Sony Group Corporation (NYSE:SONY) Q2 2024 Earnings Call Transcript

Sony Group Corporation (NYSE:SONY) Q2 2024 Earnings Call Transcript November 9, 2023

Sony Group Corporation misses on earnings expectations. Reported EPS is $1.12 EPS, expectations were $1.19.

Unidentified Company Representative: The time has come. FY 2023 Q2 financial results announcement for Sony Group Corporation. I am Okada, Corporate Communications. I will be serving as master of ceremonies. Let me introduce the people on the stage. First, Mr. Hiroki Totoki, President, COO and CFO; Naomi Matsuoka, Senior Vice President, Corporate Planning and Control Ned Group DE&I support for Finance, Business and Entertainment Area; Sadahiko Hayakawa, Senior Vice President in charge of Finance and IR. Today, 3 persons will be explaining the consolidated results for the second quarter FY ’23 and full year consolidated results forecast, after which we are going to have a Q&A session. We are scheduled to have a total of 70 minutes [Foreign Language]. Today, after Ms. Matsuoka and Mr. Hayakawa explained the content on here, I will summarize the entire earnings briefing. Mr. Hayakawa, please go ahead.

Sadahiko Hayakawa: From here, Ms. Matsuoka, and I will explain. Consolidated sales for the quarter were JPY2,828.6 billion, an increase of 8% compared to the same quarter of the previous fiscal year. Consolidated operating income significantly decreased JPY106.4 billion year-on-year to JPY263.0 billion, mainly due to the JPY64.3 billion decrease in the operating income of the Financial Services segment. I will explain the details in the parts devoted to each business. Adjusted EBITDA decreased JPY60.8 billion year-on-year to JPY426.4 billion. Income before income taxes decreased JPY113.5 billion year-on-year to JPY257.6 billion. Net income attributable to Sony Group Corporation stockholders decreased JPY81.6 billion to JPY200.1 billion.

Results by segment for the quarter are shown here. Next, I will explain the full year consolidated results forecast for FY ’23. The assumed exchange rate for the second half of the fiscal year have been revised to approximately JPY142 for the U.S. dollar and approximately JPY152 for the euro. The full year forecast is for sales to be JPY12.4 trillion, an increase of JPY200 billion from the previous forecast for operating income to be unchanged at JPY1.170 trillion. And for net income attributed to Sony Corporation’s stockholders to be JPY880 billion, an increase of JPY20 billion from the previous forecast. Adjusted EBITDA is expected to be JPY1.785 trillion, an increase of JPY35 billion from the previous forecast. The consolidated operating cash flow forecast, excluding the Financial Services segment is expected to be JPY1,160 billion, a decrease of JPY90 billion, mainly due to the impact of the foreign currency conversion adjustment resulting from the change in the foreign exchange rate assumption and the increase in working capital in the G&NS segment.

The FY ’23 results forecast by segment is shown here. Now I will move on to an overview of each business segment. First, the G&NS segment. FY ’23, Q2 sales increased a significant 32% year-on-year to JPY954.1 billion mainly due to increased sales of PlayStation 5 hardware and an increase in third-party software sales. Operating income increased JPY6.8 billion year-on-year to JPY48.9 billion, mainly due to the impact of increased sales despite the deterioration in profitability of PS5. Adjusted OIBDA increased JPY18.9 billion year-on-year to JPY83.1 billion. The FY ’23 forecast is for sales to be JPY4.36 trillion, an increase of JPY190 billion from the previous forecast. Operating income to be unchanged at JPY270 billion. Adjusted OIBDA to be JPY385 billion, an increase of JPY10 billion.

The overall number of monthly active users for the PlayStation in September was 107 million accounts, an increase of 5 million from the same month last year. And the proportion of PS5 users who have high user engagement increased to a little over 40% of the total. In addition, total gameplay time during the quarter increased 4% year-on-year, a stable level of growth. PS5 hardware unit sales for the quarter were 4.9 million units, basically in line with our expectations and a 25% increase over the number of PS4 units sold in the second quarter FY 2016 when we sold 20 million units for the year. We have kept unchanged our high target of 25 million units for PS5 sales this fiscal year. To achieve this target, we plan to release a new PS5 model that is smaller, lighter and data storage capacity.

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Q&A Session

We also plan to introduce to the market PS portal through which users can enjoy remote play in combination with the PS5. This is expected to assist us in increasing the sales momentum during the year-end selling, which is the largest opportunity to sell products. On the other hand, while carefully monitoring the results of our sales promotion activities during the year-end selling season, we are proceeding with business operation that aims to balance the penetration of PS5 with profitability. As for software, the PS5 exclusive title, Marvel Spiderman 2, which is released on October 20, sold through more than 5 million units worldwide as of October 30, and it has become a big hit. Regarding PlayStation Plus, by continuing to offer attractive new features and content to our users such as starting cloud streaming of PS5 title from October on our top-tier service premium, we aim to increase engagement while further expanding the composition ratio of our top-tier services, extra and premium.

Next is the Music segment. FY ’23, Q2 sales significantly increased 14% year-on-year to JPY408.7 billion, mainly due to the increased streaming revenue and the impact of the foreign exchange rates. Mainly due to the impact of the sales increase, operating income increased JPY2.3 billion to JPY81 billion compared to FY ’22 Q2, in which a onetime gain of JPY5.7 billion was recorded due to the receipt of litigation settlement. Adjusted OIBDA increased JPY9.6 billion to JPY97 billion. Profit contribution from visual media and platform was approximately 20% of the operating income of the segment. The FY ’23 forecast is for sales to increase JPY70 billion from the previous forecast to JPY1,560 billion and operating income and adjusted OIBDA to each increase JPY15 billion to JPY295 billion and JPY350 billion, respectively.

On a U.S. dollar basis, streaming revenue for the quarter increased 9% for recorded music and 10% for music publishing, which is stable growth. During the current quarter, we had the hits shown here, including Doja Cat’s, latest single, Paint the Town Red, which was #1 for 4 consecutive weeks on the Billboard Global 200 chart. Moreover, the new album released in October by Rima Entertainment artists, Bad Money, has become a huge hit debuting at #1 on the U.S. Billboard Album Chart and having 21 songs from the album ranked in the top 100 of 45s rankings immediately after that release. In order to achieve growth that outpaces the market over the mid- to long term, the Sony Music Group is focused on strengthening its competitiveness in growth areas.

In the rapidly expanding field of indie labels and independent artists, we are building an ecosystem across SMG, including expanding our repertoire and service capabilities for artists through the Orchard and Al. We are also focusing on expanding our business in growing global markets. In Latin America, where the market size last year increased significantly, 26% year-on-year to USD 1.3 billion SMG has established itself in the #1 position in recorded music as growth in places like Brazil has accelerated due to the acquisition of some give in March 2022. In other growth markets such as China, India and Southeast Asia, we are also actively discovering and developing artists, acquiring catalogs and expanding artist services through the Orchard and AI.

Next is the Picture segment. Sales for the quarter increased significantly, 18% year-on-year to JPY399.6 billion, and operating income increased JPY1.8 billion to JPY29.4 billion, mainly due to an increase in the number of delivered works in television productions and the impact of foreign exchange rates. Adjusted OIBDA increased JPY2.2 billion year-on-year to JPY42.6 billion. The FY ’23 sales forecast is JPY1.460 trillion, down JPY10 billion from the previous forecast. Operating income is forecasted to be JPY115 billion, down JPY5 billion. And adjusted OIBDA to be JPY165 billion, no change. The Writers Guild of America strike ended on September 27, following an agreement with the American Association of Motion Picture and Television Producers.

In addition, an agreement was reached on November 8 local time in the negotiation with the Screenactors Guild, and we expect that the protracted strike will come to an official end after certain processes are undertaken within the union. Due to delays in production and constraints and promotional activities, we are seeing negative impact such as a delay in the release of certain motion pictures and a delay in the delivery of television productions. We have incorporated the impact that can be assumed at the present time into our forecast for the fiscal year. Even after the strike ends, it will take time for business activities to normalize due to the concentration of production and theatrical releases. So we expect this to have a negative impact on next fiscal year’s results.

However, we plan to engage in cost control and other measures to try to reduce the impact. Additionally, Quanta’s business is growing steadily. And last month, it finalized a global distribution agreement with Amazon. As a result, Amazon Prime video members can now subscribe to the service as an add-on channel and enjoy more than 1,300 titles of annual content provided by Crunchyroll. This service has already been launched in the U.S., Canada, Sweden and the United Kingdom, and we plan to further expand the service area in the future. Next is the EP&S segment. Sales for the quarter were JPY613.5 billion, down 9% from the same quarter of the previous fiscal year in which demand for TVs increased due to a recovery from lockdowns in Shanghai. Operating income significantly decreased JPY16.8 billion year-on-year to JPY61.0 billion mainly due to the impact of the lower sales of TVs. Adjusted OIBDA decreased JPY15.0 billion year-on-year to JPY87.6 billion.

FY ’23 sales are expected to be JPY2,440 billion, an increase of JPY10 billion from the previous forecast and the forecast for operating income and adjusted OIBDA remain unchanged at JPY180 billion and JPY280 billion, respectively. The market environment for major product categories during the current quarter continued to be difficult for television, while products such as digital cameras and headphones remained strong. Regarding televisions, in response to service demand and increasing price competition, we are proactively revising our sales plan conservatively and controlling sales risks and inventory risks as well as focusing on cost reduction measures. Regarding the digital camera market, especially in China, which is strong, we will aim to maximize sales and profits during the year-end selling season and further expand market share in each region through the sales of new mirrorless single-lens cameras and interchangeable lenses, which we introduced in the current quarter and October and which are selling well.