SoftBank Corp. (9434) Earnings Call Transcript & Summary

Thank you very much for waiting. We would like to begin the SoftBank Corporation Investor Briefing for earnings results for the 9 months ended December 31, 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; Management Planning division, Deputy Director, Vice President, Sasaki. Today's presentation 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 attending today. I am Fujihara, CFO. So we've just completed the earnings results presentation by CEO. And we would like to also take questions afterwards. Here is the highlight of this quarter. Revenue and profits increased strong progress towards full year forecasts. We upwardly revised full-year forecasts. And our major business is mobile, and mobile revenue achieved year-on-year turnaround, expect revenue increase from fiscal year 2023 full year. Now as for PayPay, achieved positive EBITDA for 3 consecutive quarters. I would like to touch upon in details one by one. Here, you can see the figure for the results for Q1 to Q3 and especially the progress rate of Q3. Operating income, 93.8% and net income 96.8%. We exceeded full year forecast. Now I will break down. Here is the revenue. As for revenue, JPY 166.1 billion, up by 3.8%. So as for the progress rate, full year forecast against 75.2%. Especially nontelecom business is leading this increase. As for consumer, electricity revenue decreased while mobile revenue is turning to a recovery trend. I will elaborate on this later. Next is adjusted EBITDA, JPY 46 billion, up by 3.6%. Progress towards full year forecast, 83.4% has been achieved, which is very much steady. And especially covering the impact of mobile service price reductions through growth in nontelecom business. Here is the operating income. The left graph shows excluding PayPay remeasurement gain. So last year was JPY 687.2 billion. And this fiscal year quarter, JPY 731.9 billion, which is up by JPY 44.8 billion by 6.5%. And the progress rate is 93.8%. Here, compared to year-on-year consumer is minus JPY 8.2 billion. However, full year forecast, we are expecting to achieve the target Media and EC. The progress right toward full year forecast is 92.9%, which is leading the entire operating income. Now I would like to introduce by segment. First, Consumer segment revenue. Entire revenue year-on-year slightly down by JPY 5.9 billion, mainly impacted by electricity. Sales of goods and others plus JPY 47.3 billion, up by 11%. The last second quarter, there was the increase in the units sales price of mobile device, so which is leading the increase of the revenue. And in the third quarter last year, the sales was very aggressive. So year-on-year, plus JPY 35.5 billion year-on-year in the quarter basis. As for electricity, revenue decreased due to decrease in electricity trading. Broadband is going steadily. Then revenue increase from subscriber increase. To focus on is the mobile. The Q1 to Q3, minus JPY 3.8 billion. Looking back to the previous fiscal year was minus JPY 56.6 billion, which was pretty big. And now the delta has been really big in terms of increase. The breakdown of these main factors is that mobile service price reductions, we were expecting like JPY 50 billion minus now which is below that for 9 months, we estimate like minus JPY 37 billion, which is covered by subscriber increase and others. And I want -- I would like to talk about the decrease of JPY 3.8 billion. So here, you can see by quarter. So due to the actual revenue increase is shown on the left side and the year-on-year comparison is on the right side, in terms of mobile revenue. So year-on-year, 4.9%. So entirely against JPY 3.8 billion, 9 months to accumulate is JPY 1.4 billion. So even with a cumulative number, it should achieve the target. So the fourth quarter will increase, and we are confident in the increase in revenue. That's why we made it 1 year ahead of the schedule. Here as for segment income, minus JPY 8.2 billion for 9 months. Sales of goods and others is plus JPY 47.3 billion. Next to it, the cost of goods sold is a little bit bigger than that. So the gross profit shows minus JPY 6.6 billion. Even though sales is up; however, the sales promotion has been focused. Therefore, as a total, the gross profit is lower. Now electricity, the service sales is -- the cost of services has recovered. The sales has dropped of electricity. However, we have made some efforts. So therefore, the gross profit has been positive in a positive way. And also sales commissions and sales promotion expenses. The major one is that depreciation decreased and acquisition-related costs increased with deferred expenses in the past years. Others, a little change, but as a total, minus 3.6%. So the total JPY 8.2 billion. The progress rate is 90%, which we believe is very steady. Now Enterprise segment, the sales is JPY 25.5 billion, up by 4.6%, especially solutions, JPY 27 billion so -- which is leading the entire segment revenue. Segment income is JPY 16.3 billion, up by 15%. The onetime factors was -- there was onetime factors before. So it shows plus slightly. So I think we are on a steady progress. Against the full year forecast, progress rate is 81.8%. Next. Here is the solution of the breakdown of the solution, especially recurring revenue in Business Solutions showed continuous growth, especially security and cloud area led the revenue. And now Media and EC segment, already LY presentation was made. So as for the segment entirely, 2.6% up and as for income, JPY 36.6 billion, up by 28.8%. There was a onetime factor last year and this year. And especially for commerce area, there was cost optimization, which worked really well. And the media and strategic focused on concentration and selection worked really well. And Financial segment, left side is the revenue and JPY 83.3 billion by 95.2%. Last year, it was only 3 months result was included. So if it was included, JPY 140 billion. So income is shown on the right side, starting with the JPY 2.4 billion last year. And so the minus of this year and PayPay card. And so last year, PayPay was also included, therefore, JPY 1.4 billion plus. And last fiscal year, Q1 and Q2, there was a PayPay amortization, including this minus JPY 3.5 billion is the landing figure this quarter. And if we assume that 9 months fully activated by PayPay, and we assume that year-on-year was plus JPY 8.3 billion. Now Distribution segment and others, you can see that both revenue and income increased. Next, I would like to talk about net income. Same as operating income. We want to start from the figure of last fiscal year. And entirely year-on-year, JPY 93.3 billion, up by 29.8%, and excluding PayPay remeasurement gain and operating income increased and LINE, Yahoo! and profit losses for affiliates were included and showed positive and PayPay was excluded here. And as for LY, last year's loss absence showed positive and this time, it shows great positive figure. And income tax would be also going up, but consolidation of LINE and Yahoo!, increase in LINE, Yahoo!'s net income has been included. So considering the noncontrolling interest, here is the progress rate of 96.8% towards the full year forecast. As for CapEx, we were planning to reduce 20% of CapEx. For that, on an actual basis, Enterprise full year forecast of CapEx for Consumer and Enterprise toward the full year forecast is 66.4%. We believe that we are on track. Next is free cash flow. We are steadily progressing. We were targeting JPY 580 billion and right now, JPY 443.9 billion. So we would like to also utilize the bond type class shares to be applied to invest to generative AI. Next page is talking about net interest-bearing debt and net leverage ratio. On the left-hand side, over JPY 3 trillion was net interest-bearing debt, down by JPY 140 billion. In terms of EBITDA, net leverage ratio is shown on the right-hand screen or 2.4x, which is same level as last year. Our policy is 2.5 or lower, so we are on track. Status of assets and equity. Total assets was about -- excuse me, total assets, JPY 1.5 trillion. Total liabilities, JPY 1.1 trillion. We issued JPY 120 billion of bond type class shares. And also, we did share buyback at JPY 58 billion. So that's the state of assets and equity. And moving on to KPIs. First, operating data of telecom. Mobile subscribers grew steadily and churn rate for main subscribers up 0.9% year-on-year, reflecting increase in market liquidity. We anticipated this level. So again, we are on track. By the quarters. On the right-hand side, main subscribers net additions, we see a huge decline due to a decline in Enterprise tablets and 3G service discontinuation. But for Consumer side, we are in good shape. Smartphone net additions are steadily increasing, which is a huge contribution to our business overall. Now ARPU. JPY 3,740 or JPY 100 decline year-on-year. For the last 3 quarters, we are looking at about flat. On the right-hand side, you see Y-o-Y on a quarterly basis, improved from 140 to 100 minus in -- from second quarter to third quarter. And the last time we announced the financial results, we anticipated JPY [ 170 ], and we revised down to JPY 130, which remain the same. But I think we are looking at better position than previously anticipated. We hope that maybe breakeven as early as next year. Broadband, we are building up user base and electricity. We have been gradually expanding areas, but we are still conservative in terms of sales activities. Media and EC. By the quarters, e-commerce transaction value. Fourth quarter last year, since then, we have been improving. We had a lot of campaign activities planned for quarter 4, so we can anticipate improvement. Likewise, since fourth quarter last year, we have been seeing improvement. So I believe that this segment is contributing to the overall business performance. PayPay user base increased by JPY 7.4 million or 13.8%, up. Number of payments up by 25.8%. So they are using more than just the number of users increased. PayPay's GMV increased by 29.4%. And unit price has been increasing per payment transaction. They are doing a PayPay card as well. So in terms of PayPay consolidated, including PayPay card, they saw increase by 23.3%. So not only QR-based payment, PayPay card is also they want to focus on in terms of their growth. From the prospect of PayPay consolidated, revenue wise up by 27.6%. They need to increase top line more and CEO Miyakawa has high expectation of PayPay's growth. EBITDA for the 3 consecutive quarters, they are looking at positive numbers. So it's highly likely that they can achieve full year positive in terms of EBITDA. SB Payment Service continued growth. GMV-wise, up by 19.7%. And the breakdown is shown on the right-hand side. Again, non-telecom revenue has been growing, reflecting our strategy of Beyond Carrier. Revenue increased by 7.7% and operating income increased to double digit, 10.3%. Now let me share with you some of the recent topics. First, investment in Cubic Telecom. We talked about this before in previous announcement of financial results. We are working on closing the deal, and we will meet with you accordingly. We are excited about Cubic Telecom because automobile manufacturers are looking at global markets as opposed to each and every local market. So global telecoms enable us to provide global solution and for the global markets, including some challenging markets. So we want to leverage this platform to grow further, and we want to also add value of this platform. So that's a great subject that we wanted to share with you today. And ESG, CEO, Miyakawa touched upon earlier in our financial results announcement and that's just a summary of all the disclosed information. Last but not the least, let me tell you that we revised the full year forecast upward for FY 2023. Net income is something that we keep focusing on and 10% of net income or JPY 42 billion is something that we forecast more than before. Revenue increase expected by JPY 60 billion. EBITDA, thanks to mobile business, we expect JPY 40 billion more than originally thought. Operating income, on top of growth of revenue, thanks to tax cuts. We think we can expect JPY 60 billion more than original thought. By the segment, JPY 20 billion more in Consumer, JPY 19 billion more in Media and EC. Those segments are showing the great results. That's why, we increased forecast by this number. So total, we increased forecast by JPY 60 billion for FY '23 full year. Thank you very much for your attention. And now we'd like to take your questions if you have. Thank you.

We will now open up to Q&A session. We will take questions first from the floor then from the Zoom. [Operator Instructions] First, Masuno-san from Nomura Securities.

First about Consumer segment. First, operating income was revised to JPY 20 billion. What is the breakdown of the factors and net additions, even though the Enterprise had minus impact, so 3G or tablet sunset, what was the impact of those? And the Q4, can we expect to increase?

So you are taking a number of initiatives on the sales promotion so you would continue to do the sales promotion in the Consumer area. As for Consumer, full year acquisition is doing well, but the impact -- positive impact factor was upside. Of course, new price plans tend to be positive. So in the beginning of the period, in terms of the contribution, which we were expecting, but we had not expected to be realized this well. So some additional valued services or the brands sales distribution. And we worked really hard on these areas as well, which led and which contributed to the positive outcome and the revenue itself also upwardly revised. So the consumer had a great contribution in top line. As for enterprise, it was the one factor -- onetime factor, so which we believe that you would not really have to worry about the continuation of the enterprise. So the acquisition of the fourth quarter -- so we have been steadily growing. So now we have more options. And so there is a change in the way of selling the devices as well. So we would like to keep working on different approaches on sales.

Another question is the target of the medium-term management plan. The final target, you said that you will be able to achieve it. So as of now, if you were to be able to achieve at this point, then what is your plan for the next fiscal year?

While our CEO mentioned that he is now focusing on the next medium-term plan.

So the next fiscal year or further medium term plan and looking ahead, are you -- what about the investment plan further? And what sort of tactics you have in mind?

So like generative AI or Cubic Telecom investment are the long-term investment. So we are seeing for the further future growth. And in the medium-term plan, we were to turn around and then further increase in both revenue and profit. So the next fiscal year, we would like to focus on the business growth for both bottom and top lines. So the details of the figure will be announced in May.

Next Kikuchi-san from SMBC Nikko Securities from Zoom.

I have one question. For next term, direction of Consumer in terms of revenue. In fact, twofolds of that question. First, ARPU has bottomed out, which is great, and it contributes to your upgrading forecast. And we thought that not only bottom out, but turn around was something that we expected going forward. Miyakawa mentioned previously, flat. And Fujihara sir also used the term flat or breakeven, if you will. So ARPU, you don't expect huge growth going forward. So mobile revenue should come from new acquisitions. Is my understanding correct? That's the first question. Second, on the expense side or cost side, depreciation of platinum band was contributing and maybe write-down of the depreciation cycle was almost over now, whereas acquisition cost due to price reduction, acquisition cost, how should we see acquisition costs going forward?

Again, we thought that the Consumer business would turn around. But I don't think Consumer business will be strongly turning around next year or onwards. Thank you very much.

Consumer. Again, ARPU is steadily improving. It's been negative for a long time. But still, we reached increased revenue. So once ARPU decline has bottomed out, then it should contribute more to revenue growth. So consumer has a good momentum, and we want to make sure they are on the track. And ARPU, we hope that we talk -- we can talk about positive numbers as opposed to negative numbers. So next year, I think we can find it easier to predict positive results. On cost side, yes, the biggest part of depreciation kicked in this year. But of course, we need to be embraced for inflation and other outside challenges. When it comes to acquisition cost, it's represented as registration cost, and it was peaked out several years ago. So I believe that acquisition cost-wise, now we are in improvement phase. Going forward, we will see how much or how less we will spend for acquisition. But CEO, Miyakawa said that this year would be the most challenging in terms of making sure hockey stick turnaround, but we are better than anticipated. So I think it's better or easier for us to predict future next year. Decrease of depreciation was one of the, I think, reasons behind the cost reduction, which offset more the price reduction negative impact.

So next year, do you have any plan for further cost reduction?

We don't have any major initiatives to reduce our cost down. We have been reducing costs down by about JPY 50 billion to absorb negative impact of price reduction. Direction-wise, we are on the same direction. Going forward, we will do a lot of things while watching how inflation goes and how payroll cost increases in general in Japan, so we will want to see how we can strike a balance to make sure that the consumer is a driver for our growth.

Next, Ando-san from Daiwa Securities.

Two questions from me. First is I think it was about 3G. The impact to the subscribers of 3G due to the [ sunset ]. And I think there is an impact of that. And how much it will be used this fiscal year? And then what will be the impact for the next fiscal year that...

So regarding the 3G, since the timing, due to the -- because there was an earthquake, so we are discussing to delay this complete sunset of 3G. So this cost has been already almost all and would be booked in the fourth quarter. So there will be a very small impact of the final sunset of 3G. As for Consumer, the impact of the 3G sunset, there is not much impact on the consumer side in the third quarter. And so we would like you to understand there is no major impact on the revenue. The second question is on the waterfall graph on the Slide 9. In the third quarter, Q1 to Q3 result. So at the time of Q2, I actually made a calculation by myself from the Q2 to Q3 and which I see, especially the sales promotion cost and as it's -- my calculation shows JPY 6.9 billion, which I think is rather big. What types of cost of that, it will be the expenses for December promotion or after the regulation change a SoftBank. The sales approach too drastically will reduce the price would be difficult. So about the cost, spending cost largely to acquire more customers. I think that kind of factor must have been changed.

What do you see about that?

Regarding the cost, half of it would be the impact of the sales promotion and we emphasized on the promotion. So due to the COVID, there has been a cumulative impact. So however -- so as for business, we were able to make decisions from the various options in the third quarter. As for sales of goods and others, I think the profitability would be better and it will be focused on the incentives. But entirely, it would not be any big loss. So there will be more and more options. As for the figure, we would like to announce you at the right timing.

Just to confirm, so you mentioned options. That means net additions. So the net additions you may have another way to spend cost?

Yes. So the entire target for revenue and profit, we will announce properly. It may -- so we would like to have as many options as possible. So from the -- compared to the beginning of the fiscal year, we have been able to overcome difficulties and we would like to keep this pace on.

Next question is from Tsuruo-san, Citigroup Securities.

First question is about short term. Second question, long term. First, about the net add 310,000 for smartphone. What's your outlook for the fourth quarter? KDDI announced the numbers are -- were up before the revision of business law and after business law -- new business law was enacted, the number went down. So I wonder SoftBank is seeing the same effect. And in the fourth quarter, what's likelihood or net loss due to 3G sunset?

For smartphone sales or sales in general, up in December and down in January. Yes, that happen to us as well. But quite recently, it's been recovering. So we want to be on that trend while I was struggling. With regards to impact by 3G sunset, I think it should be represented early next year. So in the fourth quarter, I don't expect impact from 3G [ sensors ]. 310,000 of net adds of smartphone, how many of them were joining year before the revision of the business law, not that big, not very big.

So last -- next year, any comment about how much impact we should anticipate from the 3G cancellation or 3G sunset?

We have been converting customers from 3G to new network. So I don't think a huge impact of 3G sunset to revenue. So I don't think there will be a big surprise after 3G sunset.

Next question is more about midterm. You mentioned that you revised upward the full year forecast, and I believe that free cash flow forecast should be up as well. So free cash flow, how are you going to allocate capital in prioritization, maybe CapEx, dividend, share buyback and others? How do you prioritize allocation of capital?

Yes. We want to accelerate growth a little bit more. So definitely, we want to make sure that we have positive free cash flow and investment for future growth is one options we would take. At the same time, we want to also improve our financial position as well. In any case, in May, we should be ready more -- ready for talking more about how we want to allocate capital. And for Gen AI, Miyakawa mentioned that he wants to invest in that area more. We need a long-term view for that kind of thing. So the -- as you know, issued corporate bond type shares, which we have not fully monetized yet. So we can think about that.

One extra question, sorry. ARPU is getting better and ROI in Consumer segment should be better. So CapEx in telecommunications, not only AI, but also telecommunications in general, are you going to increase?

We have not discussed about increasing CapEx in telecommunications overall. We are not ruling out, but we have not discussed seriously about that.

Is there anyone from the Zoom who would like to ask questions? [Operator Instructions] We would like to conclude the Q&A session. Thank you so much for your questions. We would like to conclude SoftBank Corporation Investor Briefing for the earnings results for the 9 months ended December 31, 2023. Please refer to our website for today's briefing, which will be available on demand on our website later today. Once again, thank you very much for taking time out of your busy schedules to participate in the SoftBank Corporation investor briefing for earnings results for the 9 months ended December 31, 2023. [Statements in English on this transcript were spoken by an interpreter present on the live call.]