SoftBank Corp. (9434) Earnings Call Transcript & Summary

Thank you very much for waiting. We would like to begin the investor briefing of SoftBank Corporation Earnings Results for the 3 months ended June 30, 2023. We would like to introduce today's attendees. SoftBank Corporation Board Director, Executive Vice President and CFO, Fujihara; Finance and Accounting division, Vice President Naito; Strategic Finance Division, Vice President Akiyama. Today's briefing will be broadcast via the Internet. Now CFO Fujihara will give an overview of SoftBank's consolidated financial results.

Hello, everyone. Thank you so much for your participation. We've just completed our earnings results presentation. So I would like to explain in details. I am CFO, Fujihara. This is the executive summary of earnings results, revenue and profit increased, making steady progress towards full year forecast. I will explain in details after this. I would like to touch upon the figures. Year-on-year, we made good progress and both revenue and profits increased. Progress rates for operating income and net income toward full year forecast, both exceeded 30%. I would like to talk about revenue shown by segment. Overall, JPY 67.7 billion, positive year-on-year. Progress toward full year forecast is 23.8%. We are progressing steadily. This time, we changed some segment names. And we consolidated the names in Japanese and English. So the details of segments and PayPay consolidation contributed and distribution contributed significantly. I would like to talk about in detail each segment. And now I want to talk about adjusted EBITDA. As for consumer, minus JPY 13 billion. However, I will talk about the impact of mobile price reductions. And due to the impact of mobile price reduction, especially in noncommunication -- non-telecommunications business, surpassing the impact of mobile service price reductions and the progress rate is 27.4%. I will talk about operating income later here is about operating income. Overall, JPY 5 billion, up 2.1% up year-on-year against the EBITDA JPY 6.9 billion for consumer minus and non-telecommunications area covered. And the progress towards full year forecast is 31.6%. Please refer to our full year forecast. And the right side shows by segment as for Consumer, we increased in profit and enterprise distribution, media enjoyed two -- double-digit growth and financial, even though you might see the negative figure has expanded, but assuming the PayPay has been consolidated from FY '22 Q1, and we have achieved actual increase in profit. And this is about the Consumer segment. I would like to break down by business and due to the impact of mobile service price reductions we covered by other areas and especially sales of goods and others, the sales of device, JPY 10.3 billion up and 8.5% increase. So this has increased due to price increase as well and the unique price increase. And we increased the device unit price. So this Q1 had a positive impact. And as for electricity, revenue decreased due to a decrease in electricity trading. As for broadband, revenue increased from -- so we will adjust -- revenue increased this term, and we expect to continue the growth like this. And most importantly, mobile area, there is an impact of negative JPY 16 billion for mobile service price reduction and the subscriber increase in others has positive JPY 10.2 billion, which shows minus JPY 5.8 billion overall. And next is about Consumer segment, mobile revenue trend. First, left side shows mobile revenue quarterly trends, and we have customer acquisition measures included. And the right side shows mobile revenue year-on-year and a quarter minus -- Q3 last year [ 11.7 ] minus and Q4 minus [ 9.5 ], and this Q1, minus [ 5.8 ]. So this is narrowing down. Miyakawa just mentioned in the first -- the previous presentation, and we are actually seeing the clear exit to this tunnel. About segment income. Profit decreased due to mobile service price reductions. I would like to touch upon in details. First, sales of goods and others against JPY 10.3 billion sales, and we have minus JPY 3.7 billion due to decrease in sales promotions and units shipped. As for electricity, mainly procurement costs increased this is attributed to the profit decrease. But we have been handling this properly and next is sales commissions and sales promotion expenses and depreciation. So in the middle bottom shows the breakdown and they all contributed to the positive figures. And minus JPY 3.1 billion for customer acquisition cost, mainly -- this is mainly a deferred cost of the previous measures. So there is no major change on the measures. And next, Enterprise segment due to the positive performance in the Business Solutions and others, so it has contributed to a positive JPY 2.9 billion. The right side shows some expenses as well, but cost of goods services sold. As for Enterprise segment, September and March tend to have a larger profit. So we see this on track. And about Business Solutions, we focus on recurring revenue and which shows 78.1% and we would like to focus on growing this area. About Media and EC segment. Z Holdings has also reviewed in the presentation. So we have 1.9% up year-on-year. As for media, this quarter has positive 2.2%. And each quarter shows [indiscernible] 0.3%, up and so on as the parent company, I think media is recovering. And as for commerce, now we've tend to positive. So we are optimizing the performance and the right side shows segment income even though there is a onetime factor, but we have seen the positive outcome, and we would like to focus on further growth. And next is about financial segment. Revenue increased steadily. So assuming that we had consolidated PayPay last fiscal year, and we would have a positive result. So if we assume that we had PayPay and this would have been JPY 52.6 billion and the payment service and the others had positive impact, led this lending. And next is about Distribution segment. So this segment is doing really well. And especially ICT businesses for enterprise customers contributing greatly in both revenue and operating income shows a double-digit growth, which we are looking forward to further growth. And next, net income toward the full year forecast, net income showed good progress and overall 15.4% up and progress toward our full year forecast is 34.9%. Financial income and loss plus 6.3%, but absence of valuation gain recorded in fiscal year '22 and valuation gain recorded in fiscal year '23, which contributed to this positive here. And also, shares of profit, and it was -- as for Z Holdings improved due to increase in the Z Holdings equity interest in Webtoon and the SoftBank improved due to PayPay consolidation and others. Income taxes as for Z Holdings increased of operating income and the impact of Webtoon and SoftBank decreased due to tax effect associated with organizational restructuring and net income attributable to noncontrolling interests. And next to CapEx. Regarding the 5G coverage deployment has almost completed. So we -- as we announced that we would reduce JPY 70 billion even though it is a little bit slow, but JPY 330 billion, we will maintain this. Free cash flow compared to last year, down by JPY 35 billion half was due to tax. We increased CapEx last year and we started paying this year, but all in all, adjusted free cash flow should be generated as planned, and we keep focusing on that. Net interest-bearing debt and net leverage ratio. On the left-hand side, interest-bearing debt and net interest-bearing debt JPY 3.22 trillion, down by JPY 70 billion. On the right-hand side, the net leverage ratio. EBITDA went down slightly, so ratio went up to 2.6%. But for the full year, we should be able to return to last year's level. Status of assets and equity is on the next slide. Balance sheet-wise, this quarter is the timing to pay dividends. So total equity went down a little bit. But thanks to the good profit. So a ratio of total equity total assets increased by 0.2%. We mentioned earlier about our plan to issue bond type class shares. And we got an approval of shareholders to change articles of incorporation for this purpose. We want to issue JPY 120 billion, and we want to list in Tokyo, Japan, and there should be no dilution and the dividend is fixed and from accounting perspective, 100% total equity can be counted. But from a rating perspective, 50% can be accounted as capital. And again, we want to list in TSE prime market. This is the first kind in Japan. And we want to use the proceeds for investing in generative AI, next-generation social infrastructure and renewable energies while we want to also strengthen financial base. After the amendment of articles of incorporation, we are allowed to issue 5x of this kind of instrument. So we'll see how it goes. Let me touch upon some KPIs. First, operating data in terms of telecom, mobile subscriber almost reached to 30 million and 1 million increase year-on-year. In the midterm business plan, we have mentioned 1 million. So minimum, we want to hit 1 million level. So again, we want to achieve the same level as last year. When it comes to churn rate, which is relatively high, but it also see some improvement in terms of churn rate. And net additions by the quarter, we are growing the number of smartphones in a steady manner. And also, we are looking at a steady growth in main subscribers. Again, acquisitions are going well. And mobile service revenue is going well, thanks to good acquisitions. For ARPU, I'm sure you're interested in ARPU a lot compared to last year, ARPU went down by JPY 190. If you take a look at the chart, bottom right, in the first quarter last year, down by JPY 270. And by the quarter, you are looking at improvement. For the full year, JPY 170 reduction is forecasted. Maybe we can go further. Please note that from the year before to last year, JPY 80 increase, but this year compared to last year, JPY 20 increase due to discount, but from a business perspective, we are looking at a steady improvement in terms of ARPU. Broadband and electricity. For broadband. We are looking at the steady growth of cumulative subscribers, which contributes to growth in revenue. Electricity in November last year, we got rid of the upper limit, and we controlled acquisition. And in June, we decided to increase the price. And we started acquisition activities in full scale. And media and EC, this -- you can refer to these announcements, but nonetheless, EC, including advertisement, we saw a little reduction year-on-year. And PayPay, 20% increase year-on-year in terms of user numbers. And we are looking at accelerated acquisition of users and number of payments up by [ 36.5% ], even higher growth than the user acquisition. So that means that more and more people use PayPay as their payment choice. In GMV, PayPay stand-alone, 42.2% increase year-on-year, even bigger than the year before. PayPay's consolidated numbers, revenue increased by 40% and EBIT has been improving. And as you can see, it turned positive. Going forward, they may need to spend for sales promotion, but we are glad to announce that now PayPay becomes positive in terms of EBITDA. SoftBank payment service, GMV increased by 20% year-on-year. As Miyakawa mentioned earlier, non-telecom growth supported this growth. Our Beyond Carrier Strategy works in the area of SB Payment Service, for example. Both revenue and operating income increased in SB Payment Service, and we are looking at a double-digit growth. Last but not the least, ESG, as we announced, we were selected as constituent of DJSI World for the first time. We are glad to be selected, and it's really encouraging. So we will keep focusing on ESG when running the business. So that's all for my presentation. Thank you very much. And the floor is open for your questions. And I apologize there was a time lag when we turn the slides in my presentation. I appreciate your patience. Thank you.

[Operator Instructions] We will take first question. Masuno from Nomura Securities.

This is Masuno from Nomura Securities. Two questions. One is about minus [ 1.5 ] decrease, I think it's a really small one. And ARPU of [ 4.9 ] and the main subscribers average is plus [ 2.7 ]. It's about JPY 10.2 billion is also, is there any factors that contributed to the revenues -- increased revenues other than ARPU. So there must be something good other than ARPU, I assume. And so [ UQ ] Mobile from June 20 [ giga ] for -- at JPY 2,980, I think it's a really good plan. And Y!mobile and QMobile used to be the same price for the past some years, and I believe that you should incorporate good things. So that's my question, the first question.

Thank you for your question. As you pointed out, it's not a big amount, but there is onetime factor. As for mobile revenue, ARPU and the number of contracts, I think that was a tailwind for us. And towards the next fiscal year's positive turn around, it's not a big impact towards the next fiscal year. But as with UQ, yes, we have been striving like together. So I think your understanding is very much appreciated.

My second question about Super chip, the investment of JPY 20 billion. And also you would get a grant from the government, but JPY 20 billion is the final investment or this is the first phase? And how long you're thinking about for this investment.

So this is going to be booked this term, and this autumn operation will be starting. So that time, it's going to be booked. So, yes, it is certain that it's going to be booked in this fiscal year. And there is a lot of big capacity. So it's not that we are going to do at once, and we need to nurture this moving forward. So we need to identify the right timing. And so apart from the free cash flow, that's why we also decided to do the class shares initiative as well. So we will also keep you updated as we progress. So this certain capacity, so what's the volume of [ rack ]. So I think it's [ 100 ] or so need to be confirmed.

Next question is from Tsuruo, Citi Group Securities.

I have 2 questions. First, enterprise business. ChatGPT sales, I wonder if you have any sales plan goal or anything you can share in terms of sales team scale et cetera.

The number here, we expect upside and we have not taken into our exact plan. So we don't depend too much on ChatGPT for the time being, in terms of sales force, we start with 10 people for R&D. And when it comes to developing applications for our enterprise business, then we would need definitely more people for developing applications. [ Miyakawa ] mentioned before [ 1,000 ] engineers or so. So that's the total engineer numbered eventually, not from the start.

SoftBank Vision Fund invests in a lot of AI areas. I wonder if you have an opportunity to get support from those portfolio companies.

Of course, we explore opportunity to collaborate with those Vision Fund portfolio companies, but we want to develop made in Japan, generative AI. So I don't think we heavily expect support from portfolio companies of Vision Fund this time.

Second question, share buyback. At the beginning of the fiscal year, we announced the plan, but you have not executed share buyback yet. So as much as you can share with us when -- how much you plan to do share buyback.

I think we can share a bit now -- or because of the insider information from May to June, we could not disclose in detail -- but as timing comes, we will make sure that we make appropriate communication with you.

And next, SMBC Nikko Securities. Kikuchi.

This is Kikuchi. First question, it's about the acquisition cost, contract cost. First quarter compared to the last fiscal year or -- and compared to the fiscal year, what's the situation this fiscal year? And I remember that the acquisition cost increased, and you mentioned that you would be spending the same level as last fiscal year, are you planning to spend the same amount or same level as last year means that I'm concerned about the next fiscal year as well. So this first quarter? And how would that impact the second half of this year as well as the next fiscal year. And what kind of control you are handling right now for the first quarter is almost the same as last fiscal year.

So as I mentioned earlier when we have a bigger demand, then this fiscal year would be almost the same as the last fiscal year level. And for the next fiscal year, we would like to avoid leaving some burden on in the next fiscal year. But we are doing steadily against the full year forecast. And the second question about ARPU, which is a very critical KPI for you, SoftBank as in their earnings results presentation, Mr. Miyakawa said that next year would be regarding the sales revenue, yes, we would turnaround. So that's what we can say. But regarding ARPU, we still have -- it was still a drag. So first, we need to make revenue positive and I hope you understand in that way. About ARPU, I think brand mixing is contributing to this ARPU and the brand mix needs to be improved like the volume of contracts as graph shows. So as you mentioned that it's doing well. So it -- because you are acquiring Y!mobile, as for SoftBank main brand, I wonder if you can say that overall is doing well. The new acquisition means, as you said, Y!mobile is very strong, that we are acquiring most on Y!mobile compared to 2 years ago, migration from SoftBank to Y!mobile, that volume has decreased greatly. And Y!mobile users, we provide offer as a trial so that we have taken that kind of initiative. So I think that migration has been improved. So we can say that SoftBank brand has been stable, but we need to work even harder how we can make SoftBank brand shining more and that's also the further challenges for us. But including our business plans moving forward, Y!mobile is just an entrance to towards smartphone use. So we would like to acquire those new users. And then we would like to maintain those users and lead to upgrade and migration to our SoftBank brand. So we would like to reinforce this sort of measures as well.

Next question is Moriyuki from SBI Securities.

My name is Moriyuki from SBI Securities. I have a question about ARPU actually. In terms of sales of terminals, consumer slight decline, but the new acquisition increased. And it's important to get a new acquisition. But for the purpose of increasing ARPU, you want to have customers migrate from 4G to 5G. So what kind of marketing plan that you have or marketing spend you plan for migration of customers from 4G to 5G.

Usually, that theory should apply. But in the face of price reduction, there is not so much difference between 4G and 5G in terms of pricing. And effectively, 5G price went down. From 4G to 5G, sometimes price might be lower in 5G compared to 4G. But I don't think it has a negative impact on churn. For the long-term, we need to make sure that we have differentiation between different brands, including quality of network, we need to enhance SoftBank main brand going forward. I think, you're right, but, well, if you're in 5G, naturally, you will use more data, yes, that's true. So encouraging usage with 5G terminals is something that we need to look at. So, we need to be creative to launch programs so that customers feel comfortable and find it easy to purchase 5G. But again, phone prices are going up. So we can't really stretch too far. So we will see how customers react.

Second question about PayPay. In terms of EBITDA, PayPay now has turned around. But in terms of KPI priority, what is the highest priority in terms of KPI. Positive EBITDA, does that make any difference in terms of your view on KPI?

I don't think it has made a big difference. KPI is still in the growing phase. And the GMV Is one of the most important KPI, which remains the same. And EBITDA, we didn't really insist on making the positive in the first quarter. And PayPay did a great job in doing business more efficiently. So again, positive EBITDA is not necessarily the highest priority and also credit card, NISA and digital payment of salaries, there are a lot of opportunities for PayPay to grow further. So for the full year, so how much we show that PayPay can make a profit in the whole year, not necessarily quarter-by-quarter, I think you can be more comfortable and comfortable. But now PayPay is positioned to make profit. It is profitable. Yes, I think so, unless they do something crazy.

We would like to take next question from Daiwa Securities, Ohashi.

This is Ohashi from Daiwa Securities. I have 1 question. And I would like to talk about the purpose of bond type cash shares. So without giving any trouble to the existing shareholders, you -- I would like to also have some major features. So SoftBank follows IFRS. So I wonder why you challenge this bond type class shares. I would like to hear more clarify the purpose of this.

In the accounting term, yes, we can go with that. And in Japan, this type can be sold. So we wanted to challenge this type. So we would like to see how it goes in the first year but in the accounting form. So we can -- it's not just the drinks. So my -- so you can take 100% on Class A, but I wonder investors when those for investors, they consider and then look you also focus on listing. And then I think the cost might [ soar ]. So in terms of listing, since we are selling in Japan, I think it will have a positive impact. So in domestic market, this scale, I think -- I hope this would be feasible in this market in this scale. And the dividend, we need to make sure what will be the dividend. And the component of the sales also needs to be well considered. So as we actually issue this and then how much this will be our advantage. So we would like to pay attention to this thoroughly.

[Operator Instructions] So Ando, Daiwa Securities.

I have just 1 question, just to make sure I understood correctly, ARPU should be stabilized next year. And revenue wise, this year was the bottom, and we can expect churn around next year, especially revenue. It's definitely related to ARPU and subscribers and you need expenses to acquire customers. But next year, I wonder if you don't want to spend much more to acquire users. I understand that. In history, you have been focusing on acquiring customers.

Yes, acquisition is very important, lifetime value times. Our users is very important. And for our growth, yes, definitely, we keep focusing on acquiring customers. We announced our midterm business plan, and we show that our consumer business should reach the goal and the revenue comes back and the profit comes back. That's something that we want to show you in terms of consumer business direction. So again, from that perspective, we should not give up our effort in acquiring customers.

Then -- so revenue, you can expect a slight increase. And even though you spend more, you can still make money. Is that what you're saying? Or, because sales are going well. And even though you don't spend much money still, you are confident making your business profitable?

When it comes to next year maybe we might focus more on growth than this year. In 2025, we want to bring it back to the level before the price reduction. So that's a corporate commitment and consumer needs to contribute a lot to our goal. And also, we want to make sure that we keep increasing our profit every quarter. So I'd like to show the result next year with you.

[Operator Instructions] We would like to conclude the Q&A session. Thank you so much for your questions. We would like to conclude the investor briefing of SoftBank Corporation earnings results for the 3 months ended June 30, 2023. Please refer to our website for today's briefing, which will be available on demand on our website later today. Again, thank you very much for taking time out of your busy schedule to participate in the investor briefing of SoftBank Corporation earnings results for the 3 months ended June 30, 2023. [Statements in English on this transcript were spoken by an interpreter present on the live call.]