SoftBank Corp. (9434) Earnings Call Transcript & Summary

Thank you very much for waiting. We would like to start the investor briefing for SoftBank Corp. for the earning results for the second quarter of fiscal year ending March 2021. I would like to introduce to you today's attendees: SoftBank Corp. Board Director, Executive Vice President and CFO, Fujihara; Naito, Vice President, Head of Finance and Accounting Division; Vice President, Head of Strategic Finance Division of the Finance Unit, Hirono. Today's investor briefing is streamed live on the Internet. Without further ado, we will have Fujihara explain to you the earning results for the second quarter of fiscal year 2021 -- fiscal year ending March 2021.

This is Fujihara. I'll be your -- hosting this investor briefing on Zoom. Thank you very much for your attendance. I would like to give you the briefing on the earnings results. I would like to give you explanation on several topics, and we will take your questions after my presentation. First is the results. As you can see on Page 3, revenue, operating income and net income are on the slide. This year, we have the impact of COVID-19. As of [ late ], we have said that we will be aiming for increased revenue and operating income and record-high net income. We have given the guidance under that policy. The first half performed quite steadily. Revenue was JPY 2.4284 trillion, up JPY 55.3 billion. We were able to post a progress of 50%, which is bigger than the previous year. As for the operating income, our plan is to increase by JPY 8.3 billion, and we were able to increase JPY 37.6 billion in the first half and progress is 64%, so we are performing very strongly. As for net income, in terms of progress, it's 65%. It's going very steadily, so there is no problem. Last year, there was impact of gains on valuations and sales on shares. And this year, we had impact of losses of valuations and sales, so for the first half, net income had come down, but it's not worrying level. This is the overview. Now I would like to go into the details of revenue. There was an increase of JPY 55.3 billion. We're up 2.3%. One characteristic is that Yahoo has driven the growth at plus JPY 73.1 billion, up 15.1%. As for Enterprise, there was increase of JPY 20.5 billion. It is growing very steadily. These two contributed greatly to the growth. As for the Consumer segment, it was negative JPY 34.8 billion compared to the previous year, and on the right, you see the breakdown. One characteristic is that -- the revenue from sales of goods or sales of handsets that had gone down by JPY 57.3 billion. If we exclude that, in the service there was increase of JPY 22.5 billion, so the core business is doing quite well. Sales of goods had gone down in volume as well as the unit price. So 70% came from the unit price decrease. In the first quarter, volume had come down significantly, but in the second quarter, the volume had gone up. As for iPhone SE 2 launch, due to that, there was a unit price decrease and, because of this, negative JPY 57.3 billion. In terms of the service revenues, broadband did quite well. Electricity had greatly contributed as well. As for mobile, it had slightly gone down. So there were a -- special extraordinary elements, both positive and negative, and I will be explaining about that later. Now revenue of Enterprise. As Miyauchi has mentioned earlier, we are focusing on business solutions. It grew JPY 13.6 billion or 17.4%, so it had contributed greatly to the overall JPY 20.5 billion growth. With digitization accelerating with the telework, mobile had done also very well. We will continue to work on double-digit growth of business solutions business. As for Yahoo, Z Holdings has already announced this: Commerce had significantly grown and it had covered the reduction in media. Next is operating income and EBITDA. EBITDA was JPY 66.4 billion growth or up 7.6%. Operating income grew JPY 37.6 billion or up 6.8%. The difference between the two, I have said that there is JPY 12 billion in the valuation gains, so that impacted that year-on-year. And with ZOZO, there were the depreciation for the PPA. And the remaining several billions is depreciation. So you see the breakdown on the right-hand side: Consumer, Enterprise, Distribution, Yahoo. All segments have seen increase in the income. So that's the overall growth. Yahoo and Enterprise have grown in double digits, 20%, 30%, a significant growth. So it has driven the overall growth. As for the Consumer, it slightly grew. So this is the detailed breakdown. This is in particular Consumer, again plus JPY 46.9 billion. You can see services has increased by JPY 22.5 billion, but you can see that mobile is minus JPY 1.7 billion. And below that, you see it says [indiscernible] first and half year discount. This was a service you get discount for JPY 1,000 or JPY 2,000. And then because it has changed in first half, this was minus JPY 22.2 billion impact. In Q1, this was about JPY 10 billion -- minus JPY 10 million. And so I think we said that Q2 will be the peak, and it has trended in accordance with our assumption. This will continue to decrease year-on-year from Q3. One new phenomenon is the half-price support. This is a support which supports device sales. And since it's been 3 years since we have started this plan, we have decided to revise the estimate, and this is plus JPY 11 billion. And this is one of the reasons why Consumer segment has become positive, and I will explain this in more detail after this. Broadband has also grown. Electricity has grown. And if you could look at the costs side. Our cost of goods is mostly electricity. Sales promotion expenses from last October, service fee has gone down significantly, so cash-wise, there's a benefit, but accounting-wise, it took some time, which it had to be deferred and it had to be capitalized and depreciated. So it builds up gradually. So since the revision of the Act last year, the impact is starting to kick in slowly. So we can see this plus JPY 27.4 billion. And we have control of sales promotion. And [ cost reductions ] are also included in here. So that's the characteristic of Consumer. Enterprise, you can see increase in revenue contributed significantly. Yahoo, again a big impact from commerce. And others, this includes 1 month loss consolidation impact and other temporary one-off factors. So that's minus JPY billion 0.5. So let me explain about JPY 11 billion in half-price support, what has happened. So just to give you an example here: So let's say device price was JPY 40,000. And after 25 months, because this is a half-price support, you can waive the balance, but we actually received -- we trade in -- the customer trades in the device. So this looks at what happens to the waived payment and what happens to the exercise rate. So it depends on number cases and it depends on exercise rate, and you get the estimated cost. But this was a new program, so after 2 years and we looked at 1 year of progress, and because we have been able to fix the amount, we have decided to revise the estimate. In particular, before the amendment of the business Act, there was a bundling of handset and telecommunication charges, so there was impact on the revenues side. Now the program we implement today, this is just for the device alone, so it will be treated as sales promotion expenses. So that's the difference in accounting treatment. Because of this one-off effect, this has pushed up the numbers for Consumer. Mr. Miyauchi earlier explained about how we want to clarify the revenue and operating income basis. In particular, we have decided that we need to give out clearer picture on mobile communication charges. So we used to be just mobile communications, but we have decided to break it down into mobile value-added service, mobile communication charges, warranty, security, payment fee, monthly content. We have segregated them so that we can give a clearer picture of mobile communication charges. We did the same for operating income. We used to be lumped up in just Consumer, but we broke it down to consumer services and mobile communication charges. Now this information is more pro forma basis. It's not audited information, but if you could just see it as for your referencing, it would be appreciated. In 2015, this was one important year for us. We became SoftBank KK. And Mr. Miyauchi was -- first year, he was appointed to be the CEO. And at that time, we were dependent on mobile communication charges. 45% of the revenue was mobile communication charge. Now this is only 29% in FY '19. Operating income, it's even much larger, 56% in '15, but now it's 38% for FY '19. Just for your reference: If you look at the first half results, it was 30% in revenue. Operating income was down from 40% to 39%. So please confirm this number on your own as well. And we were just giving you a percentage earlier, but we want to also provide you with the actual amount. This is non-audit information again, on the next page. So mobile communication charges, we added Y!mobile, and this have overcome the cannibalization with SoftBank brand. So during that time, revenue and operating income was on a declining trend during that time. And we have tried to endure that phase, but 2017 was the bottom; and 2018, '19, both revenue and operating income have been growing slightly gradually. And you can see -- on the first half result, you can see it's either flat or a slight increase. This is net income. This slide is exact the same slide Mr. Miyauchi used. In addition to operating income, right next to it, you can see financing income and expense. We have one-off, one-time gains and losses. We had about JPY 10 billion last year, and so on a year-on-year basis it's about minus JPY 22 billion. If you look at share of profit, losses of associates, using equity method, this is almost 0. PayPay was lossmaking, but it hit the bottom and it's starting to recover. But in terms of business, it -- overall it's trending very well. And if you can look at net income attributable to noncontrolling interests. We have Yahoo! of -- So 55% is included. And Z holding is 50% stake, so even larger. So among Z Holdings, there's an impact, and that is actually summarized here. On the next page, I will talk about CapEx and cash flow. In terms of CapEx. Including Z Holdings, it was JPY 178.2 billion. Excluding Z Holdings, it was JPY 141.8 billion. Overall, it's we are aiming at JPY 400 billion. The progress is about 35%. We are on track. Centering around 5G, we are making CapEx. As for free cash flow, you see the graph on the right. Excluding Z, it's JPY 670 billion. Out of that, JPY 120 billion is the impact of IFRS 16. And the payment is done through financial cash flow, so there is no actual payments. So we need to exclude that. And the guidance is JPY 550 billion. Currently it's JPY 338.3 billion, so the progress is quite steady. Next is interest-bearing debt and net leverage ratio. Net interest-bearing debt is decreased by JPY 150 billion, and this mainly came from Z Holdings movement. And as for the interest-bearing debt, at the very top: So we have moved our headquarters and we had to book the use of property rights. And because of that, interest-bearing debt had come down. EBITDA is increased by JPY 60 billion, so the numerator and denominator both improved. So it has declined from 2.5x to 2.3x. So both improved. Towards 2022, we would like to get to the 2x level in terms of net leverage ratio. So that's our progress for the current quarter. Next is KPI. I would like to start out with cumulative subscribers. Smartphone subscribers. We would like to have 100 million people all using smartphones, and we are focusing on smartphones. And the smartphone subscribers reached 25 million, and year-on-year, it's plus 1.97 million. So we would like to focus on the increase of 2 million year-on-year, and when we get to 30 million, I think, we believe that 80 million will be smartphones. And if we go 2 million each time, then we would be able to accomplish this earlier. And Y!mobile is driving this growth in the smartphone subscribers. SoftBank brand, LINE MOBILE brand, they are all seeing increase in the subscribers, so we would like to focus on our multi-brand strategy. Next is churn rate. Smartphones is 0.64%. It is improving even further than before. In terms of the main subscription and the tablet, feature phones, even if we include this, there has been improvements; and that has contributed to the management efficiency. Next is ARPU. In terms of ARPU, there has been decrease by JPY 150 [ on that ]. ARPU before discount is minus JPY 450. And decrease of JPY 290 from the discount ARPU. So out of the JPY 150, as I have said at the beginning, the discount service impact was about JPY 100, a little over JPY 100, for the first-year discount. And if we exclude this, Y!mobile mix is going up, and that led to the decrease in the ARPU. So the first half -- the first-year discount impact will be decreasing, and we would like to have it get to the flat level. Next is broadband. In the Hikari service, we have gotten the 6.76 million in subscribers and we were able to increase by 600,000 year-on-year. It may be hard to see in the graph, but from first quarter to the second quarter, because of more people doing remote work, the sales is accelerating. We would like to make this a pillar. On the right, you see Home Bundle Discount Hikari Set. It has gone beyond JPY 10 million -- excuse me, 10 million, so -- subscribers, and this is contributing a lot to the retention level. And in looking at non-telecom business, I have several businesses I want to introduce. Z Holdings has already disclosed this, but in terms of e-commerce transaction value, in the middle 2000s, they said they wanted to be #1. Mr. Kawabe has interest in striving towards that. It has been growing by 30%, and their goal is to increase this even more. And this is a big topic for SoftBank consolidated subsidiary as well as we want to collaborate. And also, the SB Payment Service. This is very much like GMO. It's a gateway service. This, again, has potential for growth. In Q1, because of the decline in travel-, entertainment-related transactions, there's slight delay, but in Q2, it has showed double-digit increase. So there has been recovery, so we want to add this to our growth domain. Mr. Miyauchi also explained this earlier, about PayPay. Registered users has exceeded 30 million, so the progress has been made. Number of payments grew by more than 5x year-on-year. So this is a service that's been used more and more, and we want to continue to place PayPay at the center of our strategy. Even among the shops, more than 1 million increase in 1 year. It's 2.6 million stores now that you can use. So there's many places users can use. The number of users are increasing, so we believe that this has -- a great driver of our growth. Now in terms of the voting rights, SoftBank Group has 50%. Z Holdings and SoftBank have 25% each. This is the present ratio of voting rights. We have preferred stocks. So post 2022, we can convert our preferred shares. So with the future consolidation of PayPay in horizon, we would like to make sure this grows, so we have decided to issue stock acquisition rights to Paytm in September 2020 as well. Mr. Miyauchi, also at the beginning, explained about the public offering of our shares. Let me explain a little bit more in detail. So 40% is SoftBank Group, but rest are the 60%, among which individuals, private investors hold 27%. Compared to previous year, that's an increase of plus 10%. And we have seen increasing foreign institutional investors. It used to be 7%. It's now 19%. Domestic institutional investors have also increased, so we have been able to diversify our shareholders base. And we have -- understand that shareholders have great expectations for us, and we would like to meet that expectations. This is net income by segment. We have decided to increase our disclosure. Again this is non-audited information, but we have received requests from the investors to show a little bit more details in net income. So about the operating income, we showed this on segment basis, but we have given you a net income breakdown. As for income tax, this is 31.5%, which is the effective tax rate for the corporate tax, and we have applied that to each segment. We have mobile, distribution, Yahoo. From operating income, if you deduct income tax, you have net income. This is after tax, which you can see here on this table. And again this also shows the impact of mobile communication charges. How much is the consumer service? We have also disclosed this information here as well. This is our core business for us, core of core. So in our plan for 2022, for mobile business, we would like to be profitable, increasing income. And we have always said that and that has not changed. Mobile communication charges, of course, there's competition, but we want to increase our subscriber base as well so that we can achieve our operating income target. So I hope you will understand that we will continue to strive towards this. As for Enterprise, this is JPY 57.3 billion in net income. Income has increased by plus 18% year-on-year. I believe that the momentum is accelerating. So by FY 2022, we forecast double-digit profit growth. And basically it's really outperforming our forecast, so we hope that we can continue to grow. We believe that this is a pillar for non-telecom business. If you look at Distribution, in terms of size, it's not so big in net income, but if you look at the growth rate, it's grown double digit last year and year before. It's 13% last year. This year is about 8% right now, but we believe that we can achieve a double-digit full year basis. Yahoo was plus 30% year-on-year growth on -- in half -- first half. They have also declared that they need to make investment for future growth, so I hope that you will take that into consideration as well. But because it's a public company, you can also get the disclosed information as well. Our share -- our stake, excuse me, is about JPY 1.4 trillion today. And we acquired this by JPY 670 billion, so there's a lot of unrealized gains. And we don't have any plans to sell it. As for PayPay, this is an important business, so we have decided to disclose this business. In operating income, we have just 1 month consolidation for -- in April. So it is under the equity method affiliate. Now in terms of [ magnitude of losses ], it has hit bottom and is now improving. So we believe that we will monetize many of their businesses. And there is potential for growth, and we want to be sure that we grow this as well. And you can see other affiliates. There's payment service, players, HAPSMobile. They're all -- OYO, DiDi. They're all in other affiliates. There's many things that we can look forward to, and I hope it will give birth. As for interest rate and other equity method and income tax, these are all included in corporate adjustments. So I hope you will use this to -- for the valuation of our company. Last page, Page 24. Mr. Miyauchi also explained this. As of August, we have declared that we will exceed JPY 1 trillion in operating income by FY 2022. Our target is not JPY 1 trillion. It's over JPY 1 trillion. That's important. So JPY 1 trillion is just a passing point for us. And our progress is good, so we will continue to strive towards achieving this. As for shareholder returns, there will be no dividend reductions. Total shareholder return of 85% or so will continue to be maintained. So we will use these policies as -- to drive our business. So thank you very much for your attention. To be honest with you, our first half, we're very bullish on our -- against our guidance, but new rates and Docomo's move, there are some uncertainties. So there are certain things we would like to continue to monitor, but if you could just remember that we're quite bullish against our guidance. And I hope you'll bear with us for not disclosing specific numbers. So now I would like to take questions. Thank you very much.

Thank you very much. We would like to move on to the Q&A session. [Operator Instructions] Please wait for a moment until we make preparations for the Q&A session. We are ready to take questions. We will star the Q&A session. [Operator Instructions] From SMBC Nikko Securities, Mr. Satoru Kikuchi.

This is Kikuchi. I have 2 questions. One is, as you have explained, the half-price support -- my understanding is that in the second quarter -- you have implemented this in the second quarter. And in the first quarter, it was not there. And a reversal of this. Have you done all for the past so it would not be impacting third quarter on? The -- I think this was the main driver of the growth in revenue for the Consumer business, so I would like to know. So in terms of the COGS decrease for service, I would like to know what -- how it would look like in the second half.

In terms of the half-price support, we have revised the estimate inclusive of the past cases. So it was -- it is a onetime thing. So the amount was quite big, but it's onetime, so it would not be impacting third quarter on. In terms of the handset cost of goods sold, in the first quarter -- so there was -- there was a bonus-like benefit in the previous year for the provision. And in the -- but in the second quarter, we did not have any negative impact. So third quarter on, the basic trend is that we would not have anything that would move our performance to the extremes.

My second question. On Page 23, you disclosed for the first time segment-by-segment net profit. The other affiliates income, where is that coming from?

Payment service is in the black and it's growing. And players group, also in the black, or technology company. So there are subsidiaries which are growing and which are in the black. So it's an aggregation of those affiliates.

Understood. [ B work ], is that included in here?

It -- so it's very small because it's equity method, but it's included there.

Understood.

We only have 1/4, so the amount is not so big.

Understood. So in the other affiliates, the equity method companies are all included. So it's all equity method companies.

So PayPay is separate, but yes.

Understood.

Next question is from Daisaku Masuno from Nomura Securities.

I have 2 questions. In midterm, the business environment has changed, but as you have just explained today, you are still aiming for operating income. I don't know if maybe net income is better, but basically you're aiming for JPY 1 trillion in midterm. And you have rates challenges, but you have Internet service and you have other businesses that you think you can achieve JPY 1 trillion, and that progress is underway. Can I confirm that?

No, it has not changed. In fact, compared to when we initially came up with this plan, progress is far better than we have expected. We were wondering the impact of COVID, but from May, we weren't sure. August, we had better idea. And Enterprise has really been driving our growth. And we believe that we can continue to maintain our target, so as time progresses, I think we -- it becomes more viable. And this is not just for full year -- bullish not just for full year, but we are also bullish for the midterm For JPY 1 trillion, yes. I think the progress is much better. And even in Consumer business, it's solid. We're getting volume as well. So there's pressure on our pricing, but on an overall basis our major policy remains unchanged.

Second question, about rates again. Y!mobile, you have 20 gigs, and you used to have 14 gig. So you have reinforced that, so you now have small, medium, large. And SoftBank brand, you have unlimited plan for 5G. And for feature phone, you have 1-gig plan, which is very cheap. So it's just pay as you go only, but you don't have a lot of that. So you have now SoftBank lineup of small, medium, large. I think you have a nice portfolio. So that will be the composition, right? Would that be true?

Well, we're -- whether -- excuse me. How we position in 5G, a lot of things are still under consideration, including Y!mobile. We are still researching. And so in sometime in the near future, we should be able to provide you with more details on our initiative, but in any case, SoftBank, we are basically reinforcing our 5G initiatives. And we want to prepare our environment for capital investment as well. So if you could give us a little more time on overall.

So comprehensively. So wherever you need to lower the prices, you can do so, but you can increase volume and traffic so it will become more competitive. So on an overall basis, I believe that you are able to adapt to it. So whether it be midterm or whether it be this year's target, you can maintain it. The guidance is maintained, right? You said that, mobile, you will continue to grow on a midterm basis.

Yes. However, competitive environment changes. Different things happened, so we need to consider different scenarios and be prepared.

The next question, from Daiwa Securities, Mr. Yoshio Ando.

I have 2 questions. The first question is related to ARPU. I would like to know the future trend that will come for ARPU. The half-price support is not included in the ARPU. Is my understanding correct? And the point is, inclusive of the accounting change impact, the year-on-year change was explained in the presentation. So as ARPU, what would be the trend for the second half? And what would be the trend for next fiscal year? If you could explain about that, I would appreciate it.

As for the half-price support, it's outside of ARPU calculation. As for ARPU situation, out of the JPY 150 decrease, more than JPY 100 is coming from the 1 -- first year, half year support. So in the third quarter, there would be decrease in the impact from this because it has been 1 year since October, when it was changed. In the fourth quarter, the decrease of the impact will be furthered, and so we believe that the amount of the decrease by JPY 150 will be smaller. It's too early to talk about the next fiscal year, but we believe that the price is stabilizing, and we are trying to respond to the new price.

What I wanted to check was that, ARPU for second half, that would be closer to the trend of the first half.

The reduction amount year-on-year will be lesser. That's the momentum.

My second question, integration of the LINE MOBILE and the accounting treatment. If there is any update that you can give us, I would like to know. Is it okay to ask that question?

On that point, it's too early to respond. Currently, Z Holdings and LINE and ourselves are working together. And the integration will occur on March 1, so we need more time for us to be able to respond to your question. So there would be some PPA. That's what we expect.

So by PPA, do you think that will be a huge amount but -- or not so large an amount?

It would not be a surprise, but I would not be able to mention on the specifics. You need to give us more time.

Next is Mr. Mitsunobu Tsuruo from Citi Securities.

This is Tsuruo from Citi. First question, about 5G, this was mentioned in the media session, but you did not answer this question. In end of Q2, what was the subscription? And what is your goal for full year? And I apologize. I have more questions here, but has MIC requested any lowering prices for 5G? So can you continue to maintain premium price for 5G?

With regards to 5G, we have just started our initiative. The base stations is limited, so at this point in time, we refrain from disclosing, but what we can say is that iPhone has come up with 5G. Android has also 5G handsets, so I think much of the handset devices will be 5G compatible. So in an appropriate timing, we would like to make sure we disclose the number to you, and hopefully, that number will be very large. Much of the rates could be lower with the 4G, but even for 5G we will continue to monitor the market environment, the customer needs. And Mr. Miyauchi talked about unlimited plan, but there's a lot of things that we are considering internally. So I think we can at an appropriate time share more about 5G. So if you could be patient.

Another question about 5G, and this is my second and last question. In Mr. Miyakawa's explanation, you said that in the first year you said 200,000, and 150,000 next. So that will be 350,000 base stations for 5G in 5 years. Is this base station including 4G? So among the 350,000 how much will be dual, 4G and 5G? And how much will be shared? And what is the peak of the CapEx?

This includes 4G frequency as well, spectrum as well. We want to make sure that we build right area coverage and realize the characteristics of 5G nationwide. And we will start with non-standalone, but we will convert it to standalone, so in 10-year cycle I think majority will be standalone. Even in 5 year, I think you should see a nice progress. Therefore, we will not be confined to one fixed style, but we will continue to evolve and achieve 350,000. CapEx, we are maintaining JPY 400 billion. We will allocate as much as possible to 5G.