SoftBank Corp. (9434) Earnings Call Transcript & Summary

Thank you so much for waiting. We would like to begin SoftBank Corp. Investor Meeting for the 6 months ended September 30, 2022. We would like to introduce today's attendees. SoftBank Corporation Board Director, Executive Vice President and CFO, Fujihara; Finance unit, Finance and Accounting Division Vice President and Head, Naito. Finance unit, Strategy, Finance Division Vice President and Head, Akiyama. Today's presentation will be broadcast live via the Internet. Now CFO Fujihara will explain an overview of the business results.

This is Fujihara. Thank you so much for participating today's meeting, taking time out of your busy schedule. This is today's agenda. First, I would like to talk about the consolidated results for the 6 months ended September 30, 2022 and second, I would like to talk about PayPay consolidation, which we completed on October 1. The third, we would like to explain about the full year forecast for fiscal year 2022, including upward revision. Today, we cover a variety of topics. First, I would like to talk about the first half of fiscal year. This is results for the fiscal year. Q2 increased in revenue but decreased in profit. On October 1, we have PayPay consolidation. So therefore, we have remeasurement gain of PayPay, which is expected to be recognized in the next fiscal year, and we are steadily improving. Next, we would like to talk about revenue. The revenue increased in all segments. Here is the breakdown. Yahoo! Japan line and distribution base above JPY 30 billion, which contributed the most. As for full year, JPY 900 billion has not been changed but in the second half of the year, PayPay will be included, therefore, against JPY 5.9 trillion and, we are quite positive. And next, it's about adjusted EBITDA, Yahoo! Japan and Z Holdings are the only reported before EBITDA. So, as you can see last fiscal year, we had the onetime part on the gain on sales of YJFX. So therefore, this fiscal year, we see a little bit of decline. And here is the operating income. As a whole, JPY 72.3 billion negative year-on-year, which was due to the impact of price reduction, mobile service price reduction. As for the enterprise it shows decrease however, it's due to onetime factor. As for consumer, we have reinforced recruitment therefore, it shows negative. However, as for the full year, we are expected to reach the target. Let me talk about each segment. As for consumer, the revenue of consumer segment is overall JPY 7.1 billion positive year-on-year. Sales of goods and others is minus JPY 35.3 million and minus 11.9%. However, the second quarter is plus 29% even though we see some negative figure, but it shows the remaining of the Q1. As for the electricity, you can see we have a great contribution and we have some campaigns in terms of broadband area. Therefore, we see revenue decreased despite subscriber increase. In terms of mobile, we have minus JPY 29 billion, minus 3.6%. Let me talk about operating profit of consumer segment. As for sales of goods and others, as for gross profit, it's minus 24, and we have recovered in the second quarter. Now the electricity, the sales increased by JPY 75 billion. However, due to the cost increment due to the increment of electricity price in the market, which shows the negative impact. And also, sales commissions and sales promotion expenses show minus 1.7%, but as for the breakdown, acquisition customer acquisition-related expenses were minus JPY 21 million. There is deferred expense this semester. However, the cause of this negative impact is from the previous year. And depreciation and disposals are minus 1.3% due to the shutdown of the shutdown costs. And also, as for others, we have plus 1.3%, which is contributed by cost reduction efforts. And next, enterprise. Business solution was the main focus. So, this quarter, in the first half of this year, business solution, others showed JPY 13.2 billion positive and 13% plus. As for this quarter, we have been able to book remeasurement gain of business integration. However, due to the provision for litigation against PayNet therefore, we have some minus JPY 9 billion. Excluding onetime factor, the business as a whole, we are on steady growth. So, we are going to put even more effort to achieve the target in the second half of this fiscal year. And regarding recurring revenue, we have achieved 10.7% increase year-on-year so we would like to focus on nonrecurring revenue even more. Now next is Yahoo! Japan Online segment shows positive JPY 33.9 billion year-on-year however, segment income shows minus JPY 16 billion year-on-year. That's due to the absence of gain on sale of YJFX and also a remeasurement gain of business integration of LINE MUSIC -- that's why it shows minus JPY 5.8 billion of onetime factor. Now distribution business, especially revenue increased by 15% year-on-year. Income was up by JPY 100 million of both revenue and income increased in distribution business and chart on the right-hand side is for your reference. Talking about the net income. Financial income loss, we saw big numbers here. One, litigation-related expenses or provision for litigation, JPY 9 billion. And last year, we had valuation gain and this fits culture, valuation loss happened. And PayPay has been improving, which contributes to the total performance. Income taxes coming back positively, and progress-wise, 44.7% year-to-date but taking into account of revaluation gain of PayPay, we should be able to revised full year forecast upward CapEx. We focus on 5G this year, which has been doing well. We have more CapEx than last year in terms of 5G investment and progress-wise, 40.5% so we should accelerate further for the rest of the fiscal year. IFRS 16 increased by JPY 14.7 billion due to a colocation contract renewal. From a balance sheet perspective, we recorded a bigger number than usual, but just IFRS 16 impact. Free cash flow, a little bit lower than last year, down by JPY 7 billion but for the full year, we are looking at JPY 600 billion. Decline in EBITDA and operating income are negative factors, but should be offset by income tax. For investment, we invested heavily in PayPay, but PayPay doesn't need that heavy investment anymore. And even though we pay a lot for 5G investment, still overall, investment is a little bit down from last year. Net interest-bearing debt and net leverage rate, excluding Z Holdings, we see a decline by JPY 6 million. Balance sheet, total assets, JPY 13 trillion-- even paying dividend, we see positive number and fair value should be applied for PayPay as of end of September. Then, total equity to total assets increased to 23.4% even after dividend payments. I will talk more about it later. Now let me share with you KPIs. Mobile subscriber numbers which is progressing well, about 7% increase year-on-year. Churn rate, a little bit higher than last year, but recently, we see a slight improvement. Net additions by the quarter is shown here. Smartphone net addition, JPY 400,000 for the quarter or JPY 70,000 up year-on-year and again, it's been going well compared to previous quarters. Main subscribers net addition JPY 200,000 or JPY 14,000 increased from last year. Another KPI ARPU which I'm sure interested in, ARPU decreased by JPY 200. Let me clarify one thing on the right-hand side about Y!Mobile last year, 200 may look very strong, if you will. What happened last year was an introduction of a critical plan for Y!Mobile and also, we did 1 month free for basic charge in FY '21. So, that was a onetime impact last year. On top of that, voice and value-added service has been growing better than our -- at the beginning of the fiscal year forecast that contributed to JPY 230 total ARPU forecasted for full year. At the beginning of fiscal year, we were looking at JPY 270 if you look at the bottom right corner. And we got feedback in the first quarter and maybe you overestimated which turned out to be true. So, second quarter, we were looking at JPY 200 and for the full year, we forecast JPY 230. Broadband going well and electricity -- we are very cautious doing this business because of the volatility of the market. And the Yahoo! line, those numbers were already disclosed by those businesses. For revenue, both increased. Next chart shows ESG-related topics. In September, we published integrity reports 2022. Now I would like to talk about PayPay consolidation. As announced, we established B Holdings and jointly managed by SoftBank and Z Holdings. As planned on October 1, we executed this plan. Our voting rights is 46.1% as for our economic stake in PayPay and after the exercise of stock acquisition rights by patent, our boarding rights in PayPay has been 66%, and our economic interest will be 43.6%, which has no change. And this is the segment change due to PayPay consolidation, newly establishing financial segment major operating companies that constitute the finance segment; PayPay, PayPay Card, PayPay Securities and SB Payment Services. As for the registered user, they exceeded JPY 51 million, which is 21.1% up year-on-year. On October 3, when we announced strategies, monthly users, MTU exceeded JPY 25 million, which is almost half of the registered users and this has also increased by 12% compared to the previous quarter. The number of payment transactions which PayPay is mostly focused on and GMV was up 43.4% year-on-year and the code payment market share of GMV of code payment is 67%. We still see more space to grow in this area and PayPay profitability, revenue, and EBITDA are all going well. Since last October, we have no longer providing free of charge campaign and now we are very close to the position that we are able to see the PayPay turnaround. You may be interested in how the PayPay profitability and its structure. So, this is about total take rate against the cost ratio and total take rate was 1.1% last fiscal year, which was not covering the costs. However, this quarter, now total take rate grew by 1.6%, which can cover cost of goods sold and fixed costs. So, as we call a second and third layers, the finance services, as we accumulate around this service, we should be able to improve this total take rate further. As for PayPay's strategies, including PayPay card, the Atobarai, the deferred payment would be a great contribution to increase the payment -- the number of transactions. And we should be able to advance our services much closer to the user's convenience. And we would like our customers to be able to use both QR and card payments, both. We would like to update as we move forward around this initiative. And next is about SB Payment Service, which was explained in the first presentation today. This is an exciting business. Here, both revenue and operating income growing steadily, continuing growing in revenue and operating income. As for GMV of SB Payment Service, as you can see, even for the first half of this fiscal year, we grew steadily. So, this company started for the in-group communications payment. However, now this business has grown to the non-telecommunications which are driving force of the growth. Now let me talk about impact of PayPay consolidation. Revaluation gain, JPY 294.8 billion is confirmed in line with the consolidation and the change of accounting method, we recognized intangible assets. And annually, JPY 26 billion estimated amortization of intangible assets take place. So, all in all Operating income plus remeasurement gain in PPA amounts to JPY 767.4 billion. And net income for FY 2022 first half, considering impact of JPY 189 billion on net income is JPY 426.3 billion or 80% of initial forecast. As you can see on the slide, revenue stayed the same, but adjusted EBITDA and operating income, we revised upward in terms of forecast. By the segment, consumer even though performance is very good, but we remain the forecast as is. Enterprise provisions for litigation, which was not anticipated at the beginning of the year is now reflected here. Financial JPY 19 billion negative and others JPY 40 billion negative, including strategic investments that are under discussion and also potential early shutdown of 3G equipment so those are included in others. Now let me talk about changes in accounting policies for transactions under common control. Most specifically, PayPay acquired at fair value and that was the same treatment done by the holding. So, it was treated as the same way as acquisitions from outside the group so PPA or goodwill need to be recognized . So, the whole series of transactions are treated that way. It's an appropriate treatment of a company who has been independent for some time and we go back as far as possible. So, we decided to apply the same treatment to the holding consolidation, which took place in June 2019. We made a press release as of 2nd of November for these changes of accounting policies from pooling of interest methods to acquisition method so impacts are reflected like this. Numbers of FY '29 were amended accordingly. Impact of PayPay consolidation is shown here on the slide. On the right-hand side, illustration of PayPay share revaluation. PayPay were losing money, so book value was 0 but revaluation gain turned out to be JPY 294.8 billion from common shares and from preferred shares JPY 128 billion, of which JPY 65 billion is OCI. Every quarter, preferred shares are revalued, so revaluation of preferred share was recognized as of 30th of September. On the left-hand side, again, the valuation gains from PayPay consolidation, JPY 294.8 billion and PPA amortization, JPY 28 billion -- of that the holding JPY 23 billion and PayPay, JPY 5 billion. Those are PL impact and from BS perspective, impact-wise 2.7% or 3% from total equity perspective. So, balance sheet has improved and net assets over JPY 3 trillion cash flow remains the same. Reflecting those numbers and taking into account of which aspect, which respective amendment. Revenue stays the same, but operating income and adjusted EBITDA and net income were adjusted as you can see on the slide. By the segment, full year adjusted forecast and FY '21 full year retrospective numbers were shown on Page 43, we will keep track of those numbers going forward. That's all from myself. Thank you very much. Again, we have covered varieties of topics, and you may have other questions. And now we are moving into Q&A session.

[Operator Instructions] First, Ando-san from Daiwa Securities.

Two questions. One is about ARPU revision and on the other hand, consumer operating income remains the same. Which means the cost may increase, I believe, so the breakdown and your plan against that, please explain.

First, about ARPU, JPY 40 up, means several million will be up and so this fiscal year, we will see the pressure -- the cost pressure, which is more than JPY 10 billion, and towards the second half of this fiscal year, we would like to bring forward a shutdown schedule and we would like to keep some strategy investment as well as the promotion expense. So, we are considering in different aspects. Regarding the sunset shutdown, yes, that is included under others. And also, we will allocate to the certain segment later on. But for now, it's under others.

And yes, I was surprised to see JPY 30 billion or JPY 40 billion for other costs. And you mentioned a is also including some strategy investment. I would like to know more about it. And also, since shutdown cost means you're going to book some more expense.

So strategy investment, and sunset, which accounts more in this JPY 30 billion to JPY 40 billion. As for sunset from ADSL, PHS and we are -- we are doing along with our schedule and where to remove first. And we are trying to bring it forward as early as possible. That's why we are going to bring the cost also forward as well. We are constrained on what we can do in the right way. And in the first half of this fiscal year, we were a little bit behind the promotion costs. Therefore, in the second half of this fiscal year, we would like to put a little more on the sales promotion. And as for our strategy investment, we haven't determined specifically in which segment so therefore, we are still under consideration. In terms of the actual amount of the investment. So, this JPY 30 billion to JPY 40 billion will be booked to this fiscal year. Regarding the next fiscal year, is it going to be the profit increase factor? Yes, that could be said so. which means the second half of this fiscal year, we have a little more space to work around.

Next question is from Masuno-san of Nomura Securities.

I have 2 questions. First, about ARPU. Why do you think it's going well. Advertisement and content and devices are all related to ARPU for SoftBank. Voice and value-added service, you mentioned are doing well. So again, what's the background behind steady progress of ARPU?

Well, ARPU is still a challenge, to be honest. That challenge or concern is shared by the senior management. And of course, we have tried a lot of initiatives to improve ARPU and value-added services, for example, NTB focused even more and our sales team continues to work on that. And for voice, we thought that it will be even more challenging because of COVID-19 and other reasons in the environment. But now people are going out more than before and we think that we could revise our full year forecast. So that's the background.

Talking about value-added services, content, advertisement, device insurance, what's doing well?

Well, device insurance is good and thanks to the huge customer base, we can be confident more so than last year.

Second question about change of accounting methods. PayPay's fair value was JPY 136 billion as of 30th of September but as of October 1, JPY 294 billion. So 2x increase first, end of September and second, 1st of October.

Yes, revaluation gain comes in as of October 1 then the holdings revaluation.

Looking at your press release for shareholders' equity, JPY 318 billion, does that mean increase by JPY 314 billion? Are there other things happening, but that was a huge event?

When we applied equity method pooling, we didn't use a goodwill, but now we used goodwill after the change of accounting method. Yes, back then when the holding was consolidated in '19. So it reversed back to you as of today.

And next, Citigroup Securities at Tsurou-san.

One thing related to Ando-san's question around electricity. The pressure due to the inflation. I would like to hear more explanation.

The annual increase of the cost is around JPY 10 billion. Yes, there is a pressure of that amount. I mean, so absorbed so it means not annual to exceed JPY 10 billion is for annual full year.

And the question one is regarding Z Holdings business results in which I attended the presentation, the advertisement income looks still optimistic. Miyauchi-san is leading the synergies of those group CEOs and but how you are going -- how you have incorporated the deterioration of the business performance of Z Holdings this time? And what about next fiscal years' plan.

Thank you for your question. Regarding Z Holdings, I cannot make any straight comment as a parent company but Z Holdings, there are some potentials we expected. Regardless of the further situation of Z holdings, we will remain as a parent companies. So Z Holdings have focused on the expenses and other business activities. So therefore, I'm not looking at this in too negatively but please refer to the Z Holdings report.

My second question is CapEx. So, it will be the same through the next fiscal year. So, the cost reduction will be focused on the network. The core network has been reduced and 5G is not moving as fast as planned. So the breakdown of the price reduction through the next fiscal year, if you could touch upon, that will be great.

As for base station deployments and then this year, we are in the phase to expand the coverage, which we are still focusing on. We are committed to accelerate the coverage and I believe that we are not touching the competitive field.

So the breakdown of the core network and base stations, can you elaborate on that?

I would like to explain around that later. Thank you.

Kikuchi-san of SMBC Nikko Securities.

Two questions, maybe a little bit detail about increase of acquisition cost. First quarter, I believe JPY 21 billion in second quarter looks about the same. Is my understanding correct? 21 for first quarter and 21 for second quarter. You mentioned that you don't expect increase next quarter or next year, but I wonder if you're okay with that because next year you may expect decrease of profit in consumer business. So I wonder if acquisition costs may have an impact because maybe you may focus too much on ARPU rather than acquisition cost?

Thank you for your question. Talking about acquisition cost compared to last year, first quarter, second quarter, maybe it implemented a lot of initiatives. So, amortization for the current term may be big but again, we don't feel a significant change in the business environment. Going forward, acquisition cost may not increase or decrease dramatically which we have been anticipating. Looking at the trend now for the last half of this fiscal year, maybe business environment may be changed so I can't say anything firm now. But again, you should not expect any surprise at the end of the fiscal year because since the beginning of the fiscal year, we keep saying that fiscal year '23 will be the bottom so that kind of view remains the same.

So let me make sure I understand correctly. The first quarter, JPY 21 billion; second quarter, JPY 21 billion and second quarter compared to last year remained the same but for the full year, you keep the full year forecast. So, for the second half of the year, you may need to increase acquisition costs for the second half of this fiscal year.

Yes, it's more likely that more activities will take place in the second half of the fiscal year than first half. But because there are other external factors like regulations and others. So, I can't say anything concrete at the moment.

Next question is about electricity business. First half, you recorded a loss but you should expect improvement in the second half of the year because of evolution of the upper limit. And electricity business users decreased a little bit compared to previous quarter. So I wonder if there are any specific reasons why or it's a general trend.

Yes, it's true. In the first half, we saw some challenges because of the market. But we took down the upper limit, so we should be able to recover more in the last half of the fiscal year, we should have double digit for the full year. Acquisition of electricity users, we can't stretch further, taking into account the pricing. So, we are not really actively acquiring users but we may accelerate our acquisition activities once the market condition changes. Telecom carrier doing business is not something unique or strange. So, we stay flexible in terms of how we approach the business.

Next, SBI Securities, Moriyuki-san.

This is Moriyuki. Related to the previous question the sales promotion-related costs were expected around JPY 60 billion and the second half of the year, it may be accelerated, but against JPY 60 billion in the first half of the fiscal year, is it upward or downward? What's the factor? Can you tell me more? If it's downward, then in order to recover in the second half of the fiscal year, considering the remaining time of this fiscal year, do you have to accelerate more?

Yes, in the first half, among JPY 60 billion, which included the gross profit of mobile devices as well. So, in the second quarter, we have recovered around this. And then customer acquisition related expenses is somewhere that we have expected in the beginning of the fiscal year I see.

So, the margin of mobile devices, depending on debt.

Yes, that's one factor and also in the second half of the fiscal year.

What's the reason that you are able to get to margin on that?

In the second quarter, yes, it did well. It was much stronger compared to the first quarter; the number declined drastically and now the price of Apple has increased.

So compared to Q1, I think Q2 and moving forward should be better? And the second question related to the previous question around minus operating income of JPY 40 billion and the cost would be reduced by JPY 50 billion and which included the amortization. So the cost reduction will be brought forward and next fiscal year could be showing the positive profit if you bring this cost reduction impact brought forward.

As you can see here, as for the Others by segment of JPY 40 billion, we cannot categorize in certain segments right now but next fiscal year, there may be some pressure from electricity and others, we would like to even make further efforts to be able to absorb all this impact. So regardless of this sunset scheduled bringing forward you consider this JPY 40 billion was something that we originally planned but what we could do with this, I mean, JPY 40 billion, and -- so this additional one, you're talking about sunset? Yes, as for sunset, originally what we planned had been already included in certain segments. And on top, we have put under others.

Next, Chiba-san from JP Morgan Securities.

Well, just one question actually. About net addition could you break it down by month. You are doing well, but in the quarter, there were some movements in the market like new iPhone introduction or competitors' activities.

Well, first quarter, second quarter getting better compared to Rakuten, for example. Rakuten changed their price point in mail and trend-wise, we saw some changes and related to KDDI, I think you can imagine how it happened. Overall trend, we are looking at following wind. That was true in July and August, also a strong trend, maybe outside factors contributed positively to us. In general, again, we are looking at very steady progress of our net adds.

Due to time constraints, we will take questions from two more people. One is Mitsubishi UFJ Morgan Stanley Securities, Tanaka-san.

This is Tanaka. Yes. One question about enterprise business. In the second quarter, the provision of litigation and the remeasurement and again, so I think for the second half of this fiscal year, the target to achieve the target may be a bit harder. So, what do you think?

Yes. As for the enterprise segment, the employees in the field are positively and aggressively working with confidence and we have more and more opportunities to propose different solutions to the clients, potential clients, but still taking the time to materialize such proposals. That's why it's not shown as actual figure. However, there will be a demand from different clients towards the end of the year so there will be some seasonal factors we can expect. As for the cost, we are looking at it severely, we still like to work hard around that. So as for this rather than recurring revenue you would like to achieve the target through the solutions. And yes, there are a lot of opportunities, continued opportunities, so we would like to also keep working on the recurring revenues as well.

Now Okamura-san from Okasan Securities.

Two questions. First, about enterprise competitive environment. Solutions were doing good in the second quarter but since July, NTT Docomo, we consolidate -- we organized their businesses, and going forward, I wonder if that could have an impact on your Enterprise solutions business?

I don't think that we are disadvantaged in terms of competition so we are in a good momentum and we hope to show intangible results.

The second question about the Z Holdings. From a parent company's perspective, Z Holdings media top line is a challenge, so they are trying to save costs that could have a negative impact on growth. So EBITDA that they are committed to for the next fiscal year, from parent company's perspective, do you think that they should meet the commitment no matter what? Or you don't think that Z has to reduce investment just to hit the committed numbers?

For commerce, they depended too much on royalty point or shopping point and they needed to find other areas to expect growth rather than a point. For next year, the numbers, they were committed for a long time so I'm sure they are sticking to that. But going forward, they should not overstretch so we hope that they will grow appropriately in line with their business performance.

That's all for Q&A session. Thank you very much. Now I would like to close the investor briefing on earnings results for the 6 months ended in September 30, 2022. [Statements in English on this transcript were spoken by an interpreter present on the live call.]