SoftBank Corp. (9434) Earnings Call Transcript & Summary

Thank you very much. Ladies and gentlemen, we would like to start investor briefing on earnings results for the 9 months ended December 31, 2024. Presenters for today include Mr. Fujihara, Board Director, Executive Vice President, CFO; Mr. Akiyama, Vice President, Head of Strategic Finance Division; Mr. Onoguchi, Vice President, Head of Finance, Strategy Division; Mr. Sasaki, Vice President, Corporate Planning Division. This briefing is being broadcasted live on the Internet. First, Mr. Fujihara will explain the result of 9 months ended December 31, 2024.

Thank you very much for joining us today. After the presentation, we are going to take questions as much as possible. Executive summary. Revenues and profits increased in all segments, making good and steady progress towards the full year forecast upwardly revised in November. Mobile revenue consistently showed a good performance for the continued year-on-year growth. PayPay consolidated profit continues to expand, achieving sustained profitability. Consolidated banking and security service into PayPay to accelerate growth was announced. That was the executive summary. First, numbers. Revenue and profits increased steady progress towards full year forecast, revenue record high. Operating income up by 12.3%. Progress towards the full year forecast, revenue and -- sorry, operating income and net income exceeding 85%. And let me go to breakdown. Revenue increased in all segments, up by 6.6% year-on-year. Progress toward full year forecast is 75.8%, steady growth. By the segment, double-digit growth in distribution from growth in ICT products for enterprise as well as financial and enterprises. Adjusted EBITDA up by JPY 62.7 billion or 4.8%, progress toward the full year forecast 80%. All segments contributed to the great performance. Details will be explained later together with operating income section. Talking about operating income, it was up by JPY 89.9 billion year-on-year or 12.3%. Against the full year forecast, which is JPY 950 billion, progress is 86.5%, all segments, so increase. For Media and EC, increased by JPY 250 billion including one-time factor of JPY 198 billion. But excluding that, sorry -- onetime factor was JPY 28.6 billion, even excluding that, it showed a great performance. Consumer segment. Mobile revenue continued to increase year-on-year. Sales of goods and others also improved. Revenue increased JPY 60.1 billion or 2.8%. More in detail, sales of goods and others, the shipment decreased compared to last year, but we reduced the price reduction and also high-end products are selling well. So unit price increased a lot. As a result, we posted revenue growth. Electricity. Revenue decreased due to a decrease in subscribers. But on the other hand, broadband revenue increased due to increase in subscribers. For mobile, revenue increased mainly due to increase in subscribers and stabilized ARPU also contributed to a pretty good growth. As for mobile, by the quarter, it's excluding marketing and acquisition, customer acquisition initiatives for the 5 consecutive quarter, we have seen increase in revenue. Backed by the recovery of mobile revenue and improvement of sales and goods, profit increased JPY 17.7 billion year-on-year or 4.2% against the forecast of JPY 530 billion, progress so far is 83.1%. Gross profit from sales of good, like I said, increased and -- gross profit increased and electricity profit increased due to improved procurement cost despite decrease in sales. So service revenue for electricity went down by JPY 7.4 billion, but it contributed to increased revenue, thanks to improved procurement cost. Sales commission and sales promotion expenses increased due to stronger customer acquisition activities and sales promotions. Rather than price reduction, we increased the number of events and also some value level support programs. And we are in the phase of decreasing of depreciation, which contributed to JPY 15.9 billion. And demolition costs of the 3G network and more electricity bills and also performance-linked to remuneration for executives, those factors contributed to increase in expenses. Now Enterprise segment. Revenue on the left-hand side, increased JPY 63.7 billion or 10.4% year-on-year. As for Solution, JPY 65.6 billion increase, so almost of the solutions contribution led to revenue increase. And solution include Cubic Telecom, and excluding Cubic Telecom performance, we still saw double-digit increase. On the right-hand side segment income, it increased JPY 12.2 billion or 9.5% year-on-year, progress, 82.6% against the full year forecast. We are making steady progress toward the year-end forecast. Impact of new consolidations was included in expense and impact of new consolidations, which includes Cubic Telecom is going to bring us positive results in the future. Cost of goods and service sold was JPY 24.2 billion. Enterprise recurring revenue grew significantly with the effect of newly consolidated subsidiaries. Recurring revenue increased JPY 61.6 billion or 33.5% increase. Again, newly consolidated subsidiaries include WeWork Japan and Cubic Telecom. Media & EC. LINE Yahoo already made an earnings call. So I will just simply touch upon Median & EC segment here. For Commerce and Media, we saw an increase. As for income on the right-hand side, we saw some one-time factors, which is described in the chart, and commerce include ZOZO and reuse, which shows a strong performance, it contributed at JPY 12 billion, and media also made a contribution, but netted by other adjustments, we still saw income increase by JPY 54.5 billion or 33.3% progress to the forecast, 87.2%. Financial segment increased JPY 32.7 billion year-on-year or 19.2%, mainly driven by PayPay consolidation, which was around JPY 28 billion or 18.3% increase year-on-year. Segment income on the right-hand side shows PayPay's strong contribution of JPY 28 billion and more revenue and this cost was presented here. So all in all, everything goes well and income increased in the end by JPY 26 billion or progress to the full year forecast, 129.9%. We already achieved full year target. Distribution Segment and Others. Revenue was pretty good, increase of JPY 160 billion or 35.2%. Of that, JPY 40 billion was the one related to intercompany transaction. But excluding that, we saw strong performance. And income also grew. Others saw increase of JPY 9.1 billion year-on-year. Net income increased led by operating income increase outpacing the full year forecast. If you take a look at the note on the right-hand side, financial income or loss. WeWork Japan interest payments, devaluation losses was borne by SoftBank. And as for LINE Yahoo, valuation loss of put options on equity method affiliates was accounted for. When it comes to corporate tax, there was a huge impact last year for LINE Yahoo, but net-net, total, we saw increase of JPY 29.9 billion or 7.4%. Progress to the full year forecast was 85.6%. CapEx. Consumer and Enterprise CapEx are progressing in line with the initial plan. Progress is 65.5% against the full year forecast of JPY 330 billion. Others increased due to growth investment in AI computing platform. I will come back to that point later. 66.5% in the dot line is related to license fee for the stations using 4.9 gig band, JPY 4.8 billion over 16 years. Talking about the fee, JPY 76.8 billion, which includes interest payment. So JPY 66.5 billion in current value is accounted for. And the category-wise, it's now categorized as others. For the time being, it has a negative impact on capital investment, but here is how we are going to process financially. Primary free cash flow, JPY 509.9 billion, increased by JPY 97.0 billion year-on-year or 21.8%. Working capital worsened a little bit, but net-net, operating cash flow was JPY 15.8 billion. Investment cash flow improved dramatically. Decrease in CapEx payments in the past year, and the dividend from LINE Yahoo shares buyback. Due to those factors, investment cash flow improved dramatically, 11 -- excuse me, JPY 112.8 billion. Primary free cash flow and long-term growth investment is shown on the right-hand side, about investment in AI computing infrastructure, JPY 34 billion was accounted for at the end of the third quarter. Total investments so far, JPY 49 billion. JPY 121 billion was already decided by the management and JPY 121 billion after the investment, we will achieve the target. Last year, we issued JPY 120 billion of Bond-Type -- sorry, Bond-Type Class Shares, and proceed from Series 2 Bond-Type Class Shares are to be used for future strategic investments, including Sharp Sakai Plant. Once we hear from [ power ] company about the power electricity availability, we will sign a final deal. Things are going well. So pretty soon, I think we can really make this happen. As you can see at the very bottom, we made an estimate of a partnership with OpenAI early February. We have received a lot of questions, and we want to utilize AI in multimode and we want to build next-generation social infrastructure. For that strategy, this partnership with OpenAI plays a big role, and it has significance. Next, I want to talk about net interest-bearing debt. The left side shows the figure, 2.94% is the net interest-bearing debt this time and year-on-year, it's minus 0.11%. And we procured JPY 200 billion, and the WeWork interest. And then when you look at net leverage ratio, it's 2.3% compared to the previous year. So it has improved. We are now ready to invest for the future. And this shows newly acquired credit ratings from S&P and Fitch. And we have also received ratings standalone, which will be included in our business selections in the future. Now I will go through the balance sheet. Two points, one, the assets is that JPY 780 billion up, and that is due to the enhancement of financial business. The second is about shareholders' equity, and it was up JPY 268 billion. So this is for dividends. So therefore, this quarter tends to have the minus of shareholders' equity. But due to the issuance of Bond-Type Class Shares, the total is JPY 268.2 billion plus. And this is about the reorganization to strengthen financial business. So PayPay acquirers, PayPay Bank and securities subsidiaries and for PayPay Bank holds 75% and securities 75%, respectively. And as you can see on the left side, this is at the beginning of LINE consolidation. So there are many different brands existed, and it was a very complex capital structure. So over 4 years, now it has been streamed line and simplified capital relationship. Now I want to talk about operating data first about telecom. So JPY 1.07 million up and churn rate is 1.30%. And there are some customers who purchases SIM and the number of customers who does that are tend to be in the Y!mobile brand. And this is the net additions. So the third quarter is 0.17 million. So we see that it's been steadily. So looking at 1 million, and we should be able to achieve. We are on track. So March is the big season. So we would like to have a close attention to it. And as for main subscribers, net additions is 0.19 million, which is better than last quarter. Next, I want to touch upon ARPU is JPY 3,760 at Q3 and plus JPY 20 year-on-year and that is due to the increase in unit prices due to the introduction of new plants and the expansion of value-added services, even though there was the increase of Y!mobile composition ratio. So year-on-year, we say that it is remaining flat quarter-to-quarter, but we should be able to land as we expected. So this shows the conversion to SoftBank brand, which we see that it's going well. And this is our strength compared to other carriers. So we would like to also focus on this. Under the severe price reductions condition, we have tried different things and which bore fruits. So now I want to talk about broadband. And as you can see, it's JPY 0.23 million, up 3%. As for electricity, even though it is slightly declining, but towards Q4 so -- we would say that in Q4, we should be able to announce positive results, especially a full-scale customer acquisition resumed in Greater Tokyo region. So here shows Media & EC as you can see, and it is slightly up compared to FY '23 and FY '24. And most recently, the recent quarter is JPY 60 billion. So as for Media, from FY '23 to FY '24 from minus 0.5%, it gradually increased. And so as you can see, by quarter base, it is slightly up. Next, I want to touch upon PayPay. So the register the users is up 5.55 million and up 9% and number of payments up 23.2%. So with a great number of registered users, so the number of payments also increased. Now GMV compared to the number of payments, it is a bit higher. So the GMV is also higher including PayPay card, it's 23.4%. So we believe that it would exceed. And for PayPay consolidated revenue also positive and JPY 28.5 billion, and EBITDA is also positive. So now the SB Payment service is also going very well and JPY 1.3 trillion up and 22.6% plus. And about ESG topics, we received a grand prize and Nikkei SDGs and also selected as constituent of the ESG index for the third consecutive year and also PXP Corporation. So in the presentation by CEO, Miyakawa, he touched upon OpenAI and Crystal and there are a lot of questions around that. So let me comment on that. So in May, 2023, we announced the midterm and long-term EBIT management plan. And so we are already close to the target that we had planned and we are on the track, and there are a lot of choices in our businesses right now. And -- so centering on generative AI, and we have also invested in our future growth. So for the next fiscal year, each business would also see the increase in revenues. So therefore, we would like to make sure to put the right measures. And also, we would like to also pay attention to a high level of dividend and stable dividend, and we also like to achieve high income profit as well. Thank you very much for your attention. Now we would like to open it to Q&A. Thank you.

[Operator Instructions] And the first question from the floor.

Tokunaga from Daiwa Securities. I have 2 questions. First about investment in GenAI. In last year's fourth quarter, you mentioned that you kept investing in GenAI, and once it goes over breakeven, investment in GenAI would grow even further? So the investment that you have done so far would go over a breakeven point pretty soon and also maybe we should look at longer phase in terms of your investment for the future.

Now that initiative like target project was announced. We have been increasing investment in growth opportunities, and we are going to invest more in next year. But we have to spend some time for preparation like training and developing. So in the investment phase for AI development and also getting Sakai center prepared next year, maybe we might see some impact on our top line, but we still want to make sure that we have both income increase and more investment.

Should we expect more expenses in the future?

Beyond FY '26, which is going to be covered by next midyear plan. So expense of cost will be increased but we, I think, should we be able to start monetizing investment that we will have done by then.

Second question about your third quarter you made a steady growth and in line with the consensus. Is there any significant difference by the segments? For example, do you have still room for growth investment? I don't know, PayPay consumer, there are segments where you want to spend the money, but do you still have room for investment in particular segments?

Well, PayPay's growth was much better than expected. Against the number we announced. In November, the progress was 129% or so. So PayPay still keeps its momentum while delivering a lot of marketing activities, still, we -- they save cost, also they are showing a pretty good performance. But all segments saw increase in income. So they played their roles, respectively. Going forward next year and onwards, there are still challenges in different segments, whatever issues that we could address this year, we want to do as much as possible.

About the Sakai actually, do you incur cost once you sign a deal, sign an agreement?

Well, if in February, the confirmed availability of electricity. By the end of March, we should finalize and a sign a contract. But when it comes to depreciation, for example, it won't get started until next year. So I don't expect huge expenses from Sakai by the end of this fiscal year.

Now we would like to take questions from Zoom. Tsuruo San of Citigroup Securities.

I have 2 questions. One is about Slide 26. So up to this quarter, so the competition is severe this year, and the churn rate is higher and the net additions as big difference. So what do you see about the situation of this?

So ARPU is going well and -- than expected, and you're going to do more promotion and considering the higher net additions. So this figure also includes enterprise contract as well. So we believe that it should be able to achieve. We are not going to do any additional or excessive sales promotion, but of course, we have to see what will happen in March, which is the high season. However, we believe that we are in a good position to be able to achieve it. So we are handling pretty well under the control.

The second question. So about SB OpenAI the next fiscal year's PL, what do you see about that? So JPY 450 billion from SBG and then SBKK will be paying to OpenAI. So the ARM or SoftBank bank group, if SBKK are to provide -- offer and resource and what would be this like? And -- So looking at the resources allocated by SBKK. So how much do you think be spent from JPY 450 billion. So what is the plan mid- and long term?

In that area, we are still working on in detail. So I can only give you answer in a very limited manner. So of course, there will be a transaction between OpenAI and us, and there will be an opportunity for us to earn from the business. And also, we need to also allocate resources, and we need to make a solid plan for that. So we -- as SoftBank KK, we would like to also focus on our revenue and income. That's the basic thing, and we would like to make a decision properly. So the details around this should be able to be announced in May. So the future plan, we should be able to come some results from this, and we would like to establish a solid business where we can be convinced enough.

Next, Mr. Masuno from Nomura Securities.

Two questions. First, PayPay. Revenue wise, GMV grew and it looks like revenue was really good, but expenses did not increase a lot. It seems to be true. I mean next year and onwards, should I expect more expenses as well as more revenue. So can we expect not so much expenses next year for PayPay? Or should we expect a reasonable level of expenses next year? Do you share with us your view?

To be honest, this year is not too good, but I would just say both revenue-wise and expenses-wise, we saw an increase. But going forward, not only PayPay, but also banking and securities, we need to have them grow. In that sense, PayPay may spend some amount of money. But at the same time, they have more revenue opportunities. So we expect a lot from PayPay in terms of revenue next year.

Next question about investment in AI. For Sakai plant, if it's running -- started running in '25, in FY '27 or '26, you may have to incur some cost after plant gets running in FY '25. And 75% of OpenAI Japan will be gone as minority holding. So I wonder, if you send 1,000 people to be SB OpenAI Japan, can you sustain?

About your Sakai's question, in order to start using Sakai factory, as operational base, we need to make some preparation. And depreciation will take away some time around FY '26. But some part of depreciation needs to be accounted for next year. Part of the place is still used by Sharp. And compared to FY '26, depreciation of FY '25 is very small, but still, we will start depreciating FY '25 for Sakai factory. And in terms of balance of -- against expenses, the human resources and expectations, we need to figure out how much will be the reasonable resources, human resources to be allocated for. But we believe that the work that needs to be done in SB OpenAI Japan requires that level of human resources. But we want to make sure that, that effort will not affect negatively next year's performance.

OpenAI joint venture, even though they make money, only 25% will go back to you, can you strike a balance?

I understand your point, but in the long-term plan, I keep mentioning that net income will be very important in LINE Yahoo, PayPay, we always keep in mind that the minority shareholding is a challenge. So economic interest is something that we have always in our mind.

Kikuchi San of SMBC Nikko Securities.

So this fiscal year, I think it's going well. And the next fiscal year's -- next fiscal year's positive factors and the segment, which segment do you think will be the best contribution to the business or performance as a whole. And since business is going well, you said that there will be -- there are more choices to make. What kind of choice are you thinking about? Even though you mentioned AI, are you talking about SB OpenAI Japan. Can you clarify what you mean by options?

So by segment in detail, we would like to announce in May. But the consumer, ARPU is now stable and the subscribers, so also stable. So we would like to expect positive revenue and also enterprise and 2-digit growth, and it's been like this for the past 7 years. So Enterprise business should grow like this. And with the one-time factor, and we would like to also expect the positive from end PayPay, outstanding growth is something that we should be focusing on. And even though there is more room to improve and to grow. So all for all segments, we would like to have more revenues and especially the generative AI. So -- if needed, we would like to challenge without any hesitation. So that is the option that -- we are in a position to be able to take actions when it's needed. So in a way that we have more options to make decisions, and for that we need to focus on our core business to have more option cards in our hand. So we are we have not identified particularly which segment it is.

So about cash flow the investment to the AI computing infrastructure this fiscal year and the investment can be secured for that this fiscal year. But for next fiscal year, is going to be covered by the Bond-Type Class Shares as well or what is the scale of investment amount to...

So for class -- Bond-Type Class Shares, I think it's very unique and that fits to us, and so we have been getting this kind of fund in advance. So the leverage ratio is now recovered to 2.3%. So we are now on a steady situation towards the end of the fiscal year. So -- in Shareholders' Meeting, we also were approved to provide 5x. So there will be more other options to get funding. So we would like to also see what will be the future return, and we would like to take some challenges that -- so when the price -- mobile price reductions started and -- so then we had to both be very defensive and offensive, but what we are now, we see that we are in a very good position that we can challenge on what we would like to do. So we would like to keep this commitment to the next fiscal year. So the investment on OpenAI -- so investment on SB OpenAI Japan is not a big scale. I don't think that it would be big, but we need to have further discussions. But as of now, I can say that it's not big.

[Operator Instructions] Now, we would like to conclude the session of Q&A. Thank you very much for joining investor briefing on earnings results for the 9 months ended December 31, 2024. This Investor Briefing will be available on our website. Once again, thank you very much for your time with us today, and appreciate your kind attendance.