SoftBank Corp. (9434) Earnings Call Transcript & Summary

Thank you very much for waiting We would like to begin the SoftBank Corporation investor briefing for the earnings results for the 3 months ended June 30, 2024. We would like to introduce today's attendees SoftBank Corporation, Board Director, Executive Vice President and CFO, Fujihara. Strategic Finance Division Vice President, Head Akiyama Finance and Accounting Division, Vice President, Head Onoguci. Corporate Planning Division Vice President, Sasaki. Today's briefing will be broadcast via the Internet. Now CFO, Fujihara will give an overview of SoftBank's consolidated financial results.

[Interpreted] I am Hua Fujihara, CFO. Thank you so much for taking time out of your busy schedule to attend the briefing. We've just ended earnings results presentation. So I would like to give you the overview of the financial results, and we would like to take questions. So here is the executive summary. As you can see, revenues and profits both increased in all segments, we are making steady progress towards full year forecast to the mobile revenue consistently shows good performance with continued year-on-year growth. The third financial business turned profitable as PayPay consolidated achieved a positive operating income for the first time on a quarterly basis. Let me touch upon in details by the figure. So revenue and profit increased. So good progress towards the full year forecast. As you can see year-on-year progress. Operating income is 33.8%, and net income, 32.5% with 2-digit growth. So the progress rate for operating income and net income, as you can see, towards full year focus, both exceeded 30%. So revenue and operating income hit record highs for the first quarter. So we would like to explain on the retrospective adjustments for fiscal year '23 results. We transferred SoftBank Technology Corporation and its subsidiaries to enterprise segment. So from this fiscal year, SoftBank -- sorry, SB Technology Corporation is the enterprise business segment. So there are 2 details adjustments you can see at the bottom. I will explain later. Now the revenue the revenues increased in all segments. So all the segments achieved 3 digits. And in the full year forecast, JPY 6.2 trillion. So against this, the progress rate is 24.8%. So we started with a good short 7.4% up. This is the record high for the first quarter. Now I will explain adjusted EBITDA. Profit increased in all segments. JPY 29.7 billion, up by 6.9%. And the progress toward the full year forecast is 27.4%. We are growing steadily. Now I would like to explain the operating income. So as you can see, profits increased in all segments. As shown in the figure, Financial segment turned profitable and media and EC contributed greatly. Forecast, full year forecast, we hit a record high for the first quarter. We are going to touch up on the media and EC. So this revenue includes onetime factors of JPY 32.7 billion. Excluding even this, we still achieved 2-digit growth. Now I will touch upon by segment. First, consumer segment: the actual result is JPY 681.7 billion, up JPY 13.1 billion by 2.0%. The mobile revenue continue to increase year-on-year. And sales of goods and others improved by JPY 8.4 billion. As for the mobile revenue trend is shown here by quarter. So this is the actual business. The right one shows the year-on-year compared to the previous fiscal year, we have been growing steadily. And after COVID and last June, in the first quarter, one-time factor was included. We expect that we would start [indiscernible] and we are going to start with a positive figure, and we are expecting to increase this. As for consumer income and increased by JPY 8.4 billion, up 5.6%. So progress towards full year forecast of JPY 530 billion is 29.5%, which is better than the last fiscal year. And I want to touch upon a few points here. The left side, service revenue, mobile increased by JPY 7.6 billion, which contributed largely in electricity, minus JPY 3.9 billion, the revenue decreased. However, when you look at the cost of goods and it's [indiscernible] has contributed positively. And the middle sales of goods and others and the gross profit margin has increased. So these three are the major contribution to the earnings. So as for the cost, sales commissions and the sales promotion expenses. The cost has increased slightly. However, the depreciation and the others are almost flattish. So therefore, as a total profit increased. Next, the Enterprise segment. So overall, JPY 20.5 billion up, so which achieved a double-digit increase. And for the Solution -- Business Solutions, JPY 20.5 billion increase, and we have a new consolidation. WeWork and Cubic Telecom. So with new consolidations. So excluding the impact of new consolidations, so the organically growth was up by 13.6%. On the right side shows the segment income among the expenses, cost of goods service sold mainly impact of new consolidations. But as a whole, it's the positive of lending. As for progress rate, 24.4%, which is a little slower than the last fiscal year, but the full year forecast of JPY 170 billion should be on we are able to -- we should be able to achieve that. We are on track. So as for the Business Solutions and the other revenues, you can see the nonrecurring revenue and the recurring avenue. So as I explained, WeWork Japan and Cubic Telecom, our under recurring revenue, which contributes to this increase. And SoftBank Technologies. And this figure is also included this fiscal year and the last fiscal year as well. So therefore, this also has contributed. And IoT products and others were transferred from mobile fixed line. So it was accounted and the solutions, but we made a retrospective adjustment, as you can see at the right bottom. Next is Media and EC segment. So this was already announced by LINE/Yahoo. So segment revenue, up 6.0% and increased by JPY 23.1 billion, social media up by 4.5%. Segment income, onetime factors, JPY 32.7 billion. LINE/Yahoo focused and there was a big event this year. So which impact -- which has the impact on this increase of JPY 32.7 billion. So as a whole, JPY 41.9 billion increase, up by 74.5%. So 20% increase by JPY 9.1 billion. So next is financial segment. So sales expanded steadily and income turned profitable. And the segment income started from minus JPY 1.8 billion to plus JPY 5.7 billion. So the year-on-year up by JPY 7.5 billion, which was largely contributed by PayPay consolidation. And next, distribution segment and others. Revenue grew largely which also includes internal transactions of SoftBank, there is -- there are some products which was impacted by the weak yen. As for others, R&D and pre-investment, this -- the first quarter is still slow, but we are going to expand R&D and pre-investment area. Next is net income. Overall, JPY 15.8 billion up, and we achieved a double-digit growth by 10.8%. And the progress rate is also exceeded 30%. And the financial income loss, as you can see for a SoftBank of operating income, it does not -- the financial income and loss, which does not have a big impact. However, LINE/Yahoo Group due to the absence of gain on the change in equity interest and Webtoon recorded in the previous year. So it has a larger impact than SoftBank. So next is CapEx. Consumer Enterprise. The full year forecast was JPY 330 billion. Progress toward full year forecast for CapEx is 20.2%. Last fiscal year was 18%. So we are on track. And the other increase due to investments in AI computing platform. So in the earnings results presentation, there was a question raised. So let me add, the generative AI investment, excluding subsidiaries, JPY 13billion or so. And the last year, we also counted like JPY 10 billion or so. Part of it will be counted next year. So the investment related to generative AI would not -- would be below JPY 100 billion. So we are considering right now to bring it ahead, including the investment for Sakai data center related. So CEO, Miyakawa, commented related to that, but we are thinking about JPY 10 billion or so.

[Interpreted] Next, let me talk about the cash flow for mid long-term strategic investment to understand that more we introduced a concept called the primary free cash flow. Such assets ongoing cash-generating ability such as for debt repayment and dividends in existing businesses. It was JPY 60 billion last year and the year before, generated. So that's the number we are looking at in handling primary free cash flow. And rent to base stations and dividends paid, then the free cash flow after dividend is on the far right. And again, for mid long term, our investment, it may take time for recoup, and we need to invest in research and development initially. So it's more like advanced investment. For that, we want to utilize long-term investments, including capital financing and government subsidies. JPY 120 billion that was decided was backed by about the same amount as the bond type class share. Now we are planning a second bond type class shares, again, for a long-term strategic investment. Now about the primary free cash flow, first quarter, JPY 96.6 billion or increased JPY 48.3 billion year-on-year, mainly due to improvement of working capital. And also, we see improvement with regards to the payment. And we are looking at JPY 43.9 billion investment in AI computing platform, net interest-bearing debt and net leverage ratio JPY 3.34 trillion, excluding PayPay and in Yahoo, compared to last year, increased by JPY 110 billion, mainly due to WeWork Japan. WeWork Japan had about 48 offices and the future rent needs to be recognized as the liabilities. It was about JPY 110 billion. So that was the net interest-bearing debt up. And leverage ratio, even though EBITDA went up, but our net leverage ratio remained at the same level. In other words, debt up by WeWork depends succession was absorbed or almost offset by EBITDA. Balance sheet. As you can see, the assets up by JPY 254.9 billion, mainly due to write-off used assets, securities in banking business, property, plant and equipment. And this quarter is the quarter for paying a dividend. On top of that, WeWork Japan. So that's how it moved in terms of net interest-bearing debt. Now talking about KPIs, on telecom side, Mobile subscribers grew steadily with the rise in overall market liquidity. Smartphone churn rate increased by 0.8% year-on-year. Smartphone increased by 4.5% and the churn partly due to SIM-only subscription or churn, we saw increase of the churn rate by 0.1% year-on-year. Our main subscriber net adds went down, but excluding the impact of the 3G shutdown, we saw a positive number and smartphone users continue to add new users, [ ARPU, 3730 or 10-yen-up ] year-on-year on a quarterly basis, almost flat. Why mobile SoftBank brand both introduced new price plans last fall and that contributed to higher unit price. But while mobile's percentage is getting bigger and the trend should continue. As a company, we are looking at JPY 0 for the full year. And telecom electricity or broadband and electricity. For broadband, ADSL was closed, then the number of broadband overall went down slightly, but users of SmartOne Hikari or fiber to the home continue to grow. And electricity customer acquisition activity should resume later this year, but we are currently suffering from some negative numbers. Media and e-commerce. LINE made an Arling announcement recently. But for the first quarter, our EC transaction value increased by JPY 46 billion. So it's been improving since last year. On the right-hand side, advertisement increased by JPY 7.6 billion, and last year was decreased by JPY 5 billion. For PayPay, which is growing well. The number of users increased by 6 million or 10%. Number of payments, which is on the right-hand side went up by 19.6%. In fact, number of payment outpaces user growth. In other words, there is a rise in payments per person of GMV of the PayPay stand-alone increased by 21%. Number of payment increased by 19%, like I mentioned earlier, and the GMV also increased by 21%. And with the PayPay card included from consolidated prospective PayPay GMV increased by 19.4%. Again, PayPay revenue increased by 19.2% or equivalent level of GND. EBITDA for the fourth quarter posted JPY 9.3 billion, and SoftBank Payment Service, GMV has been growing and non-telecom portion is especially growing like beyond the carrier, SoftBank. Last but not the least, ESG topics. First, Board composition. To enhance dependency and diversity, we added two independent external directors. External directors now comprise a majority of 54.5% of the Board, strengthening its independence, especially from the perspective of parent subsidiary both listed. And NetZero, we announced the progress around that in June. So that's all for my presentation. Thank you for your kind attention.

[Interpreted] Now we will open it up to a Q&A session. We would like to take questions from the floor first and followed by Zoom. Those who would like to ask questions by Zoom, please access the Zoom. Previously announced the access procedure. And once you have accessed zoom, please turn off your live webcast to prevent Howling. We would like to take questions from as many people as possible. So please limit your questions to two. Please raise your hands first from the floor.

[Interpreted] I'm Tokunaga from Daiwa Securities. I have two questions. One is about free cash flow. So why announced to should be able to acquire the dividends from the holdings. This is going to be used for the long-term purpose. And Page 19 it shows that the investment related to AI. So is this going to be -- if not bring it forward, it's going to be like JPY 100 billion or so. So thank you for your questions.

[Interpreted] The first question is about primary free cash flow. Regarding why -- and PayPay, we treat them as external as since our listing will be treating like that. So the portion from LINE/Yahoo will be under free cash flow -- so as for growth investment and this are not connected directly. So of course, we might use it for the other way around. But as regarding the CapEx. So acceptance and inspections and cash are [indiscernible]. So it will be under the JPY 100.7 billion. So JPY 120 billion, that is actually under the JPY 120 billion range.

[Interpreted] The second question is about net additions. So in this quarter, smartphone additions is a little bit slow. So under this competitive environment, so what do you -- do you think that the decrease in the advertisement and things would be does this decrease trend do you think will continue?

[Interpreted] So due to the 3G discontinuation and this has the impact to March or so. So now we see a little bit of recovery in June and July. Of course, we need to pay attention to the competitive environment situation. But full year, we are going to achieve the full year focused. So as full, so we are taking a good balance. As for the acquisition cost is about JPY 1.8 billion, but it is going to turn positive. So it's the expenses are not going to drag the entire growth. So as for the deferred payment. So we are going to see the cost effectiveness. And so if we can -- we would like to secure some room to be able to put more for advertisement as well.

[Interpreted ]Any other question from the avenue. If not, we'd like to take questions from Zoom participants. [Operator Instructions] First, Kikuchi-san from SMBC Nikko Securities. Please unmute and speak.

[Interpreted] I have two questions. First LINE/Yahoo, there was a onetime effect, and you made a good profit, good income in Media EC. For the second quarter in [ ORS ], how are you going to utilize the income that was much better than probably expected, thanks to the onetime factor?

[Interpreted] Thank you for the first question, if I may answer Media EC, we saw a strong result. And operating income is a very -- we have a bullish view on operating income. But LINE/Yahoo has a limited contribution of our net income. So we need to look at the net income as well. We are still in the first quarter and it's early to say how it goes the next quarter and onwards. But again, I think we are beginning to have more options with some optimism in that business segment.

[Interpreted] Thank you. And I understand that you are committed to net income, which is great. And Series 2 of the bond type class share, you plan to issue and last year, you mentioned that you would consider the next round after the call, but it's been less than 12 months you mentioned -- since you mentioned. So the dividend at the end of the fiscal year can be payable thanks to that instrument, which is good. But I don't know if it's sustainable to keep depending on that instrument because compared to last year, the volume or scale is bigger in the Series 2. So going forward, how are you going to control such a financial instrument?

[Interpreted] First of all, the dividend -- Three things. First, delivering our consolidated net income should be something that we can really deliver. And also, resource for dividend as a stand-alone is also needed, which we are comfortable with at the moment. And we don't depend on bond type last year. It is -- it should be included in the surplus capital. So the first, we want to pay dividend using the source of surplus earning, and also, we don't need to depend on our corporate bond type of class shares. So again, issuance of our corporate bond type class share is not directly linked to payability of the dividend. We want to issue that class share for the future investment.

[Interpreted] I think that's the best way of financing for long and midterm growth. Thank you. So I understand that you don't have a policy going forward. But when we change the articles of incorporation; we have not decided the timing, but we just decided to issue 5x, and we changed amended articles of corporations. So we have a tool, and I believe that this should contribute to our future growth. And we will make a best judgment at the right time. But the first series of class share was very welcomed in the market, and we have a high demand from the investment companies. So we want to take advantage of such instrument as needed.

[Interpreted] Next, Masuno-san from Nomura Securities.

[Interpreted] I have two questions. The first question is the mobile business, the actual business performance. So the net additions, so now the considering the discontinuation of 3G service. So I believe that SoftBank should be able to acquire more. So is there any impact of the Rakuten initiative? And ARPU increased by JPY 10. And this ARPU also includes the additional value as well, so --- What do you see that this current situation? And the sales promotions, net additions and ARPU and how do we evaluate the result of these 3 things?

[Interpreted] So as for net additions compared to the past, you may see, it's down a bit. However, the same contract and the Rakuten impact, well, of course, there is some competition. I wouldn't say there is no impact. However, in terms of ARPU and so there is -- I wouldn't say that there will be any big damage to the -- our business as a whole. As CEO Miyakawa has mentioned earlier. So -- as for additional value, so telecommunications value or additional values, we consider them as one thing. So I think we have a good flow in [indiscernible]. So there is a little bit more positive result due to the additional services or values, but we would like to accumulate and the result of the business and so we need to also have the certain growth of the number of users. So I see that we are getting stronger, stronger in terms of the business foundation. So regarding new investment, so JPY 43.9 billion of the advanced investment, we would like to see more a breakdown of this. So as for I believe that you have applied to METI for JPY 156 billion of investments. So JPY 150 billion is for CapEx, which is reflected to the [indiscernible] so JPY 42 billion is from the subsidiaries -- sorry, subsidies. As for CapEx, you can say that it should have a negative impact. But as for the net JPY 100.8 billion. And the -- so there is some figure that we are going to add at the time of receiving the subsidy. Therefore, you may see that now the bigger figure for the advanced investment. However, as for the net JPY 13 billion. And so as a total, it is equivalent to the total amount of the bond type class shares issued amount.

[Interpreted] Just to confirm, so as you mentioned, JPY 100 billion is something that you would say as the maximum of the advanced investment -- so among amount JPY 120 billion, so below JPY 100 billion is something that we have accounted as the advanced investment -- so the actual figure of JPY 43.9 billion, can you give me the breakdown?

[Interpreted] JPY 18 billion is for a 100 and a majority of this is for what we have decided for advanced investment for AI related -- and deliveries of those GPU, there was an announcement that shipping has been delayed and only the major customers are able to receive the shipment.

[Interpreted] So is it going to affect your business?

[Interpreted] We expect that we should be able to get it to deliver as early as possible.

[Interpreted] Next, Tsuruo-san from Citigroup Securities.

[Interpreted] Our first question, similar to Mason's question. Smartphone and net adds, what your view, 170,000, which is similar to KDDI and you are aiming at JPY 1.5 million for the full year. So the progress is low, I think. So in the range of JPY 1 million to JPY 1.5 million for the full year, how many is more likely?

[Interpreted] I can't say exact number, but again, we were impacted by the shutdown of 3G and the impact has been felt until mid-May. And from mid-May to June/July, we have seen improvement. So next quarter compared to last quarter should be better. So 1 million for the full year is not enough. That's the rough number that I can tell you. So when you get a second question, whether you want to have a net adds or ARPU or net income, of course, you want to strike a best balance. But when the market condition changes, which would be the highest priority when you run the business? Well, one of them it should not be only one of them. For now, for example, smartphones and net adds, you may find it very challenging or tough. But the SoftBank brand and Mobile brand, like Mikasa mentioned earlier, currently, the ratio is about 50-50, which is better than before, and that should contribute to ARPU. So at the end of the day, revenue should be most important from a prospective of running business, but smartphone should be the entry point for all brands and all businesses that we have. So smartphone net AFS remaining important. So we need to, again, track balances, depending and we should prioritize one higher than others depending on the market conditions.

[Operator instructions] We would like to conclude the Q&A session. We would like to end the investor briefing for the earnings results for SoftBank Corporation for the 3 months ended June 30, 2024. 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 schedule to participate in SoftBank Corporation's investor briefing for the 3 months ended June 30, 2024.