SoftBank Corp. (9434) Earnings Call Transcript & Summary

Thank you very much for waiting. We would like to start the investor briefing for earnings results for the 3 months ended June 30, 2021, of the SoftBank Corporation. We would like to introduce to you the presenters for today. SoftBank Corporation, Board Director, Executive Vice President and CFO, Fujihara. Vice President, Head of Finance and Accounting Division, Naito. Vice President, Head of Strategic Finance Division of the Finance Unit, Akiyama. Today's briefing is streamed live on the internet. Now Mr. Fujihara will be giving the briefing for the earnings results.

My name is Fujihara, CFO of SoftBank Corporation. Thank you very much for coming to the briefing. So we have announced our earnings results, and I would like to give you a supplementary explanation about the earnings results followed by Q&A. I would like to now give you the earnings results. First is the highlight. Executive summary. Revenue and operating income increased year-on-year. Net income declined slightly. Operating income and net income achieved approximately 30% progress toward full year forecast and well on track as planned. So there was mobile service price reduction and consumers, so reduction in the profit. However, there was and more increase in the enterprise business in terms of the profit that covered the decline in consumer. PayPay achieved JPY 1.2 trillion of GMV, which is increase of 65% year-on-year. I will be giving you the details on later slides. Without further ado, I would like to begin. First is a summary. As it was introduced by our President, you see the progress rate. So the revenue is 24.7% progress, so it's going steadily. So this is segment by segment information. Please take a look at the numbers, JPY 1,356.6 billion. So that is JPY 183.9 billion year-on-year. In 2018, '19, '20, we have been able to increase the revenue on a year-on-year basis consecutively. And in the first quarter, we were able to do that once again. One of the characteristics is that we now have LINE. So we now have Yahoo! Japan and LINE segment. There was an increase of JPY 99.5 billion year-on-year, a significant contribution. Out of the JPY 99.5 billion, JPY 70 billion is the contribution from LINE. In terms of the consumer business, there was an increase of JPY 67.7 billion year-on-year. There was a recovery in the, at the mobile handsets, but I will be giving the details of the breakdown. As for Distribution and Enterprise, there was a positive contribution. Next is adjusted EBITDA. There was increase of JPY 16.2 billion increase year-on-year or plus 3.6%. In the Consumer, there was a negative impact from the mobile service price reduction, so it was negative. But distribution and -- Enterprise and Yahoo!, there was a significant contribution. Aside from consumer inclusive attribution, there was a double-digit increase in terms of the percentage. Next is the operating income segment by segment results. So the Consumer was negative, but Enterprise increased, which was enough to cover the decline in Consumer. In Yahoo! and LINE, EBITDA, there was JPY 8.7 billion increase, but it says JPY 800 million plus. So there was amortization of intangible assets as well as the stock-based compensation expenses associated with LINE business integration. So that was absorbed and this number was derived. I think that this impact was a concern of the market, but we were able to increase in the profitability. So I would like to go into the breakdown. So let's start with consumer segment. Your most interest is in this segment. So I would like to be a little more detailed in this section. So first of all, in terms of segment revenue, left-hand side, in sales of goods and others, the biggest factor for JPY 600 billion is that last year, because it was in the midst of SOE, many of the stores were reducing their operating hours to [ 6:00 p.m. ]. And customers did have a lot of opportunity to go outside their home. Therefore, we saw sluggish sales, but this has completely recovered, increase in device sales and because of iPhone 12, unit sales price has also increased. So together, we have -- has led to revenue increase. So with broadband, this is about JPY 10 billion increase. Mobile, the increase is the greatest. This is the largest portion. It's minus 3.8%. As I had said earlier, we had accounting treatment for first year, half year discounts, plus, it was plus 5.6% before. This is now positive this year. So if you do the calculation, the rest is minus JPY 9.4 billion. And against is minus JPY 9.4 billion, the price impact is a little above JPY 10 billion or so. So because device sales increased, but we had a few discount and the brand mix is now more on the Y!mobile and decrease in SoftBank brand. So there was a change in mix change. So this is primarily due to the price reductions. This is the reason for the negative. On the right-hand side, you can see the expense and profit. Against the sales of goods, we have cost of goods sold and expenses. We have service commissions and expenses here. With regards to sales related, because of recovery in sales activity, we had increase in sales commissions and sales promotion expenses. So this has been reflected in the results. So this is Q1 results. Now let me comment on what will happen going forward. In Q1, so this is minus JPY 10 billion in impact [ fund ] rate reductions. In Q2, we're looking at rather than JPY 20 billion, JPY 30 billion or JPY 40 billion increase, but because Q1, this is the initial activity of the impact of price reduction. So this is a big delta. So in Q2, we're looking at maybe JPY 15 billion or so. This is what Mr. Miyakawa said earlier as well. So this will continue to build up towards at the end of this year. However, if you look at our price plan or mobile subscription, when they upgrade, they are often review their plan as well. So over the next 3 to 4 years, this sort of impact will continue to accumulate. So that will be at the basis. In light of that, the first Q1 delta tended to come out larger. So I hope you will understand that element. So with this assumption, we build our business plan and manage it accordingly. So with regards to profit increased this year and next year's plan, it will remain unchanged. We will continue to do our best to achieve that target. Meanwhile, let's look at the Enterprise segment. This segment has done enormously well. In terms of revenue, this is plus JPY 9 billion. If you look at Solutions, this is where the growth has been the largest. Solutions was plus 17% last year and 17% likewise a year before that. In the Q1, there was a onetime thing. So this is 9%. This is slightly weak, but on a yearly basis, we should be able to go in the latter half of the two-digits. So that would be 15% to 19%. Profit is plus JPY 7.2 billion year-on-year. The [indiscernible] plan is [ JPY 198 billion ]. So maybe the margin of increase was maybe about JPY 20 billion or JPY 30 billion. So this is about JPY 34 billion or so. So I think you can see that this is progressing well. So this is quite bullish. In terms of expenses, this is slightly down. We had some reversal on expenses. It's a onetime off elements here. That's plus JPY 3.3 billion. But in any case, Enterprise is bullish. So Consumer was pressured by price reductions, but it has been offset by Enterprise segment. And looking at the Business Solution and Others revenue, this is a driver of growth. As it was introduced by Mr. Miyakawa, earlier, more than 70%. So that by Q1, I would say that 78%, this is recurring revenue. This is a ratio to Business Solution and Others, and this will give breadth to the business. Let's look at Yahoo! and LINE segment. This is what was announced by Z Holdings yesterday. So it will basically in line with what they have said. So this is plus JPY 99.5 billion year-on-year. Media, their main stake, this is where they're strong. This is where they have been able to see a lot of synergies from the integration of LINE. On the right-hand side in segment income. Even in terms of profit, the business growth, this is where it's quite strong at plus JPY 7 billion. And with integration of LINE, they have absorbed all the different costs and negatives they have now been able to record a positive income. Let's look at Distribution segment and Others. Last year, it grew by about 30%. So year-on-year comparison, maybe the growth rate isn't as large. But this quarter, profit is double-digit growth. So again, this is performing quite well. On the right-hand side, you can see other businesses, among which, SoftBank Payment Service, this is plus 24% year-on-year increase. They will continue to record increasing income. So their presence is becoming more and more relevant. So let's look at net income. Overall, this is minus JPY 1.2 billion year-on-year increase in operating income, and we have positives in valuations. And so even the finance income has been positive. But unfortunately, we had [ negatively ] income taxes. This is due to the integration of LINE and some investments that we have made. These are one-off. I would say half of minus JPY 13.8 billion is what I have just described. So that's the increase here. And we also have noncontrolling interest. This is -- the economic stake in Z Holdings has decreased from 44.6% to 32.6%. So this is the reason why the number has increased to minus JPY 2.5 billion. So if we add the 2 together, this is more than JPY 9 billion in impact. And even then we have absorbed this, it's still minus 1.2%. But the progress is already 30% or so. So I think you can say this is doing considerably well. CapEx. This is JPY 97.4 billion. So this is IFRS method has used to be booked, but this has been excluded. It's JPY 88 billion. So full year forecast is JPY 400 billion. So you can see that CapEx spending is a little quicker than before. This is due to the acceleration of 5G business. So JPY 400 billion forecast remains unchanged. Next is cash flow. Adjusted free cash flow. Last year, it was JPY 236.3 billion, and it has significantly decreased the share. I talked about this in the first quarter of last year, but last year, because of the COVID-19, we decided to consider cash is king, and there was a lot of securitization made. And as of the end of fiscal year 2019, we were conscious of the equity ratio and we wanted to streamline the balance sheet. So in 2019, in the fourth quarter, we have suppressed the securitization. But in the first quarter of 2020, there was a lot of securitization, so the cash was strong. This fiscal year, we had JPY 400 billion of dividend end. payment last year, we -- in the past, we had [ reinvent ] the base stations. But because of the IFRS, the payment was in the financial cash flow, and that's JPY [ 120 billion ]. And the additional cash flow, we wanted to have -- So we have a lot of growth opportunities inclusive of PayPay. So we -- there is a possibility that we will be conducting a growth investment. So in any case, we would be handling this in a conscious manner. In the second -- in the first quarter, there was corporate tax issues and capital expenditures. There were more expenditures compared to the previous years. So that's one of the reasons why there was a year-on-year decrease of free cash flow. Next is the balance sheet. On the balance sheet, cash and cash equivalents, we have been able to accumulate it well. So there were some interest-bearing debt increase. And the net asset ratio is what we are conscious of. And the first and third quarters, because we had dividend payment, equity ratio tends to come down. So that's a seasonality matter. Next is net leverage ratio. Net interest-bearing debt. Because of the increase in the corporate taxes and dividend payment, it's JPY 4.4 trillion. As you can see on the right, in the net leverage ratio, because of the situation on EBITDA, the situation is almost on par with the previous year. We have to look at the balance of the, at growth opportunities, but we would like to be a little less than what we see on this chart. Now I would like to talk about our KPIs. First is the subscribers. There is a growth of smartphone subscribers. We now have 26.18 million. So we want to get to 30 million by the end of fiscal year 2023. And I think that we are at a faster pace than that. So compared to last year, it was plus 1.68 million. There was a weakness in the April growth. And also, as you can see on the right, the churn rate, the smartphone churn rate was 1.01%. Last year, there was various factors, including COVID, the Telecommunications Business Act change. But even compared to 2 years ago, it is still high. So there was a large impact from the situation in April. On the next slide is the -- I wanted to show you the monthly figures because it was very different. So 70,000, 80,000, out 10,000 are the increase -- a net increase of smartphones for each month of April, May and June, respectively. And the churn rate coming down from 1.21% to 0.8% in June. 0.8% in June compared with the 2 years ago is a bit high, but this is the level that we have in place right now. Now I would like to talk about ARPU. On a year-on-year basis, it was negative JPY 130. So the JPY 150 improvement for the discount ARPU. And out of the negative JPY 130, the biggest factor contributing to this was mobile service price reduction. And also there was acceleration in the brand migration. So that -- so overall, the impact was around JPY 100. So first and half year discount improvement factor is there at the basis, but the mix of Y!mobile is increasing. And in the SoftBank brand, there is debut discount. So there is a larger impact from that. So overall, it was negative JPY 130 year-on-year. So this number, on a quarterly basis, we believe that it will decline. So we believe that it will exceed JPY 200 at the end, but -- so we need to take various initiatives, and we will be reporting to the progress as we go. In any case, we are factoring in these factors, but we were able to -- we will be able to increase our profit even with that. Next is broadband. In terms of broadband cumulative subscribers, this is growing steadily. This is 0.43 million year-on-year. ADSL included, total is 8.18 million. This is household numbers, and we're looking at -- aiming for 10 million. And we have now disclosed electricity subscribers, it's 1.88 million. As Mr. Miyakawa also explained, it helps retain customers, reduce churn rate, and if you don't subscribe to electricity at the same time, then this churn rate is double. So we would like to focus on increasing electricity subscribers. With regards to e-commerce, Yahoo!, this is basically repeating what Z Holdings has disclosed. So e-commerce, because last year grew quite significantly, this year's growth rate is slightly down. Even the CEO has taken this on as a challenge. But even for us, EC is strategically important, so we would like to continue to grow this segment. And with regards to advertising, which is mainstay for Yahoo!, you can see its steady. So this is a number here. Let me turn to PayPay. In shareholders' meeting, I said that we're already exceeding 40 million. So it continues to be performing well. And internally, we talk about whether we can receive to go and achieve 50 million, when will be the timing be. So we will continue to increase the number of registered users. Now this year, our focus will be on being more profitable. So until Q3 last year, PayPay continue to focus on -- I think we talked about how we want to improve our profit so that it will become profitable. So this year, we will accelerate on sales promotion and increase the number of registered users. Meanwhile, in the middle of Q2, we have new contract with merchants, which we will be -- should be disclosing at the appropriate timing. So these are -- the numbers are based on all of these different assumptions. But in any case, all these activities will lead to increasing top line. Number of merchants is increasing as well. So it's now 3.34 million. In terms of number of payments, as it was introduced earlier, in order to increase the number of customers using the service itself, number of payments is important. So as Mr. Miyakawa said, this is probably one of the most important KPIs. In terms of GMV, this is also very significant to us. So this is plus 65.2% increase. It's JPY 1.2 trillion on a [ momentum ] basis, sometimes it goes as near as JPY 1.5 trillion. So this is expected to continue to grow. Next is SB Payment Service. This continues to grow. Last year it was JPY 4 trillion in GMV. This is now growing furthermore. In particular, the cross views within the group has been promoted. So it's -- we have started providing settlement service to ZOZO as well in March. So with this tailwind, we see enormous growth. So we will continue to grow this business. And next is on ESG topics, including carbon neutral. We would like to continue to increase our initiatives here and have more disclosure on this. Carbon neutral 2030, we just recently announced declaration to achieve zero greenhouse gas emissions. And have been able to receive certification from international organizations. So this is something we do this very seriously in full scale. And in terms of global development of non-terrestrial network, we looked at aligning with Smart Africa to contribute to Africa as well. In terms of governance, we have increased the ratio of external directors to 4 to 6 externals. So now we have 13 altogether, which is 46% of external independent directors. And we have added 2 women external directors. So now we have a total of 3, and we have 1 female auditor as well. We have established Advancement of Women Promotion committee. Mr. Miyakawa himself takes initiative, and we have target by division. And we have a very specific target of aiming to increase the ratio with female manages to 20% by FY '35. So that is all for me on the earnings results. So we would like to take questions from the floor.

[Operator Instructions] First, I would like to designate Mr. Ando from Daiwa Securities.

I have 2 questions. The first question is related to churn rate. In July, the trend was the same. So there is a trend of decline in terms of the churn rate. That's my understanding. My question is as follows. The churn rate is coming down and the net increase of the main subscribers, do you think that the pace will pick up and come back to the original levels? Or do you think that you would not be able to recover to the original level of the net increase? So if you can -- do you believe that you cannot go back, what factors are different from the originating states? So that's my first question.

In terms of the churn, so in June, there has been a decline. So I think that June will be the one benchmark. We believe that the number we can expect for churn rate is about this level. As for the smartphones, we want to recover through various initiatives. In terms of the tablet, there were shortages in the inventory. Because of that, for main subscribers, it has become weak. And as for [ MVP ] the -- there was a weakness as well. So for the main subscribers, those kind of situation must be taken into account. But in any case, in terms of the competitive environment compared to 1 year ago or before the mobile service price reduction, we had been the sole winner or close to a sole winner. In that sense, the competitive environment has become more equalized. So we cannot be too optimistic. But the trend of the recovery is something that we would like to maintain.

I would like to ask for a supplementary comment. The price campaign of the competitors, I think that has ended from April to May. And if the churn rate does not go down so much after June, so what are the factors contributing to the fiercer competition?

Compared to 2 years ago, the churn rate is slightly high. We believe that the strength will continue. The migration to competition is a bit higher than the level that we have seen 2 years ago. March and April were one end of one extreme, and that will not happen now. But we would like to have as a baseline of what we see in LINE MO. And in April, I think there would be various events like launch of iPhone, et cetera. So we want to focus on volume, that is in our DNA. And I think that there would be an opportunity for us for recovery. From the business management perspective, we would like to consider this trend as the baseline trend.

I would like to move on to the second question. Related to cost. You didn't talk so much about the cost. In the first quarter from the perspective of cost, what kind of operations did you implement?

This fiscal year, we were too focused on the cost, and we have been conducting various initiatives. On a yearly basis, there are factors that contribute to increase in the cost like networks and also we are taking various new initiatives. So that contributes to the generation of cost. And we want to -- we want to conduct the cost decrease through the reduction of the existing costs by around JPY 50 billion. And you may think that on the surface that the cost increase is incurring, but there are cost reduction initiatives going on. And through that, we are trying to keep the cost flat. So that's the basis of our activities. In the first quarter, for example, we -- so moving to Takeshiba was a beneficial activity. Activity for the reduction of the cost. But in the first quarter, there was the double payment of the rent because we had to pay for our building in [indiscernible] And the cost reduction measures impact, you will be able to see as we go through the year. Thank you very much.

Next question is from Nomura Securities, Mr. Masuno.

This is Masuno from Nomura Securities. In a large conference, I asked the same -- this question. With regards to net increase of the main subscribers, this is not just smartphones, but if you include everything, the norm should be great. And smartphone is 250,000. But if it was 2 million for full year last year, then you have to do 1.5 million more than you will have to do [ 400,000 ] in Q2, Q3, and then 750,000 in Q4. That would be your homework. So [ quarter 500,000 ] what sort of initiatives do you have to achieve this number? Do you think you can achieve it? What is the pace? Would you be able to comment on this?

So the way you perceived 2 million, this is -- we have never included 2 million in our management plan. Miyauchi mentioned 2 million, but this is a sales target internally. I think he said that. So we don't plan to achieve 2 million each year in my management plan. So I hope this is not a misunderstanding. So this 1.68 right now, this is the number that we do need to be conscientious of.

From Citigroup, Mr. Tsuruo.

This is Tsuruo. So I would like to ask my question. My first question is related to the sales of mobile handsets. Mr. Miyakawa talked about the base station for 5G. But in terms of the sales of the handset, how is it as well as the subscriber of 5G handset? And also -- So in terms of the population coverage, would you talk about the current situation? You were aiming at 90%.

So if the number is different according to the definition of 5G, so from the perspective of the sales of handset, KDDI disclosed that today sold 3.4 million and our number is very close to that. 5G contract is actually a bigger figure, but this cannot be connected unless there is a handset. So 3 million -- around 3 million is the current situation for us. In terms of the base station. In the latter half of May, we were able to surpass 10,000 base stations. And so according to our estimate, I think that we were the first to reach the 10,000 base station level. As for the 5G coverage, we want to capitalize on this advantage. So next year, we want to get to 50,000 in the spring of next year. So our target remains unchanged, and we will continue to make efforts for the achievement of that goal. We want to get to the more than 90% coverage by 5G, and we want to be able to say that next year.

I have a follow-up question. So as of the end of June or by the end of May, what was the coverage rate?

So I don't have the number, but it is not so high. So because we only have 10,000 -- a little over 10,000 base stations.

I would like to ask my second question. Maybe it's a tough question. Data governance. Yesterday, in Z Holdings briefing, there were a lot of questions asked and -- but there was not much answers given. I think that the investors are investing in Z Holdings because you are a parent company. So LINE and Z Holdings synergy, the PMI status. How is the current status?

I would not be able to talk about what Z Holdings management has not said because we are both listed companies. We now have A Holdings and I'm participating as a Board member. So A Holdings is the parent company. And they -- this is a [ Naver ], where we would be able to discuss with Naver. So we are checking the data governance issue. And Z Holding is working very sincerely on the data governance issue. There is a third-party committee, and I think that the conclusion of the third-party committee will be derived soon. And we would like to use the result of the discussion of the third-party commission to go forward. So there has been a global development going on, and we were trying in the past several months to get global alignment. I think that the understanding amongst each other is getting better. And the PMI is going on steadily, even though there is some delay, but we think that we can catch up. In any case, we want to -- we want to create an environment where the Japanese citizens and the Japanese government will trust them. So we would be working very hard.

So another follow-up question. The third-party commission. You said that the results will be coming out. So the PMI and synergy, that will begin to be seen soon.

That's correct. Yes, because they are looking for synergy in their business.

Next is Mr. Kikuchi from SMBC Nikko Securities.

This is Kikuchi. I have 2 questions. I want to, first of all, ask about enterprise business. So Consumer continues to decrease in profit, but Enterprise offsets that. Meanwhile, if you look at first quarter this fiscal year, this is increase of JPY 7.2 billion. In Page 9, which you have published, there's JPY 3.3 billion in reversal. So increase from operations is about JPY 4 billion or so. Meanwhile, mobile revenue is JPY 5.7 billion increase. I assume there's not much increase in cost here. So I think much of it goes down to profit level. So in other words, increase in Enterprise is supported by mobile business. But if you look at quarterly sales revenue of mobile, the increase since Enterprise smartphones was Q2, Q3 last year. And mobile revenue in Enterprise hasn't really grown much after Q2. And if you compare Y-o-Y, it's positive Q1. But in terms of actually a number of sales volume, it's probably not as much. So in Q2, I don't think it will be increasing revenue and profit. So what I want to ask is, is mobile increasing in terms of volume or has it stopped increasing? So that's my question. And then in addition to that, I want to ask about Business Solution and Others. Profit contribution, as long as I look at this level, it has not really contributed much to income, and this is plus JPY 3.9 billion in solution, but actually, cost of goods sold is JPY 5 billion. So it actually looks quite negative in terms of the income level. So solutions business, is it truly profitable? So I had multiple questions in my first question, but that's what I wanted to ask.

Thank you for the questions. With regards to mobile, it's true. They do make significant contribution, meaningful contribution. I understand what you mean. Last year Q1, because of work from home, I think it was quite strong. So compared to that, maybe we do need to recover this a little bit more. So I think we will continue to work on that. And this is more for overall. But our enterprise business is different from consumer business in that there's a lot of cross-selling. So if you -- wherever we were selling first half, half year discount, we saw mobile. Where we were selling mobile, we sell other products. And sometimes we do start with digital marketing and then they end up using mobile service. So there's a lot of cross-selling. So on a quarterly basis, there's a lot of different elements. That's why there's fluctuations in margin. But on an annual basis, I would say maybe this is about 2% increase in margin at the annual level. So I think this is improving on an overall basis. So we will increase efficiency and increase in revenue at the top line level. So those are the 2 things we want to present at the same time. Now business solutions. It is profitable. But as you point out, compared to Mobile income, well, if you look at incremental margin on Mobile, maybe it's not as good. So we need to, again, increase our efficiency so that we can improve overall number. Our plan is JPY 182 billion. I think compared to that, I think we are fully on track. So I think you can be assured about that.

Understood. My second question, I want to ask about consumer business. You always talk about subscribers. That's important to you or -- so I guess you don't -- aren't so concerned about ARPU on a relative basis. But in order to reduce your churn rate, maybe you are utilizing Y!mobile too much. That's what it's perceived. And if you look at brand mix and if you look at this KPI craft, Y!mobile's percentage is increasing quite rapidly, especially in Q1. And if you go with the space within 4 years, it will probably reverse with the main brand. So Y!mobile becomes more and more attractive, enhanced features. Meanwhile, the more emphasis you put on that, the value of your main brand, [ SoftBank ], from the consumer users point of view, becomes less distinguished. We are not really seeing superiority of iPhone either. So this sort of operation perhaps needs to be revisited -- reexamined somewhere. So maybe you should be concerned too much about mobile device sales. You have to focus more on ARPU and brand mix. Maybe the timing will come which you need to shift your focus on that. Do you have that sort of discussion internally? Can I get a comment on my view?