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 6 months ended September 30, 2024. We would like to introduce today's attendees, SoftBank Corporation Board Director, Executive Vice President and CFO, Fujihara; Finance and Accounting Division Vice President and Head, Akiyama; Strategic Finance and Accounting Division Vice President, Onoguchi; Corporate Planning Division Vice President, Sasaki. Today's briefing will be broadcast over the Internet. Now, CFO, Fujihara, will give an overview of SoftBank's consolidated financial results.

I'm Fujihara. Thank you very much for taking the time out of your busy schedule to attend this briefing. We've just completed the presentation. Our result is very positive. We would like to touch upon the details. First, here is the executive summary. Revenues and profits increased in all segments, making good and steady progress towards full year forecasts. To that, we upwardly revised full year forecast. The reason for this upward revision is that mobile revenue consistently showed good performance with continued year-on-year growth. Also, PayPay, which we have been focusing on, consolidated achieved positive operating income for 2 consecutive quarters. I will explain details. Please refer to this. From revenues to net income, all increased, and steady progress towards full year forecast. Progress rate is also steady. Especially operating income, 13.9% year-on-year and JPY 71.5 billion year-on-year. First, revenue. Revenues increased in all segments, JPY 218.3 billion, up year-on-year by 7.4%. The progress rate is 50.8%. Especially distribution, enterprise, financial segments showed double-digit revenue growth. They are driving the entire growth. Next, adjusted EBITDA increased in all segments, up by 5.1%, JPY 45.8 billion, up year-on-year, and the progress rate is 55.7%. So as you can see, Media & EC, Financial and Enterprise, these 3 segments recorded profit increases and achieved 3-digit growth. Now I would like to talk about operating income. JPY 71.5 billion, up year-on-year by 13.9%. Progress rate is 65.1%. Profits increased also in all segments, especially Media & EC grew by 39.9%, JPY 43.5 billion, up year-on-year, which includes the onetime factors. Even though we exclude that, it is increased. Let me break down by segment. First, Consumer segment, JPY 47.1 billion, up by 3.4%, due to the mobile revenue continued to increase year-on-year as well as sales of goods and others improved. And speaking of sales of goods and others, and it's minus [ 3.4% ]. And the unit price. So last year, revenue increased significantly, mainly from increase in mobile device unit price. This is due to reduction in discounts, increase in sales of high-end devices and so on. Therefore, JPY 37.4 billion, up by 13.7%, which drove the growth of Consumer segment. And electricity revenue decreased due to decrease in subscribers. And for mobile, revenue increased mainly due to increase in subscribers and so on, and stabilized ARPU also contributed to this increase. Now about mobile revenue trend by quarter. So this includes the consumer acquisition measures. So we would like to show you, on the right side, this is the mobile revenue year-on-year. And as you can see, it is increasing every quarter for the past 4 quarters. We would like to maintain this trend. Now Consumer segment by profit. So JPY 12.5 billion, up by 4%. So progress toward full year forecast of JPY 530 billion is 60.8%. The breakdown of this, as you can see in the middle, sales of goods and others, JPY 37.4 billion, and cost of goods sold is minus JPY 23.3 billion, and expenses minus JPY 11.3 billion. And also, as for the cost, electricity is the main, and the cost of services is plus JPY 10.7 billion, which contributes to the incremental cost. So it also contributed to the profitability. As for the expenses, sales commission and sales promotion expenses, minus JPY 19.3 billion. As for the depreciation and disposal and others, JPY 8.9 billion plus, and others is minus JPY 12.1 billion, which includes onetime factor as well. And next, Enterprise segment. This segment, JPY 44.2 billion, up by 11%. So for JPY 44.2 billion, among which solutions contributed greatly. There are 2 new consolidations included, which are WeWork and Cubic Telecom. These 2 companies also, JPY 22.1 billion of the impact of new consolidations. And on the right side shows the income. So impact of new consolidations, as I mentioned, JPY 22.1 billion. Excluding this, exactly the same number. So the new consolidations are very even right now. So we would like to expect the further growth of these new consolidations. And others are like cost of goods/service sold and also the rental business of mobile. So the business has improved. So as you can see, this is making steady progress towards full year forecast. As for the Enterprise, we are focusing on recurring revenue and nonrecurring revenue as well. And especially recurring revenue, JPY 41.1 billion, up by 34.9%. As for Media & EC segment, I'd like to just briefly touch upon, JPY 35.6 billion, up by 4.6%. And Media and Commerce, as you can see, grew by 4%, 3%. So this also focused on the selection and focus. So therefore, the onetime factors include JPY 28.6 billion. And Commerce and Media both grew positively and strategic as well and due to the improvement of security measures. So there was some adjustment in others. Financial segment, the sales expanded steadily, JPY 20.4 billion, by 18.6%, which contributed greatly by PayPay. As you can see on the right side, segment income, the PayPay consolidated was JPY 14.5 billion, which contributed this income increment. And I would like to talk once again about a KPI. And next Distribution segment, which CEO, Miyakawa, elaborated on this, and JPY 131.4 billion, up by 43.9%, which includes JPY 36.6 billion of AI computing platform. So still, it has shown a great increase. So including the R&D upfront investment, JPY 13.1 billion in the second half, maybe double of this, even though it is a bit behind schedule. However, in the second half of the year, the R&D upfront investment will be bigger than that of first half. And next, net income increase led by operating income increase, outpacing the full year forecast. As for the financial income and loss, as for SoftBank, devaluation losses in fiscal year '24 for LINE Yahoo, valuation loss of put options on equity method affiliates and so on. And also the absence of gain on the change in equity interest in Webtoon recorded in fiscal year '23. And for income taxes, LINE Yahoo, absence of deferred tax impact from business restructuring in the prior year, while SoftBank had effect of deferred tax impact from business restructuring and so on. So as you can see, JPY 21.7 billion, increased by 7.2%. Next, about the CapEx. For Consumer and Enterprise, CapEx are progressing in line with the initial plan, which was JPY 330 billion, and progress toward full year forecast is 41.6%, which is very similar to the previous year progress rate. And others, you can see JPY 34.7 billion, which includes AI computing platform. I will explain details later. Next, free cash flow. Primary free cash flow increased by JPY 104.7 billion, by 41.8%. So we were forecasting like JPY 100 billion a year. So we can say that it is a steady progress. So previously, we were spending JPY 400 billion of CapEx and then was reduced down. And then this shows some positive result. As for LINE Yahoo, dividends from LINE Yahoo share buyback is also included here. And the long-term growth investment and primary free cash flow will be managed separately. And for long-term growth investment, JPY 48.7 billion, and adjusted free cash flow is JPY 306.5 billion. So as I mentioned in CapEx related to the investments in AI computing infrastructure, as we announced repeatedly that we would be investing in the Generative AI-related things. So here is the status. And FY '24, the first half CapEx, JPY 34 billion, and the payment JPY 47 billion. And we were actually -- we secured and procured the amount for this. So JPY 200 billion will be spent for the future investment. Net interest-bearing debt and net leverage ratio. Net interest-bearing debt remained at the same level, while year-on-year lease liability increased after succeeding rework, but EBITDA is going well. So looking at net leverage ratio, 2.4x, which has been improving since last year. Status of assets and equity. If you look at the third line, JPY 15 trillion of total assets, that's the book size. Somewhere in the middle, you see total equity, which is JPY 2.5 trillion. And net income increased even after dividend from surplus. Net interest-bearing debt, JPY 274 billion. It was increased due to PayPay's working capital and lease liability from WeWork Japan business succession. Talking about stocks, like CEO, Miyakawa, mentioned earlier in the financial result announcement, we executed a share split on October 1. As of end of September, the ratio of 40s and under shareholders increased from 27% to 34%. Younger shareholders, we have seen the increase of that ratio. Going forward, we want to increase the ratio of young shareholders. And we also issued Series 2 Bond-Type Class Shares for mid- to long-term strategic investment and the details are shown on the right-hand side of the slide. Now let me talk about KPIs. First, Telecom business. On the left-hand side, smartphone cumulative subscribers up by 4% to 1.2 million. On the right-hand side is churn rate, 1.19%, up by 0.17% year-on-year due to mainly by Y!mobile churn and a short period of customers' contract. And by the quarter, smartphone net adds. At this current pace, I think we are at a good rate towards 1 million a year ARPU, JPY 3,750 or JPY 10 up year-on-year. We are looking at a positive trend of ARPU, which is helping us to solidify the business. If you take a look at on the right-hand side full year, our forecast is 0. Looking at the trend, I think we are in good progress. So access charge at the end of the term is not reflected here. But as a whole, as a business, we are in a good shape. SoftBank brand and Y!mobile brand relation is shown here. Because of the price reduction 3 years ago, Y!mobile drew more customers from SoftBank brand customers. But since then, Pay-toku or large volume offering have been helping to turn the trend around. And although the number of Y!mobile customers is going well, but compared to last year, it's been down. However, because of the migration from Y!mobile brand to SoftBank Mobile, it helped to increase ARPU. Next, telecom and -- broadband and electricity. For broadband, we are looking at gradual growth, whereas electricity is gradually decreasing in terms of subscriber. But in electricity, since the beginning of November, in Greater Tokyo region, we started accelerating sales activities. Media & EC, if you take a look at the quarterly trend, in FY '23 Q1, we posted minus 70. But since then, we turned around and we posted 37.8 million as of EC transaction value and Media is also going well. We decided to consolidate those e-commerce and advertising business to improve efficiency and our decision and effort have been paying off. PayPay. Number of users hit 5.77 million or up by 9.6%. And number of payments actually increased by 22%. Payment count per user goes up. And GMV is a little bit better or bigger than this 22.1%. All in all, including card, GMV as payment business as a whole grew by 21.6% and top line growth is very substantial. Revenue went up by 17% to JPY 116 billion, and EBITDA grew significantly. So PayPay's profitability has been bigger and bigger every quarter. Payment service, SoftBank Payment Service, GMV continued double-digit growth, up by 21.8%, and mainly driven by non-telecom, which is very exciting. Those are the business KPIs. In terms of ESG, we deployed evacuation center system nationwide, which provides SoftBank's mobile service and free Wi-Fi in the event of a disaster. We also published integrated report 2024 and Sustainability Report 2024. Last but not the least, let me share with you our upgraded full year forecast. From revenue to net income, the slide shows how much we upgraded the full year forecast; revenue by JPY 150 billion; EBITDA, JPY 35 billion; operating income, JPY 50 billion; net income, JPY 10 billion. That's the increase of the forecast. By the segment. For consumer, it's been over 60%, but the forecast has remained the same at JPY 530 billion. Enterprise progress is over 50%. But again, full year forecast remains the same. Distribution, JPY 20 billion, progress to the forecast is going well. So Consumer, Enterprise, Distribution are doing well against the full year forecast. Media & EC, on the other hand, is going well, even including onetime event. We raised our forecast by JPY 20 billion. Financial business, thanks to PayPay's brisk business, we raised the forecast by JPY 17 billion. Other up by JPY 13 billion due to mitigating risk factors. All in all, we raised our full year forecast by JPY 50 billion. JPY 970 billion (sic) [ JPY 950 billion ] for next year is something that we need to hit motivated by the CEO. So that's all for the financial results. And we'd like to take your questions as much as possible. Thank you for your attention to the presentation anyway. Thank you.

We will now open it up to a Q&A session. First, we would like to take questions from the venue and then Zoom. [Operator Instructions].

Tokunaga from Daiwa Securities. I have 2 questions. One, so not only focusing on net additions. And I think that comment made us relieved. However, my concern is that you will be also focusing on ARPU that makes us relieved. But if you focus on ARPU, how are you going to grow in the next fiscal year or midterm plan? And the plan like Pay-toku, if that kind of plan improves, even though the ARPU increases, that revenue may drop. So what is your opinion on that?

Regarding net additions, it's not that we are not going to pursue net additions. But smartphone is something, it is the entry point for our entire revenues. We do not focus only on net additions. So regarding ARPU, of course, we will be focusing on ARPU, but mobile sales, and we would like to also keep focusing on mobile sales as well. So increasing mobile sales is, of course, important. For that, we need to focus on ARPU as well. So as the company and mobile revenue increment is something that we also focus on moving forward as well.

So in that case, in the next 2 or 3 fiscal years, what do you think about the trend of ARPU?

So I think there are some factors. So if the growth rate of net addition slows down, then it would also impact ARPU. So if the lower price brand, the users increase, then, of course, it would also impact.

My second question is about upward revision. So JPY 50 billion. Media & EC and Financial segments are the core, but it looks like LOI and others, when you -- can you explain about LOI and others? And also the mitigation of risk factors, you also mentioned about that. Can you elaborate on that?

Yes. So as I mentioned, PayPay and LINE Yahoo, JPY 35 billion. So the remaining is on the SoftBank side. Regarding the risk factors, of course, there are some factors of the valuation. And also, of course, if we could accelerate the generative AI-related businesses, we would like to accelerate as much as possible to mitigate other risks. So if something happens in one segment, it would also impact the other segments as well. So over the half year, so each segment has become solid. So therefore, we decided to revise upwardly this time.

Any other questions from the venue? If not, we would like to start taking questions from participants on Zoom. [Operator Instructions] The first, Kikuchi-san from SMBC Nikko Securities.

I have 2 questions. First, on the Enterprise business. You posted a good income year-on-year for the first half and also looking at the full year forecast. A new consolidation contributed to income just by half. But stand-alone, I'm sure that you are growing organically. I wonder if there is anything onetime impact included? If not, in the last half, can we expect the same level of income or profitability of Enterprise business?

Mainly growth of Solution business contributed to the brisk business performance. And mobile rental business, because of the used device market and market change, we saw a positive trend of mobile rental business that was included, but it was not something like a onetime impact.

So Solution is, I think, mainly a recurring business. So in the last half, maybe JPY 50 billion segment income can be expected, do you think?

Well, for full year, our guidance is JPY 170 billion. Against that, I think progress-wise, we are doing well. So if it's JPY 170 billion, in the last half, JPY 37-plus billion. And in the last half, you expect loss in income. But last year, a onetime impact was included. So compared to last year's last half, this year's last half may not see as good as last year's onetime effect.

And we listened to Miyakawa-san's presentation earlier, and Miyakawa-san mentioned that he would not focus too much on net adds by spending acquisition costs. But if you change, the market, the industry itself could change as well. If that's the truth, I think that will be big. In fact, DOCOMO, KDDI, until you think that you cannot bring customers from KDDI or NTT, they would not stop introducing competitive pricing offer. So I think a huge movement in the market. But I think that Fujihara-san is saying that you are not too much focusing on net adds. Who should we believe Fujihara-san or others?

I'm not different from Miyakawa-san's statement. Again, my message -- or Miyakawa's message was we would not focus too much on net adds. Of course, higher is better in terms of net adds, but we don't want to spend too much acquisition cost ineffectively, and we want to run the business in a healthy manner. The fact of the matter is costs are going up, and we are facing a cost pressure. So again, our finance team and Miyakawa-san are on the same page.

I think what we are doing -- what we have been doing is very excessive, like JPY 3 or JPY 1. And you're not going to do something too eccentric. If that's the case, net adds will be 0.5 million, but do you have a target of 1 million for the full year? Or you don't have to necessarily hit 1 million target a year. If you are committed to 1 million target a year, from our perspective, maybe it's too much. So again, my question is, do you change your pace of plan?

Well, again, we don't want to be unhealthy. And you just want to run the business in a healthy manner.

Next, Citigroup Securities, Tsuruo-san.

I have 2 questions. Again, I want to also ask about net additions. So initially, this fiscal year, there is a target of net additions of like 1 million, 1.5 million, and now it is closer to 1 million, which is a little lower than your initial target. What made this different? Is it due to the competition or pricing or any other factors? And so next fiscal year, you're targeting 1 million. Is it feasible?

So because the target is getting lower. So initially, when we announced the mid- and long-term business plan, the 1 million of net additions we announced. So that is what we were aiming for. And the last fiscal year, it exceeded, and that's why you feel that what we have achieved now seems lower, but around 1 million net addition is reasonable. So the next fiscal year onwards, it depends how it goes in terms of the circumstances. And we would like to target acquiring a certain volume. However, as the CEO mentioned that excessive is something that we would like to avoid. So the full year forecast is upwardly revised as you did so.

And let me confirm with your comment. So how did you consider the competition in the second half of the fiscal year?

So JPY 530 billion is within our achievable target. And due to the future competition, we believe that we have assumed that. And anyways, we would like to continue our momentum towards the next fiscal year as well.

Next, Masuno-san from Nomura Securities.

I have 2 questions. First, about the Consumer. Y!mobile price plan, competitiveness of the price plan. UQ Mobile's [ Komi-Komi ] plan will be launched next week. So compared to that, I don't think Y!mobile price plan is competitive enough. Like a 2 gig option was launched. And discount of electricity and PayPay card, everything less. Of course, the Y!mobile price plan looks cheaper, but it's not. So I wonder the price-sensitive users are the only target of that Y!mobile new price plan. UQ's plan, however, doesn't offer discount, but catalog offer, if you will, is reasonable enough. So again, Y!mobile price plan, I don't know if it's competitive enough, especially when next week Qmobile will launch new plan. And Miyakawa-san mentioned that the new price plan was the weapon against ahamo. So I wonder next week and onwards, do you think you sustain?

Of course, we need to keep watching how customers or users go. And LINEMO, we took actions with LINEMO as well. So we will see how things go in the market.

The second question, other segment. Aside from like adjustment factors, [ Plan D ], R&D expenses and GPU data center depreciation and LLM, which I think is included in R&D. So what are included in others and what are not included in others? For example, data center, which I believe is included in Telecom business. But once, for example, Sakai data center is built, would it be included not in the Telecom sector, but in other section. So what are included in other?

Well, R&D, Gen AI are main items in other. For example, depreciation of Gen AI infrastructure or AI call center expenses, they are included. So anything related to AI, HAPS are included in other.

Talking about the segment going forward, I think segment structure might change as we grow. But at the moment, it's more like research and development. But at some point, which segment leads or drives growth?

We will see. Maybe not as early as next year, but the year ahead, maybe we might consider a segment change or reshuffling segment. So we are looking at a lot of options at the moment in terms of which one should be included in which segment.

At the moment, data center is included?

Yes. For now, yes. Those data centers, not all of them go up and running at the same time. So we are looking at the timing of those assets operation.

[Operator Instructions] Citigroup Securities, Tsuruo-san.

I have 2 more questions. One is about next fiscal year's business forecast. Considering the result of this fiscal year or the progress of this fiscal year, I don't see any risk, but where you're focusing on, especially for the next fiscal year?

Well, considering the next fiscal year, so looking at this fiscal year, first half and the second half, and R&D and gen AI-related things, that will be enhanced even more, which will also include Sakai data center thing. So we would like to absorb all this and then establish a solid bottom. That is our focus, which we believe that is something that we should be focusing on towards the next fiscal year.

The second question, if possible, we would like to hear your answer. As for LINE Yahoo, so by the end of next fiscal year, they will be spending -- JPY 365 billion will be used for share buyback. And so what is your look of that?

Yes, I cannot give you a decisive answer for that. But this time, there is a special reason and factor for the prime market. So for LINE Yahoo, this is a very important matter and needs to be solved carefully. So therefore, at JPY 350 is something that they accepted. Of course, the higher share price is the better. And so A Holdings and LY and we would like to have a thorough discussion, and we would like to come to the decent outcome.

That concludes the Q&A session. Thank you very much for joining us for earnings results announcement for the 6 months ended September 30, 2024, investor briefing. This investor briefing will be distributed on demand on our corporate website. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]