opportunities and so we are able to create opportunities upside and for IP value of Sony as a whole. For instance, there is a likeness or image, right? So those are peripheral, the NIL, the rights, and by acquiring those catalogs across the Sony Group, we are able to expand the usage of catalogs. Therefore, in that sense of course we should have always disciplined approach and to look at the opportunities for acquisition of catalogs. Thank you.

If I may supplement in my speech, as I mentioned recently, in the market, particularly in the streaming market, the service users and listeners their age the group has become more of a mature age group. In other words, evergreen music has been more often listened to by those groups. So for us, I believe that that is a very important asset. And the fact that we have evergreen catalogs that also shows our attitude of commitment to the artists and therefore through a and all activities. And so we would like to use it as the asset to give a very good spin off.

Operator (participant)

Okay, let's move to the next question. Horikawa-san, Bloomberg please.

Thank you. This is Horikawa from Bloomberg. Can you hear me? Yes, please go ahead. I have two questions. First, about the game business this quarter PS5 hardware is the target 18 million units it's unchanged and PlayStation 5 Pro is released so it will be. Some people say it will be difficult to have a wide user base with JPY 120,000. What is the plan for sales of PlayStation 5 Pro as well and the second additional investment to Rapidus and have you made the additional investment? If yes and what is the reason for the additional investment?

Hiroki Totoki (President, COO, and CFO)

Okay, thank you for the question and the first question about the PS5 sales 18 million units is that unchanged? Answer short answer is yes, will remain.

First quarter was slightly weaker than planned, and second quarter pretty much a target, and that has been the actuals in the first half. For the second half of this fiscal year, we will have some sales promotion in our plan, and in the first half of the year we did not introduce a price reduction which we had for PlayStation 4 in the past, so we have been able to sell through without the discount.

Now, PS5 Pro unit numbers are included in this. PS5 Pro is rather high-end; core hardcore users are the target of this hardware, so we don't have a large contribution in volume and compared with the PS5. I think it is in fact stronger, and in terms of the pricing, many people made different comments on that, but pricing for PS5 Pro has not had a negative impact, I don't think. And second question about Rapidus additional investment, and we, I apologize, we do not make comments on individual specific projects like this, but our basic thinking is that the semiconductor industry is needed for the growth of the economy and also for the economic security. As such is very important, as we are one of the members of that industry. If the semiconductor industry is to be enhanced and we believe that will strengthen the infrastructure and the technology personnel base and that's good for industry, so we want to make a due contribution to that. it.

Operator (participant)

We are running out of time so we have time for two more persons for questions and please press asterisk and then number if you wish to ask a question. Suzuki-san from Weekly Diamond.

My name is Suzuki from the Weekly Diamond. I hope you can hear me and please limit your question to only one. In the interest of time I'd like to ask you a question about game business in live service business and then you fail the Concord and also you gain a success and you have two different experiences and I'm sure that will have given you a lot of learning and that's what you explained. Can you talk a little bit more about that and what didn't work and then what really work? Can you elaborate on that?

Hiroki Totoki (President, COO, and CFO)

Thank you very much for your question. I might be repeating myself.

But. In terms of what didn't work, we need to have more detailed confirmation or validation, and we should have done those more. And then we need to have more detailed gates to make sure that we check the user test, or we need to repeat those gates more so that we could have caught it earlier to determine whether that will be accepted by the users or not.

We need to have more information that will enable us to make more sound decisions. I think that's the overall reflection. In terms of what worked and looking back on what worked, we usually don't do that, but if things are really working, and then of course like in all the things that I have said work really well to really produce a great result, and looking back on the past, so I think we need to go back to the basics and then make it really stronger.

Naomi Matsuoka (SVP of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation Portal, Financial Services, Business, and Entertainment)

The next question will be the last question. Sato-san from Nikkei, please.

Sato from Nikkei, can you hear me? Yes. Please just confine your question to one regarding Concord. I have a question. Actually, it's not easy to pay attention to that. And for Sony Group anime films and games, well, you have diverse contents so you have produced diverse content and so how you are going to combine them from Concord the lessons how you are able to take advantage of the lessons from Concord. Regarding that matter, as lessons we have learned a lot, but the way to face the issues regarding PC for instance, the PlayStation accounts that we have offered and well, actually by offering them for instance sometimes that tends to invite pushback but for the live service games.

So in order to maintain order of the gaming so that anybody can enjoy the game safely and we need to create environment conducive to that. Of course, enjoying the game freely and having some restrictions may not call it rule but to ask the users and gamers to follow the manner and those balance is very important. We have to continue to seek the best way to achieve this. So the time runs out. So now we would like to bring an end to the question answer from media and from 4:52 we would like to start question answer for the investors and analysts. So please wait for a while. We'd like to begin the session for the analysts and investors. Please wait until the session is.

Sadahiko Hayakawa (SVP in Charge of Finance and Investor Relations)

Thank you for your patience. Now we'd like to start the Q and A session for investors and analysts. My name is Kondo, I'm with the IR group of Sony Group Corporation and as is the case with the media session, we have these four persons responding to your questions. And when you ask questions, we have sent you the instruction included in the invitation. We ask you to limit your questions to just two questions at the most. So we'd like to start. So if you have a question, please press * and number one on your phone. So SMBC Nikko Securities Katsura-san please.

Ryosuke Katsura (Analyst)

Okay, thank you very much. SMBC Nikko Securities Katsura and I would like to talk about I&SS and ET&S each for I&SS in the additional documents page.

Wafer production capacity is now at full and you will continue we will start adjusting that and what will be the period you will be adjusting making adjustment and also on page eight there is an inventory level. So with the addition of the impact from the Forex, has there been any change in the outlook? That's the first question. And the second question about ET&S is about the digital camera. You have become more cautious about your outlook for digital cameras market. Now that revision is limited to that only or ET&S as a whole. You are taking another look and as a result we have flat unchanged as a whole. But the plus and minuses we could expand on.

Hiroki Totoki (President, COO, and CFO)

Thank you for your question.

Regarding I&SS utilization rate, currently as you know, full production capability is utilized for the third quarter. We plan to have the same shift of full operation. And as of now we have regarding the inventory, I think as of late end of March we have a little bit more production at the inventory. I talked about the production control adjustment so we will cut back the inventory a little bit as such and so we do not consider is needed to adjust the production much.

And as for ET&S as a whole, there is some change. ET&S as a whole, that. Is.In China, the market, the TV market is softening and worldwide not much change though. So that's how we view the TV market. And for the increased cost for logistics, that is now included as a risk in the October assumption and in imaging because of a competitive condition there is an increase in the sales promotion cost and also Chinese market risk is also incorporated. But in the initial plan we had overall risk as a whole as well. So we did not change the full-year forecast for operating income this time. Thank you. Katsura-san,

Sadahiko Hayakawa (SVP in Charge of Finance and Investor Relations)

moving on to J.P. Morgan's Ayada-san, over to you.

Junya Ayada (Analyst)

This is Ayada from J.P. Morgan, and I have two questions with regards to game. The first one is in the second quarter there was a huge jump so I like you to take a note. And then there was an increase in profit by JPY 8.85 billion because of the foreign exchange and then also the hardware and third-party network, what was the profit contribution of each? And in terms of hardware, I think you turned a profit in the second quarter and do you think. And then also you mentioned this profit improvement of the hardware in the second quarter. In all, what was the driver behind that?

That was the first question, and then the second question is looking at the game, especially hardware in the second half and the third party software lineup in the second half not compatible with PS4 but some titles are only compatible with the PS5 and there has been an increase in the number of that. And what's the thinking behind that and upgrade? Are you sort of expecting the accelerated transition from PS4 to PS5? Because we are talking third parties and those users with the PC and PS4, they might be able to purchase it for PC and there might be such a risk. And how do you view such risks and opportunities? I know that you overdelivered in the second quarter, so maybe you might have decided to increase the marketing promotional costs in the second half.

Hiroki Totoki (President, COO, and CFO)

So, with regards to gain in the second quarter and in terms of operating income growth, you have given us your analysis, and in our view it's very clear, close to what you have said, and also the sequence that you mentioned. You are correct. So, in terms of profit growth, we haven't disclosed that. But, speaking about the reason for the improved profitability of hardware in last year's second quarter as compared to the current second quarter of last year, we made a switch to the new models, which means that the cost structure improved, and then that also generated a positive contribution to the profit. And then also we launched new models in the third quarter of last year. So, basically, the cost structure remains unchanged compared to the second half of last year.

But the average selling price has improved, which is expected to generate the profit improvement year on year. With regards to third quarter, as you know, which is the volume-driving quarter end of the year. Yes, we have included a marketing promotional expense increase, and not drastic increase. If you look at and focus on only that, you might see that there would be a slight deterioration of the profitability. But that's also. Thank you very much, and sorry I forgot to address one more question with regards to upgrades. The third-party lineup only for PS5, and then you said that there might be an increase in the number of the titles, but because of the timing and because of the late stage of the console cycle, and naturally we have more titles for PS5.

But if the transition from PS4 to PS5 will continue, we believe that transition is happening and as we expect. So if you upgrade to PS5 basically and of course there would be upside in the software purchases and then we see that as a possible opportunity. And then as for the risk for third-party software for PC and we don't, we don't see that as a risk and we haven't seen that as a trend emerging. That's all I have.

Sadahiko Hayakawa (SVP in Charge of Finance and Investor Relations)

Thank you. The next question is Citigroup Ezawa-san, please, is from Citigroup.

Kota Ezawa (Analyst)

I have two questions, and regarding hardware and the results of the game, the relation between this, and also another question pertains to music, as for game. Operating income forecast the JPY 34 billion upward, the revision, and the first half and the second quarter results are better than your plan.

So is that just a mere addition of that increase on the second quarter just in terms of numbers because hardware profitability improvement seems to be the major factor to increase the results of second quarter and the cost structure has improved and the profit has increased so that may increase the profit of the second quarter but that is not reflected so I just wonder whether that is reflected in the second quarter results or forecast? And the second question pertains to music. In evergreen the music has been more often listened to by users and until a few years ago the hit chart of new songs Sony Music artists the portion share was the largest and you put a lot of the emphasis on that and Latin America and indies you have made a lot of the emphasis in order to increase the hit songs of the new artist or new songs.

The fact that the change happens reflects the change of your position of the music business or generally in the music industry. This is a general trend of music industry that people listen to the older music more often than just the new songs. Thank you.

Naomi Matsuoka (SVP of Corporate Planning and Control, Lead of Group Diversity, Equity and Innovation Portal, Financial Services, Business, and Entertainment)

Regarding the game, answering your question, during the Q2, the reason the sales was so solid, that is also reflected in the second half. And hardware, the profitability magnitude is larger during the first half, and because a new model was introduced during the first half, the timing was important. And during the second half, sales and marketing, we have to spend more money, and so that is the reason for this difference. And as for Q4, the fourth quarter, there will be slightly more upside, and I expect a great deal, but I should not have any predetermined forecast for that, so we actually follow the forecast as is presented now. And regarding your question on music, I ask Matsuoka-san to speak, and then I will supplement her comment. Now, in my presentation, as I mentioned earlier, for the DSPs, the maturity of the market, in other words, in the developed countries, the age group has become older, and also in the SNS, some of the old songs have been listened to more often than before.

What is called evergreen, the music or songs, the share and also frequency of that music being listened to has been increasing. That is a general trend of the music industry. In emerging markets where the gross market potential is expected, like Latin America or India, there are many pieces of music which have been listened to. And we also pay attention to that to acquire the new label, etc. In terms rather than the preference of users, the composition of the market itself has changed. I think that is a way you should interpret the music market right now. To supplement on our part, the evergreen catalogs that, the results of our investment, they have been listened to more than we expected. That leads to upside our profitability. That we welcome very much.

And in addition to that, say, new songs in Latin America, that does not mean that they compromise the new songs from Latin America. So we would like to put emphasis on the both so that we can enjoy the upside of the profitability from the both.

Kota Ezawa (Analyst)

Thank you.

Sadahiko Hayakawa (SVP in Charge of Finance and Investor Relations)

Okay, let us move to the next questions. We have Yasui of UBS Securities.

Kenji Yasui (Analyst)

Thank you. Once again, my name is Yasui. I like to ask two questions. In terms of the music streaming business, since summer, the streaming growth is slowing down. That's what the competitors are saying, and that's getting some attention. It used to be double-digit growth, but now single-digit. Also, your performance in DSPs was 5% growth only. So it is temporarily slowing down. Or is that kind of structural? If you could comment on that. The second is about semiconductor second-quarter profitability. About 17%-18% profitability. In the past second quarter, it was like 20% and above. So 17%-18% is rather slow with better yield, full production. I would imagine the better profitability.

And the wafer input is increasing in dollar base as well. And the wafer cost with the change of forex rate. And if you could comment on that situation.

Hiroki Totoki (President, COO, and CFO)

Thank you for the question. First question about the music. Matsuoka-san will respond. And on I&SS second question, I will respond. Matsuoka-san, please. Regarding streaming, which has two aspects, publishing and production, and streaming growth trend is pretty much in line and still stable growth. But compared with the past, like first quarter of 2023 and before, there are multiple DSP which raised their price and that kind of made it look like they are growing rapidly. But in terms of production of the streaming, the audio portion has grown from quarter one to quarter two. As for video streaming service growth is slowing down. That's true.

As a whole, that is kind of bringing down the growth rate. So that's where current experience is. But the overall structure has not changed. So the DSP price hike timing and so on may change the streaming growth rate and DSP paid subscribers are still increasing and I think there is a room for price raise in the future. And so those are some of the factors at work in the background. Okay, let me talk about I&SS which was the second question. And OP margin was 11.4% and this year 17.3% operating profit margins last year and this year and last year was slow because of the yield issue we had. And also so Q2 did not have a full shipment as we expected.

Last year's second quarter was not a good quarter, but this year, as far as the shipping is concerned, shipment and that has recovered and brought us to the 70.3% of the profitability. Now, can we expect higher? That's for high-end sensor development as well. We are making investment in that and also increasing its capacity. The capital investment depreciation will have to be accounted, and we are not 100% successful in terms of investing and still getting enough profitability. We intend to continue to improve.That profitability.

Sadahiko Hayakawa (SVP in Charge of Finance and Investor Relations)

So we are running out of time. So the next person will be the last person who asks a question and please limit your question to only one. Nakane-san from Mizuho Securities. Please go ahead.

Yasuo Nakane (Analyst)

Thank you. My name is Nakane from Mizuho Securities and operating cash flow and that's I like to ask you about and the Financial Services and operating cash flow JPY 40 billion and has been revised to JPY 1.44 trillion. And what's the upside and downside from this and we can forecast their profit. But what are the other aspects especially inventory and then also at this point in time and I know the network business is doing really well so what about the operating capital and there might be some impact.

Then, towards the end of the year, apart from the profit, are there any factors that will affect the operating cash flow? And can you at least talk about the factors that will impact the operating cash flow?

Hiroki Totoki (President, COO, and CFO)

Thank you very much for your question. So, operating cash flow excluding financial has been upward revised by JPY 40 billion. Thank you very much for that question. As you pointed out, an upward revision by JPY 40 billion yen that is driven by the improved profitability of the game business and as you said, compared to last year, operating cash flow has increased significantly. That is driven by the improvement in the working capital in the game business. With regards to inventory situation, compared to last year, each business has a better control of the inventory and we are tightly controlling the inventory.

As we gear up for the year and selling season, the gaming and ET&S businesses, of course we need to watch closely the market development so that we can accurately forecast the operating cash flow. Thank you very much. With regards to the question as to other key factors that you pay attention to. I don't think there are any notable upside downsides apart from the working capital. For us, as we get closer to the year end selling season, what sort of inventory level that we need to have and of course we need to have a process improve in place to normalize that and then we need to do that in timely manner and then that will have an impact on the cash flow.

So, how diligent and how detailed and granular we will be able to do that, and I think that will have an impact on the operating cash flow and working capital. With that, we would like to conclude the Sony Group consolidated financial results announcement session. Thank you.