Sony Group Corporation (NYSE:SONY) Q3 2024 Earnings Call Transcript

Sony Group Corporation (NYSE:SONY) Q3 2024 Earnings Call Transcript February 14, 2024

Sony Group Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Unidentified Company Representative: We will now begin FY 2023, Q3 consolidated financial results Corporation. I am Okada, the Corporate Communications, I am master of ceremonies. People on the stage are Mr. Hiroki Totoki, President, COO and CFO; Ms. Naomi Matsuoka, Senior Vice President in charge of Corporate Planning and Control, Lead of Group Diversity Equipment and inclusion, support for financial services and entertainment area; Mr. Sadahiko Hayakawa, Senior Vice President in charge of Finance and IR. These 3 people will be explaining the FY ’23 Q3 results and full year forecast, followed by Q&A. A total of 70 minutes is allocated. Mr. Totoki, the floor is yours.

Hiroki Totoki: Today, after Mr. Matsuoka and Mr. Hayakawa explained the content shown here, I will summarize the entire earnings briefly. Mr. Hayakawa, please go ahead. Matsuoka and Hayakawa will explain.

Sadahiko Hayakawa: Consolidated sales for the quarter were ¥3,747.5 billion, a significant increase of 22% compared to the same quarter of the previous fiscal year, a record high on a quarterly basis. And the consolidated operating income increased ¥41.8 billion year-on-year to ¥463.3 billion, the second highest level on a quarterly basis. Net income increased ¥42.4 billion year-on-year to ¥363.9 billion, and adjusted EBITDA increased ¥75.5 billion to ¥605 billion. Nine-month cumulative consolidated operating cash flow, excluding the Financial Services segment was ¥618.5 billion. The full year forecast is for sales to be ¥2.3 billion, a decrease of ¥100 billion from the previous forecast for operating income to be ¥1.180 trillion, an increase of ¥10 billion from the previous forecast.

And for net income to be ¥920 billion, an increase of ¥40 billion from the previous forecast. Adjusted EBITDA is expected to be ¥1.770 trillion, a decrease of ¥15 billion from the previous forecast, primarily reflecting the impact of the foreign exchange rate on nonoperating profit and loss. The consolidated operating cash flow forecast, excluding the Financial Services segment, is expected to be ¥1.80 trillion, a decrease of ¥80 billion from the previous forecast, mainly reflecting an increase in working capital in the G&NS segment. Now I will move on to overview of each business segment. First is G&NS segment. FY ’23 Q3 sales increased a significant 16% year-on-year to ¥1,444.4 billion, primarily due to increased third-party software sales and the impact of foreign exchange rates.

Operating income decreased significant ¥30.1 billion year-on-year to ¥86.1 billion, primarily due to a deterioration in the profitability of PlayStation 5 hardware mainly due to promotions and adjusted OIBDA decreased ¥26.8 billion to ¥113.1 billion. The full year forecast is for sales to be ¥4.15 trillion, a decrease of ¥210 billion from the previous forecast, and operating income and adjusted OIBDA remain unchanged. Inventory-related reserves that were additionally recorded in the current quarter, mainly due to an increase in inventory resulting from the decline in PS5 unit sales in the current quarter are expected to be recorded as a recovery gain in the fourth quarter due to a decrease in inventory. As a result, there is no impact on our full year operating income forecast, but there is an expected shift in profit of approximately ¥30 billion from the current quarter to the fourth quarter.

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Q&A Session

PS5 hardware unit sales in the quarter were 8.2 million units, which fell short of the target to hit our annual shipments of 25 million units, but was a record high number of quarterly unit sales for PS5 and the cumulative sales have exceeded 50 million units. Due to the impact of the increasing popularity of PS5 and third-party free-to-play hit titles, key user engagement metrics have increased significantly with monthly active users for all our peers in December, reaching a record high of 120 million accounts and total game play time for the quarter increasing 13% year-on-year. Based on the results for this quarter, PS5 unit sales for this fiscal year are expected to be around 21 million units. Regarding first-party software, the cumulative sales of Marvel’s Spider-Man 2, which was released in last October exceeded 10 million copies as of February 4.

And the Marvel’s Spider-Man game series has now sold through over 50 million units, including on PC. The game is our second blockbuster hit in 2 years following God of War Ragnarok, which was released in the same period last year and is making a major contribution to profits. Regarding network services, despite the impact of a slight year-on-year decrease in the number of PS subscribers, sales increased 11% year-on-year, mainly due to the impact of a further shift to higher-end services and price revisions. Now I would like to explain our current view on the outlook for this segment next fiscal year. Regarding the PS5 hardware, which will enter its fifth year since launch, partially due to its entering the latter half of the console cycle, we aim to optimize sales with a greater emphasis on balance with profits.

So we anticipate a gradual decline in unit sales from next fiscal year onwards. We expect third-party software sales to continue to expand gradually due to the expansion of the PS5 installed base and the high level of user engagement. In Network Services, we expect subscribers to be on par with this fiscal year or slightly less due to the impact of price revision we implemented in this fiscal year, but we expect sales to gradually expand due to a shift to attractive premium services. Regarding first-party software, we aim to continue to focus on producing high-quality works and developing live service games. But while major projects are currently under development, we do not plan to release any new major existing franchise titles next fiscal year, like God of War Ragnarok and Marvel’s Spider-Man 2.

Although the burden of acquisition-related costs will ease next fiscal year, we expect profit from first-party software to decrease slightly from this fiscal year due to the impact of the decrease in sales. Based upon this, operating income for the next fiscal year is currently expected to increase slightly from this fiscal year. However, while, this is our baseline. We are reviewing measures for further improvement in profitability in advanced of finance annual forecast results announcement this May. Next is the Music segment. FY ’23, Q3 sales increased 16% year-on-year to ¥422.1 billion, and operating income increased ¥13.1 billion to ¥76.1 billion, both significant increases. Adjusted OIBDA increased ¥19.9 billion year-on-year to ¥98.5 billion.

Streaming revenue for the quarter on a U.S. dollar basis continued to grow, increasing 12% for Recorded Music and 17% for Music Publishing. Profit contribution from Visual Media and Platform was a mid-single-digit percentage of the operating income of the segment. The FY ’23 forecast is for sales to increase ¥10 billion from the previous forecast, ¥1.57 trillion operating income to be unchanged and adjusted OIBDA to increase ¥10 billion to ¥360 billion. In recent years, the expansion of the streaming market has greatly expanded the revenue opportunities and asset value of music catalogs that have been released for a certain period of time. During the quarter, the total streams of 5 of our holiday song catalogs by our artists succeeded ¥1 billion in the United States.

Mariah Carey’s album, Merry Christmas, ranked in the top 10 of SMEs album sales for the quarter 29 years after it was released. In Music Publishing, the use of catalogs synchronized with images, such as background music from movies and advertisements is also an important source of revenue. Today, we have established a strong foundation that we expect will contribute to achieving stable revenue and expanding our market share in the Music business by acquiring the publishing rights to the large catalog works led by EMI Music Publishing and the catalogs of industry-leading artists such as Bruce Springsteen and Paul Simon. Moreover, depending on the rights for each catalog, we plan to expand opportunities to use the music and are working to create new revenue, such as in the artist merchandise and event promotion areas.

Of the 4 major awards presented at the 66 Grammy awards on February 5, Miley Cyrus won Record of the Year, and Victoria Monet won Best New Artist. Sony Music Group artists and songwriters won awards in multiple other categories, including SZA, who was nominated in 9 categories, the most of any artist this year and 1 in 3 of them. Next is the Pictures segment. In the current quarter, sales increased by 10% year-on-year to ¥366.3 billion and operating income increased significantly ¥16.2 billion year-on-year to ¥41.6 billion, mainly due to increases in television and digital streaming licensing revenues and home entertainment sales and motion pictures. Adjusted OIBDA increased ¥16.3 billion year-on-year to ¥54.6 billion. The FY ’23 forecast is for sales to increase ¥10 billion from the previous forecast to ¥1.47 trillion and for operating income and adjusted OIBDA, they will remain unchanged.

Although the Hollywood strikes have finally ended, delays in script development have caused continued changes in movie release schedules and delays in the delivery of television shows. As a result, we estimate the impact of the strikes on profits in the current fiscal year to be a little less than ¥20 billion. Next fiscal year, in addition to continued delays and releases, it is expected that digital streaming licensing and other revenues will decline due to a decrease in the number of films released this fiscal year. So the negative impact on profits due to the strikes is expected to reach its peak and the amount of such impact on a U.S. dollar basis is expected to be slightly less than twice as much as in the current fiscal year. On the other hand, the paying subscribers of Crunchyroll, which is driving growth in this segment, exceeded ¥13 million as of the end of December last year and have expanded at an average pace of 23% a year since we acquired the business in August 2021.

In addition to continuing to provide appealing anime content to core fans, we are focusing on measures to broaden the anime fan base and deepen engagement by collaborating with external partners, such as Amazon expanding the service into growth markets such as Brazil, India and Southeast Asia. And further expanding in business areas such as theatrical distribution, anime movies and e-commerce. Amortization costs associated with the acquisition are expected to decrease significantly from next fiscal year onwards, and we expect this to further contribute to profit in this segment. For the next fiscal year, despite the challenging environment, where the impact from the strikes on profitability is expected to increase, we are aiming for a level of operating income that exceeds the current fiscal year as we intend to further grow our Crunchyroll business, develop and produce content all over the world, enhance theatrical distribution by distributing films from third-party studios and maintain a strong focus on cost control.

Next is the Entertainment, Technology & Services segment. FY ’23 Q3 sales decreased 2% year-on-year to ¥735.7 billion, mainly due to lower sales of televisions, and operating income decreased ¥3.9 billion to ¥77.2 billion, and adjusted OIBDA was ¥103.4 billion, down ¥1.9 billion. The FY ’23 forecast is for sales to decrease ¥10 billion from a previous forecast to ¥2.43 trillion for operating income and adjusted OIBDA, the OIBDA, they will remain unchanged. In North America, expected growth was not being made. There was no sign of major decline in demand and expected and sales were relatively steady. In the Chinese market, while demand for [Foreign Language] fell sharply Demand for digital cameras was higher than expected. And our overall performance was roughly in line with the expectation.

Furthermore, as a result of care for production and sales control, the overall inventory level in the segment at the end of December, was significantly reduced to ¥341.3 billion, an 18% decrease year-on-year. Regarding televisions in the fourth quarter, we plan to further reduce the inventory and reduce costs based on results of the year-end selling season. Regarding digital cameras and interchangeable lenses, we aim to continue to expand our businesses, including through the introduction of new products to the market. Next is the Imaging & Sensing Solutions segment. FY ’23 sales for the quarter increased significantly, 21% year-on-year to ¥505.2 billion primarily due to an increase in sales of image sensors for mobile. And operating income increased ¥14.9 billion to ¥99.7 billion, both new record high for the segment.

Adjusted OIBDA increased ¥29.0 billion year-to-year to ¥163.7 billion. The FY ’23 forecast is unchanged from the previous forecast. We believe that smartphone product market, which has continued to experience negative growth compared to the last calendar year has hit the bottom in the current quarter. But the North American market is still showing declines compared to the last calendar year, and there is still uncertainty in the outlook. During this quarter, sales increased significantly year-on-year, primarily due to a recovery of the smartphone product market and the introduction of large-size sensors for high-end products. Nevertheless, we plan to continue to operate our business cautiously for the time being while continuing to monitor product market trends and the inventory status.

The yield rate of mobile sensor, which is the most important issue for current fiscal year is progressing following the improvement curve assumed in the previous forecast. And the impact on profitability has not changed from the previous forecast. Regarding the sensor business, other than the mobile sensor, the delay in recovery in the sensor market for industry and social in fractures has become particularly noticeable. So we plan to proceed with positional adjustments and the improved inventory in the fourth quarter. Sales in the segment during the current mid-range plan are expected to grow significantly by an average of 22% year-on-year basis and 8% on U.S. dollar basis. We have been able to steadily transition our mobile sensors to become larger and more value added.