Sony Group Corporation (SONY) Q1 2024 Earnings Call Transcript

Sony Group Corporation (NYSE:SONY) Q1 2024 Earnings Conference Call August 9, 2023 3:00 AM ET

Company Participants

Hiroki Totoki – President, COO & CFO

Sadahiko Hayakawa – General Manager, Finance Department

Hiroaki Kitano – Senior EVP & CTO, Corporate Executive Officer

Naomi Matsuoka – SVP

Conference Call Participants

Masahiro Ono – Morgan Stanley

Mikio Hirakawa – Bank of America Merrill Lynch

Junya Ayada – JPMorgan Chase & Co.

Yasuo Nakane – Mizuho Securities

Ryosuke Katsura – SMBC

Kota Ezawa – Citigroup

Unidentified Company Representative

Good afternoon, ladies and gentlemen. It is now time to start Sony Group’s Q1 FY 2023 Consolidated Financial Results Presentation Meeting. I am over the Corporate Communications.

I would like to first introduce the speakers today, President, COO and CFO, Hiroki Totoki; and Senior Vice President in charge of the Corporate Planning Group DE&I promotion, also support Financial Service and Entertainment segment, Naomi Matsuoka; and then Senior Vice President in charge of Finance and IR, Sadahiko Hayakawa. So those 3 will present the Q1 FY 2023 consolidated financial results also the outlook throughout the FY 2023. And there will be a question-and-answer session, and we plan to have a 70 minutes session.

Thank you. First speaker is Mr. Totoki.

Hiroki Totoki

So the speakers today are Matsuoka and Hayakawa. And then toward the end, I’d like to make a summary comments. So first speaker, Hayakawa-san. Matsuoka and Hayakawa will present the consolidated results.

Starting from FY ’23 Q1, 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 we’ll 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 JPY2,963.7 billion. Consolidated operating income decreased JPY111.8 billion year-on-year to JPY253.0 billion, primarily due to an JPY84.7 billion decrease in operating income of the Financial Services segment. This decrease in operating income on Financial Services segment was primarily due to the impact of the recalculation of the previous weaker years’ results, resulting from the application of the new standard and absent of a gain on the sales of real estate recorded in the same quarter of the previous fiscal year.

Adjusted EBITDA decreased JPY90.6 billion year-on-year to JPY406.2 billion. Income before income taxes decreased JPY73.2 billion year-on-year to JPY276 billion. And net income attributable to Sony Group Corporation shareholders decreased JPY43.5 billion to JPY217.5 billion. Result per segment for the quarter are shown on this slide.

Next, I will explain the full year consolidated results forecast for FY ’23. The forecast for the full year is JPY12.2 trillion for sales, an increase of JPY700 billion from the previous forecast. JPY1.170 trillion for the operating income, no change from the previous forecast. And JPY1.750 trillion 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 JPY135 billion to the U.S. dollar and approximately JPY146 to the euro. The FY ’23 results forecast by segment is shown here.

Now I will move on to an overview of each business segment. First is the Games & Network Services segment. FY ’23 Q1 sales increased, a significant 28% year-on-year to JPY771.9 billion, primarily due to an increase in sales of third-party software and increase in sales of PlayStation 5 hardware and impact of foreign exchange rates. Operating income decreased JPY3.6 billion year-on-year to JPY49.2 billion, primarily due to an increase in expenses including the acquisition-related expenses of JPY16.6 billion. Despite the positive impact of higher third-party software sales, adjusted OIBDA increased JPY5.7 billion year-on-year to JPY75.9 billion.

FY ’23 sales are expected to be JPY4.170 trillion, an increase from the previous forecast of JPY270 billion. Operating income is expected to be JPY270 billion, no change from the previous forecast. And adjusted OIBDA is expected to be JPY375 billion, an increase of JPY10 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 JPY46.2 billion, a significant 27% increase year-on-year. While there was also positive on the exchange rates, this was 14% higher than the first quarter of the fiscal year ended March 31, 2022, when there was 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 has been 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. But due to the promotion began 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, and we will try to work steadily to implement necessary measures to achieve hardware sales target of 25 million units. Towards the end of the calendar year, the first party title, Marvel Spider-Man 2, and major third-party titles are scheduled to be released as well. And we expect that the entire gaming industry and the PS platform will be greatly energized.

Next is the Music segment. FY ’23 Q1 sales increased a significant 16% year-on-year to JPY358.2 billion, primarily due to the increase in streaming sales and impact of foreign exchange rates. Operating income increased a significant JPY12.4 billion year-on-year to JPY73.4 billion, primarily due to the impact of the increased sales and the recording of a remeasurement gain of 6 point — JPY60 billion from making an equity method affiliate, a consolidated subsidiary. Adjusted OIBDA increased JPY8.2 billion year-on-year to JPY82.9 billion. Profit contribution from visual media platform was just under 10% of the operating income of this segment.

FY ’23 sales are expected to be JPY1.490 trillion, an increase of JPY80 billion from the previous forecast. Operating income is expected to be JPY280 billion, an increase of JPY15 billion the previous forecast. And adjusted OIBDA is expected to be JPY335 billion, an increase of JPY10 billion from the previous forecast.

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. So 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 5 years and the number of artists producing songs for streaming worldwide has increased 35%. As a result, current market share in the U.S. over the 4 years through the last fiscal year has risen from 21% to 27%. And sales and operating income for the Sony Music Group, which includes Music Publishing overseas, have increased significantly 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 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 #1 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 #7 on Billboard’s Global Hits 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. FY ’23 Q1 sales decreased 6% year-on-year to JPY320.4 billion, mainly due to a decrease in deliveries in television productions and the impact of fewer releases of tent-pole films in the previously — in the previous fiscal year in Motion Pictures. Operating income decreased a significant JPY34.7 billion year-on-year to JPY16 billion, primarily due to the impact of the decrease in sales and impact increase in marketing expenses in Motion Pictures. Adjusted OIBDA decreased JPY33.4 billion year-on-year to JPY28.5 billion. FY ’23 sales are expected to be JPY1.470 billion, down JPY50 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 in June, has become a huge hit with box office revenue exceeding USD 680 million worldwide as of August 7, 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 U.S. in July. And the new movie, Gran Turismo, is scheduled to be released in theaters in the U.S. on August 25.

Regarding Crunchyroll, the number of paying subscribers surpassed 12 million in July, driven by the exclusive distribution of the television animation, Demon Slayer: Kimetsu No Yaiba Swordsmith Village Arc, which started in April. And 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 the ET&S segment. FY ’23 Q1 sales increased 4% year-on-year to JPY571.8 billion, primarily due to impact of foreign exchange rates despite a decline in smartphone and television sales. Operating income was JPY55.6 billion, an increase of JPY2.1 billion year-on-year, primarily due to the cost reductions in televisions despite the impact of decreased smartphone sales. Adjusted OIBDA increased JPY3.9 billion year-on-year to JPY80.9 billion. FY ’23 sales expected to be JPY2.430 trillion, an increase of JPY50 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 continued 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 remain strong.

In each category, we are running our operations so as to respond to changes in the market environment, and 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 profit level.

As the business environment for televisions and smartphones is expected to continue to be severe, we will pay close attention to costs and inventory control. We also plan to proceed with — early the reaping of income in additional 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 profit — product appeal.

Next is I&SS segment. FY ’23 Q1 sales significantly increased 23% year-on-year to JPY292.7 million, mainly due to high sales of image sensors for mobile products and the impact of foreign exchange rates. Operating income decreased JPY9 billion year-on-year to JPY12.7 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 JPY2.7 billion year-on-year to JPY70 billion. For FY ’23, sales are expected to be JPY1,560 billion, down JPY40 billion from the previous forecast. Operating income and adjusted OIBDA expected to decrease JPY20 billion from the previous forecast to JPY180 billion and JPY425 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 costs associated with the launch of mass production of new products 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.

On the other hand, the trend towards 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 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 strengthen 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 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 reevaluated 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 and loss and impact 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 JPY889.1 billion, mainly due to nonrecognition of surrender value. Operating income increased by JPY94.2 billion from the previous standard to JPY318.1 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. Because hedging operations meant to continue, 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 JPY681.4 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 is 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 JPY84.7 billion year-on-year to JPY54.5 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 JPY84.2 billion year-on-year to JPY61.4 billion. The FY ’23 Financial Services revenue forecast is JPY1.320 trillion, an increase of JPY450 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.

Unidentified Company Representative

Thank you very much. Totoki, Matsuoka and Hayakawa made a presentation. Now at 16:25, we would like to entertain the questions from the media. At 16:50, we’d like to intertie questions from the investors and analysts. And each session consists of about 20 minutes. And some people have already pre-submitted questions so that the pre-link your phone to that registered phone number. And then as to this way to ask questions in some of the matters of consideration, please refer to our invitation letter. So please wait for a few minutes before we resume the session. Thank you.

Question-and-Answer Session

A – Unidentified Company Representative

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 the previous presenters, the 3 people on the screen. So let us start to entertain questions.

[Operator Instructions]. The first question is from [indiscernible] from Nikkei.

Unidentified Analyst

I hope you can hear me. I’m of Nikkei newspaper. I have 2 parts of questions. The first question is that about your financial results. As Mr. Totoki explained to us that — so the situation is maybe leveling off, like games and semiconductors and other issues. But from the Q1, of course, you are in the middle of that phase. But Mr. Totoki, what is your vision for the growth? To 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.

And my second part of the question is about the situation on the strikes. To what extent that the movie new film release might be delayed because of the U.S. strikes of actors and others. So 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. So what do you think of that the potential impact there?

Unidentified Company Representative

Thank you very much for your question. As to your first question, so in the next fiscal year in the growth scenario that I have in mind, actually, in this mid-term business plan that the Content IP, DTC as a technology investment as well as some of the diversified business segment should have intergroup collaboration. Those are promoted.

As a result, in the last 3 years, the cumulative — that JPY1.9 trillion of capital investment in equipment imaging led to JPY1.8 trillion for that strategic investment. So gradually, we made progress. For 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. [indiscernible] HBO, that the actual — the drama TV production, but that became a big hit in 2022 in February. Unchartered was released in the theater, and those were success. Following those successes, numerous projects are ongoing, therefore, so that there’s a strong momentum now like together with the music business. This kind of entertainment business, the 3 segments of the entertainment business, in the next mid-term plan that we expect a big growth, a sufficient growth to be achieved.

As with I&SS segment, for this fiscal year, of course, there could be maybe some stagnation or we are levering off the growth to a certain extent. Of course, the revenue sales are going up. In terms of profitability, there’s slightly some areas where we are not fully satisfied. So we must secure the profitability in a growth scenario. That’s something we have to implement in the mid-term, the plan, and that’s our challenge and priority.

In 2024 and afterwards, semiconductor market situation and mainly the market situation improves, especially in China, like a recovery in Chinese smartphone market is expected. But 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 linked to the strikes, but of course, the generative AI has an adverse impact. And I think that’s something I’d like to respond to you. It’s not only affecting these films and pictures. The game of production, the music production and creator support already for anime, that the multilingual, the translation and so forth could be supported by AI. So the stakeholders have the rights and copyrights, and that should be respected in introduction of AI. Like music copyright, it might be violated. So we have to protect the IP as well as the artist and content. Related issues must be solved, just not by Sony stand-alone, but we have to have the entire interest involved in order to discuss to identify the future solution. That’s my thought on this.

Unidentified Company Representative

So we would like to move on to the next question. , who is a freelancer. Very difficult to hear your voice. I’m very sorry, but I can not 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, for the time sake, we would like to move on to the next person to ask question.

[Indiscernible] from Toyo Keizai.

Unidentified Analyst

Can you hear me?

Unidentified Company Representative

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

Unidentified Analyst

I have two questions. And first question is that, as was already mentioned, the 3 areas of segments of entertainment, the total, the income, the exceeds are 54%, the 3 segments combined. It is still very high. And so you talked about next MLP, what are the percentage you would like to reach for the total — the income of those 3 segments? And so now the China slowdown, and you have already mentioned in I&SS. And for other segment, what is the impact? For instance, the consumer spending has been quite weak in China. So what is the impact on overall business of Sony Group?

Unidentified Company Representative

Thank you very much for your question. And so I would like to answer the 2 questions. And as for entertainment, 3 segments combined, the operating income, what is our plan to reach the certain percentage? That — and we do not have any target in terms of the percentage. But 3 segments: Entertainment, the segments combined, and also I&SS where the growth is expected. So comprehensively, I believe that the percentage or the portion of the profit earned by those segments will increase.

And the second question is other than I&SS, what is the slowdown of Chinese economy on other segments? And for the consumer spending, the ET&S will be affected. The TV and smartphones are areas where — which is severely impacted. But currently, as far as FY ’23 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. But 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. But 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.

Unidentified Company Representative

Now we’d like to move on to the next question [indiscernible] from Industry Delhi.

Unidentified Analyst

I’m Abe from Industry Delhi [indiscernible]. Can you hear me?

Unidentified Company Representative

Yes, I can. Thank you.

Unidentified Analyst

Related to the question asked earlier, ET&S segment. Digital camera is the area that I have a question. The sales unit increased, which relatively increased profit. 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 a 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?

Unidentified Company Representative

Thank you very much for your question. ET&S segment, digital camera increased 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. And Europe and U.S., full on, the competition with others is getting more severe. So in some areas, there is some slight decline in share. But we are making additional investments 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 controlled in both production and sales.

Unidentified Company Representative

We’d like to entertain next question. Kyodo Tsushinsha, , please.

Unidentified Analyst

Endo from Kyodo Tsushinsha, I hope you can hear me. I have one question about camera. The sales are going up because after the COVID-19, there’s some maybe the repercussion after the — that for the people troubling again, that they like to use more digital camera. Is that the new demand? Linked to the COVID-19 and the pandemic, how the demand is increasing after the COVID-19 pandemic?

Unidentified Company Representative

Thank you for the question, as I said, there’s maybe reaction after the COVID-19 pandemic. Let us say at one time, demand was down. That’s a fact. So people now have the pent-up demand. So last year, already — that the people already bought lots of cameras after that. So the strength of demand is still persistent, which is a great pleasure. 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. So that might have a good impact on that demand.

Unidentified Company Representative

So we’d like to move on to the next question. [Operator Instructions]. [Indiscernible], who is a freelancer, please go ahead.

Unidentified Analyst

Can you hear me?

Unidentified Company Representative

Yes, I can hear you, please.

Unidentified Analyst

I have two questions, and the first point is about game business. The third party, the 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? And so that is related to that. In your document, PlayStation Plus, the number of user, there is a change in the disclosure conditions. So is there any reason for that?

And secondly, about Pictures, particularly for drama, the streaming service overseas, is there any other impact of the fluctuation of the overseas market in this area?

Unidentified Company Representative

Thank you very much for your question. The Game & Network Service that you are talking about, the increase of third-party titles, and I think your question is about our assessment on that. And during the first quarter, the new title from the third party, we have a very strong ones. And so in a software, the overall year-on-year, there has been increased revenue from this. So of course, on our part, the strong titles, the third-party titles should continue to prosper. And as a platform, we are very happy about it. And first-party titles and our new titles, because of the release timing, there has been the reduced sales year-on-year. But not only the third-party titles, but we would like to make greater efforts for the first-party titles.

And your second question is about PS Plus and the change of the assumption about disclosure conditions. And about PS Plus, we just ceased to announce a review and the disclosure. And also, there has been some expansion of disclosures. So Matsuoka-san will cover this point.

Naomi Matsuoka

And FY ’22 in June, there was renewal. And after that, the PS Plus, in addition to the greater number of the subscribers moved to the more attractive titles with the increase in app. So we have been expanding the PS Plus business. So extra and premium, we would like to continue to promote the shift. In order — and in order to do so, we would like to increase the service appeal. And on this basis, we are able to confirm the growth through network services expansion. And so we stopped the disclosing, the number of subscribers as a result.

And what are included in others? That is software sales other than PS Plus. They will be newly released. So in this area, the multi-platform will be covered, including PC. So we would like to promote this. So with additional disclosure, I hope that we can give an update about our progress.

Unidentified Company Representative

And about the Pictures, in your second question, drama streaming, is there any — the impact of overseas market? And so overall, the business environment surrounding this area is that in overseas theatrical market, there are many tent-pole, the films released. So they become very active. But as a result of strike, the major studios, the productions have been actually delayed in major studios. And so there is some concern about advertising. So the theatrical, the business, after July, we have to pay close attention. And there is the competitive environment among the streamers. And so the content 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’d like to pay attention to that.

Unidentified Company Representative

Time is running short. So the next will be the last question. [Operator Instructions] [indiscernible] from Nikkei Newspaper, please.

Unidentified Analyst

Kutsumi from Nikkei. Can you hear me?

Unidentified Company Representative

Yes, we can, please?

Unidentified Analyst

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

Unidentified Company Representative

Thank you for your question. First quarter sales were 3.3 million units, slightly lower than the expectation. But 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 promotion activities and slightly weak. So starting from July in some regions, we have started the promotion on full-fledged basis. So the sell-through, we are looking at the sell-through, and we are seeing good signs already. So in view of the seasonality of the sales, the first quarter, slightly less than the target. But. On a fiscal year basis, especially calendar year-end, by that time, we believe that there is ample possibility for us to catch up. Especially towards the third quarter, we will be increasing the number of sales, and it’s important to increase the sales. And we will aim to achieve the target.

Unidentified Company Representative

Thank you very much. Now it is time for us to end this media Q&A session. Thank you very much. The Q&A session for the analyst and investors will start at the 4:50.

Thank you very much for waiting. Let us now start this Q&A session for the investors and analysts. I would like to serve as the MC. I am of the Finance and IR Group member. The speakers are the same as the media. Session, the photos are shown on this PowerPoint slide. So I we’d like to now entertain questions and comments from the analysts and so on. [Operator Instructions].

First, from Morgan Stanley, please.

Masahiro Ono

I’m Ono of Morgan Stanley. My question is about games and the other one is I&SS. So I have 2 questions. First of all, that throughout the year that you have the annual plan for Game & Network Services systems, and the JPY7 billion is something that — JPY270 billion, so actually, that it’s only JPY10 billion. So that software, of course, the third party is a focus. So you had an analysis of flat, but you have raised that plan. And so there might be some impact, maybe the upside of this sales figure. However, this is only that level of the profitability you achieved. So maybe hardware promotion was accumulated and maybe that’s the result. But what is the size and scale you’re expecting to have some hint for the total scale you’d be achieving?

The second part of the question is I&SS. Previously you showed the outlook for the downward turn, lowered the revenue and income. So the production costs are very high and that is a very challenging situation, which the expense is regarded as — and expected 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 has to be implemented in China. So the additional JPY20 billion downward adjustment was done. But what is — is a change taking place to influence that balance? Those are 2 parts of the questions.

Hiroki Totoki

Thank you very much for your question. The first one, about the Game & Network Services related question. Throughout the year, what is our annual plan and how should we interpret our annual plan? Maybe that’s the gist of your question. But in terms of profitability, what you said is right. Third-party software, the good sales in the first quarter is reflected in there. In the second quarter and afterwards, the sales plan was adjusted upward. So that is one impact. And the other one is the foreign exchange rates, that we have revised it to the weaker yen situation. So that would push up these sales. On the other hand, what was about operating income? The third-party software sales are going up. And then of course, the profit will be pushed up by that. But the first-party titles, the sales launch was delayed, postponed. And there’s some postponement from this fiscal term to the next term. So 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, because there was original channel mix that is direct sales versus the so-called the other sales channels and that kind of sales, so the sales channel mix — compared to our original forecast, rather than the direct sales, I think the other ones going through the retail shops and the dealers, I think that proportion is likely to increase more. So you have — we have to pay margin for that. So that margin has to be taken into account in the changed sales channel mix. But overall, that part means this — how to calculate and estimate this expense there, and we are quite conservative. But the 15 million units is — 25 million units is something that we have set as a target. We would like to really achieve that target, and our intention is taken into account in this revised plan.

Another factor, the second part of your question about I&SS related question. Of course, there is some production cost increase, that was an impact. And then in China, the smartphone momentum is being changed. But these are 2 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. But no, I think we have considered fully all the potential increase. And 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. So these are the factors which are again added to revise this current plan. Thank you.

Unidentified Company Representative

So we would like to move to the next question. Hirakawa-san from BofA Securities, please.

Mikio Hirakawa

My name is Hirakawa from BofA. I have 2 questions. The first is about semiconductor. And previously, for the announcement from January to March, so at the end of the quarter, that will be higher than year-on-year. But the market condition is worse than your April forecast. So is there any change about your strategy? And the — well, the reason for the March FY ’23, why you are quite optimistic? And for Pictures, because of negotiation, it’s not easy for you to reveal your strategy about the Pictures. And so strike, how to deal with strikes of writers and the actors? How do you incorporate the impact into your — the financial results at this moment?

Hiroki Totoki

Thank you very much for your question. And first is I&SS. The first quarter — at the end of first quarter, the inventory level and about it, if I may explain, as a result of sales expansion, that has increased. And also, there is some downside of — the downward revision of sales during the first quarter. And for the future outlook, logic and sensor, strategic inventory will decline towards the end of the year. But inventory amount itself, the sales has been expanding. So FY’23 — at the end of FY ’23, compared to the end of FY ’22, it is expected to increase. There is no change in this forecast. But I should say that basically, as a result of sales expansion, this is increased as a result of sales increase. And so it does not mean that we have excessive inventory. And we have to pay close attention to the quality of inventory, but to a certain extent, we’ll keep inventory under control. And we have to effectively utilize the equipment and have appropriate timing for the investment.

And what is the reason we are optimistic about FY ’24? And the reason is that the demand for the image sensor, we do not think that we make wrong assumption about it. And the issue is — that pertains to the manufacturing cost or excessive, the inventory of — our competitors’ inventory in China, so as a result, decline of ASP. So that has adversely impacted the profitability. And as for the business, the volume itself, our forecast is not quite incorrect. And so that is the reason we are quite optimistic about FY ’24.

And your second question about Pictures. About this fiscal year, under our assumption, we have actually incorporated our assumption into the forecast. And for the details, very difficult for me to share the details with you. But 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. And therefore, that is the reason that we forecast this way.

Unidentified Company Representative

Moving on, JPMorgan Securities, Ayada-san, please.

Junya Ayada

Ayada from JPMorgan. I have two questions, if I may. The first question about game. Earlier, full year profit increased, as explained. The first quarter, profit changed. Can you elaborate on the first quarter? Compared to last year, JPY3.6 billion decrease, and excluding FX impact, about JPY6 billion decrease. In your explanation, you talk about Bungee expense is negative JPY16.6 billion, and positive side, software increased add-on point about JPY80 billion. So 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. So the content of the software sales, can you explain that? That’s my first question.

My second question, I&SS. Full year, downward revision, JPY20 billion. And the breakdown of this downward revision with FX, about JPY50 billion positive, I believe. So negative side, 70 — around JPY70 billion impact is there. On the negative side, the breakdown, the sales forecast is revised downside, and this is about half of the total, about JPY30 billion to JPY40 billion, and then the increase in the expenses of mass production launch, about JPY30 billion to JPY40 billion. So the magnitude of the increase in expenses, can you please elaborate? These are my 2 questions.

Hiroki Totoki

Thank you very much for your questions. Your first question, first quarter profit increased — or decreased 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. And then Bungee acquisition, and this is on a full consolidated basis now, so the cost related to full consolidation of Bungee. In the first quarter, the breakdown I have not explained, on a full fiscal year, about JPY68 billion, M&A-related expense and expenses for full consolidation, combined, we are looking at that number for your reference.

And then your second question, I&SS. As you pointed out, the impact of the reduced revenue and the expenses related to launch of the mass production of new products, these are negative factors. And the positive factor is exchange rate, as you pointed out. The breakdown, we are not disclosing the breakdown. So it’s very difficult for me to explain. But I would say, image sensors for mobile decreased in revenue and industrial social infrastructure image sensors decreased in revenue. So not only for the mobile, but sensor — image sensor itself is impacted by reduced revenue. That can be a hint for you to understand.

Unidentified Company Representative

Thank you very much. [Operator Instructions]. From Citigroup, Ezawa-san, please.

Kota Ezawa

I’m Ezawa of Citigroup Securities. I have a question, a semiconductor-related question. 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, and demand is likely to go up. There are 3 factors affecting the Q2, and later on, those are the important factors. Then if you separate this Q2 and the second half, I think the semiconductor is likely to improve markedly. But still the figure is still so low, or despite this, maybe the improvement of recovery might be delayed slightly. So during the second half, would that happen markedly? So could you please tell us the factors and background factors for your forecasting analysis?

Hiroaki Kitano

Thank you for your question. About I&SS, what is to do during the second quarter and the second half. When you split the 2 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.

Unidentified Company Representative

So from Mizuho Securities, Nakane-san, please?

Yasuo Nakane

Nakane from Mizuho Securities. I have one question. For the game, PS5, now the sales is bit weak. But in the U.S. and Asia and Europe, what is the situation? And can you just share with promotion, 25 million is the target of unit sales according to Totoki-san. And so current exchange rate assumed to continue, there is some the gap of exchange rate. So I believe that for that portion, there is a deterioration of profit. If the exchange rate stays this way or a further depreciation of yen, installed base is important. So you put more emphasis on installed base than the current profitability? Or PS5, when you think about future profitability, if there is a major change in foreign exchange rate, you have a plan to change this. Now JPY135 against the $1. And do you think that this is a conservative estimate?

Hiroki Totoki

Thank you very much for your question. For PS5, Game & Network Services segment, PS5, currently it’s a bit weak. And what is the situation by regions is your question. And by regions, currently in Japan, the sales is strong, and the same holds true for Asia. And about North America, the response to the promotion is quite favorable. In 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. And 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 installed base, that seems to be the heart of your question. And currently, of course, expansion of installed base is important, so we will continue to make efforts. But we do not make any extreme measures in order to achieve this. So the strength of demand and, of course, a certain level of profitability and expansion of installed bases, so those 3 factors must be well balanced. So the extreme promotion, as a result of extreme — the promotion, even we acquire the subscribers are very difficult to follow that the trend. Therefore, we would like to use data-driven, the method approach, to make it appropriate level.

Unidentified Company Representative

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

Ryosuke Katsura

Katsura from SMBC Nikko Securities. Can you hear me?

Unidentified Company Representative

Yes, we can.

Ryosuke Katsura

I would like to ask a question on the consolidated operating cash flow, excluding Financial Services segment. Full year, JPY1.25 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. And going forward, how are you 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, G&NS and I&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, excluding Financial Services, consolidated cash flow?

Hiroki Totoki

Hayakawa-san, please.

Sadahiko Hayakawa

I would like to respond to your question. First, the first quarter operating cash flow is minus JPY80.7 billion. Year-on-year, you have made a comparison, but as compared to year-on-year, positive by JPY90 billion. In first quarter, then it is negative. The key point, the PlayStation 5 inventory and I&SS, first quarter and second quarter inventory has built up slightly. So based upon these, cash flow level has come down. But this is the working capital, especially PlayStation 5 Station 5, towards the third quarter selling — sell-through, which results in cash returning. That is the assumption. So ultimately, this year, excluding Financial Services, JPY1.25 trillion is our forecast, which remains unchanged. Basically, for the cash flow, working capital, especially game, PlayStation 5 and I&SS inventory, in the first quarter, these will have impact. That’s our analysis.

Unidentified Company Representative

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