Sony Group Corporation (6758) Earnings Call Transcript & Summary

We thank you very much for joining us today. We will now begin the Sony Group Corporation's First Quarter earnings announcement. I am Ishii of Corporate Communications. I will be [ ensuing ] this session. Today, fiscal 2026 first quarter consolidated results and consolidated forecast will be presented by Executive Officer and CFO, Lin Tao, followed by questions and answers. The English prerecorded presentation by Ms. Tao will be streamed through the English channel. We are planning for a total of 70 minutes. Ms. Tao, please.

Hello, everyone. Welcome to Sony Group earnings announcement. Before explaining our financial results, I would like to discuss the impact of the 2026 Kumamoto earthquake that occurred on July 28. First, I would like to express my heartfelt sympathy to those affected by the earthquake and to those daily lives have been disrupted. We have several semiconductor facilities located in Kumamoto prefecture and neighboring prefectures. And while all these facilities were affected by the earthquake, there were no casualties other than a few people who sustain minor injuries. The Kumamoto Technology Center of Sony Semiconductor Manufacturing Corporation, Inc. [ Kikuyo Town ], Kumamoto Prefecture, which is relatively close to the epicenter experienced shaking at seismic intensity of 5-plus and suspended production immediately after the earthquake. Restoration efforts to resume productions are currently underway. Our production sites in Nagasaki, Oita and Kagoshima had no significant damage to buildings or equipment and production has resumed. We will continue our efforts to fully restore production, and we'll update you on the progress and impact on our business at appropriate time as it is currently difficult to reasonably estimate the financial impact of this earthquake. The impact has not been incorporated into the full year results forecast we will show today. Now I will turn to the earnings presentation. Consolidated sales for the first quarter ended June 30, 2026, increased 8% compared to the same quarter of the previous fiscal year to JPY 2,837.8 billion, and consolidated operating income increased 40% to JPY 476.5 billion, both record highs for the first quarter. Net income increased 32% and to JPY 342.2 billion. The financial results by segment are shown in the Q1 FY '26 results by segment slide. We have increased our FY '26 sales forecast, 2% compared to our previous forecast to JPY 12.5 billion. Our operating income forecast 8% to JPY 1.72 trillion, and our net income forecast 4% to JPY 1,210 billion. We expect operating cash flow to be JPY 1.5 trillion, unchanged from the previous forecast. Regarding U.S. tariff refunds, we expect approximately JPY 80 billion of the tariffs which the Sony Group as a whole paid to be refunded during the current fiscal year, and we have allocated most of that amount to an upward revision of our consolidated operating income forecast. The FY '26 result forecast by segment is shown in the FY '26 results forecast by segment slide. In all other segments, Sony Financial Group, which was previously accounted for under the equity method, no longer meets the accounting standard of an equity affiliate since SFGI's Shareholders' Meeting last month. Consequently, we have concluded the recording of equity method income or loss in FY '26 Q1 and it is not included in our results forecast from the second quarter ending September 30, 2026. This is strictly a change in accounting treatment. And does not imply any change in the position of SFGI within the Sony Group, nor a change in our collaborative or capital relationship with SFGI. Now I will turn to an overview of each business. First is the G&NS segment. FY '26 Q1 sales were essentially flat year-on-year at JPY 937.1 billion. Operating income increased 37% year-on-year to JPY 202 billion, primarily due to the impact of U.S. tariff refunds, partially offset by an increase in costs, including investment for the next-generation platform and restructuring costs. We increased our sales forecast 3% from the previous forecast to JPY 4.540 trillion, primarily due to the impact of foreign exchange rates. We increased our operating income forecast 10% from the previous forecast to JPY 660 billion. primarily due to the impact of the U.S. tariff refunds and foreign exchange rates as well as additional cost improvements. The number of monthly active users across PlayStation platform [ in June ] increased 2% compared to last year to 125 million accounts, a record high for June. Although total play time during the quarter decreased 4% year-on-year, we think that user engagement continued to be solid because the same period of the previous fiscal year benefited from season updates to major titles and new hit titles. We expect further improvements in engagement metrics going forward because many major titles are scheduled to be released toward the end of calendar year. Regarding the impact of memory market conditions on PS5 hardware, we have secured the quantity of memory necessary to meet our projected sales volume for the current fiscal year. And there is no change to our plan for hardware profitability to remain similar to the previous fiscal year. We continue to aim for full growth of the installed base while closely monitoring PS5 hardware demand trends and the potential for securing additional memory. In the Studio business, live service titles such as latest installment in the MLB The Show series and held over 2 now in its third year since release, continued to contribute steadily to revenue. With the result of season 2 in June, Marathon has maintained a high user retention rate while also acquiring new users. As for titles on sale this fiscal year, Saros released in April, received higher claims with a Metacritic score of 88 and is steadily expanding its user base. In addition, going forward, we expect Marvel Tokon: Fighting Souls set for release in August, Marvel's Wolverine set for release in September and God of War Laufey set for release in February of next year to continue to drive performance in this segment. Next is Music settlement. FY '26, Q1 sales increased 21% year-on-year to JPY 562 billion, primarily due to the impact of foreign exchange rates as well as increased revenue from live events and higher streaming revenue in recorded music. Operating income increased 14% to JPY 105.9 billion, a record high for the first quarter. We increased our forecast for sales 2% from the previous forecast to JPY 2.19 trillion, and our forecast for operating income 5% to JPY 420 billion, primarily due to the impact of foreign exchange rates and the consolidation of recognition Music Group. Streaming revenue for the quarter on a U.S. dollar basis increased 10% year-on-year in recorded music and 8% in Music Publishing, reflecting the global success of the movie Michael, streams of songs by Michael Jackson, whose music catalog is co-owned by Sony Music Group increased significantly, reaching approximately 4x the level seen before the film's release. We think that the significant increase in streams of his songs by Gen Z indicates that Michael Jackson's music is attracting a new generation of young fans and will continue to be enjoyed for many years to come. As catalog listening continued to grow throughout the market, SMG is leveraging its global catalog management expertise to expand its reach into new markets and audience thereby continuously enhancing the value of its catalog. We believe that we can expect further value appreciation going forward due to new and greater licensing opportunities enabled by AI. In FY '26 Q1, Ella Langley's new album, Dandelion, reached the #1 on the U.S. billboard urban chart. And its lead single broke the all-time record for the longest run at #1 by a female artist on the Billboard single chart. This indicates that we are continuing to discover new hit artists and we plan to further enhance our business foundation by also continuing to focus on catalog. Next is the Pictures segment. FY '26 Q1 sales decreased 4% year-on-year to JPY 315.1 billion, primarily due to a decline in the numbers of series deliveries in television production, partially offset by higher revenues from [ Cantero ]. Operating income increased 33% to JPY 24.8 billion. primarily driven by a decrease in marketing costs related to theatrical releases. We increased our sales forecast 2% from the previous forecast to JPY 1.660 billion. Primarily due to the impact of foreign exchange rates and our operating income forecast 3% to JPY 150 billion. Spider-Man: Brand New Day, which opens in theaters around the world starting this weekend, is one of Sony Pictures Entertainment's most iconic and long-loved franchises, and we are confident it would be ahead. In June, SPE announced that it will further enhance its experiential entertainment through a strategic investment in CASM, which specializes in cutting-edge shared reality technology that bridges the virtual and physical worlds. Through this partnership, SPE aims to provide fans around the world with new immersive content experience, and expand the value of Sony Group's extensive portfolio of IP. Regarding Anime, which is one of the pillars supporting our creative entertainment vision. We are working with creators and partner companies to further grow our business across the Sony Group. Aniplex and Kadokawa through the Anime film distribution company, [ ANIMAX ], which they jointly established in March 2026, have begun distributing theatrical anime films since May. Going forward, they plan to distribute works made by Aniplex and works sourced from Kadokawa's novel and games. Aniplex and [indiscernible] are continuing to collaborate on the development and expansion of Anime IB, and they have decided to produce a theatrical film of the global popular hit anime Solo Leveling. Frontier continues to grow its subscribers beyond the more than 21 million it had at the end of March this year, and its results in the quarter improved year-on-year. Next is the ET&S segment. In FY '26, Q1 sales increased 2% year-on-year to JPY 543.9 billion, and operating income was essentially [indiscernible] at JPY 42.6 billion. There is no change to our FY '26 forecast. The imaging market this quarter remained stable in all regions except China. Where the market continued to experience negative growth compared to the previous year. Against this backdrop, strong sales of Alpha 7 Mark V, which won the grand price at the Camera Grand Prix 2026 and the Alpha 7R Mark VI launched in June helped raise average selling prices and expand our market share in the full-frame camera market, enabling the imaging business as a whole to maintain its sales on par with the same quarter of the previous fiscal year. In the display business, new true RBT Bravia models boosting the widest color gamut in the history of our consumer TVs were well received. The continued surge in memory prices remains a key business challenge for this segment this fiscal year. However, the business is doing everything it can to implement cost reduction measures in procurement and design and to adjust its pricing strategies, including foreign exchange management. We expect to maintain the profit level projected in the previous forecast for the segment as a whole. Last is the I&SS segment. FY '26 Q1 sales increased 26% year-on-year to JPY 512.7 billion. mainly due to higher average selling prices of mobile sensors as well as the impact of foreign exchange rates. Operating income increased approximately 2.3x to JPY 122.2 billion and reached a record high for the first quarter. We have increased our FY '26 sales forecast 2% to JPY 2.110 trillion and our operating income forecast 5% to JPY 420 billion from our previous forecast, mainly due to the impact of foreign exchange rates. While the smartphone market posted negative growth for the second consecutive quarter, high-end manufacturers, primarily our major customer, are expanding their unit sales and [ market ] share, in line with this trend. Although our mobile sensor unit sales only slightly increased year-on-year, sales grew significant year-on-year due to improved customer and product mix as well as the impact of foreign exchange rates. Looking ahead to the second half of the fiscal year, we anticipate that market conditions for memory will also affect shipment volumes of high-end phones. Therefore, we remain cautious in our full year forecast and expect revenue for mobile sensors as a whole to slightly decrease from the previous fiscal year. Regarding the strategic partnership with TSMC for the development and manufacturer of next-generation image sensor, announced in May. Detailed discussions are progressing smoothly with a view to signing definitive agreements to prepare for the establishment of the joint venture with TSMC we have incorporated approximately JPY 10 billion in additional costs for the current fiscal year into our full year forecast. Through our partnership with TSMC which possesses world-class semiconductor process technology. We aim to further enhance the technological competitiveness of future image sensors, including high-density and to firmly capture growing demand not only in mobile sensors, but also in areas such as physical AI, thereby further solidifying our #1 position in the image sensor market. To summarize, the G&NS music and I&SS segments posted record profits for the first quarter, and the Sony Group as a whole has continued to achieve robust profit growth. Even in an uncertain business environment, the profit-generating capacity of each business segment is steadily increasing. And we intend to continue our efforts to deliver solid results in the final fiscal year of the fifth midrange plan. Regarding the share repurchase program, the cumulative amount purchased through the end of June was approximately JPY 120 billion out of the facility we established in May, and we intend to continue to work towards strengthening shareholder returns. This concludes my remarks.

This was a presentation by Tao. From 4:25 p.m., we will take questions from the media. And from 4:50 p.m., we will take questions from investors and analysts. We are planning for approximately 20 minutes for each Q&A session.

[Operator Instructions] We are about to start the Q&A session for media. Thank you very much for waiting. Ladies and gentlemen, we would like to start the Q&A session. First, let me introduce those on stage to take your questions. Lin Tao, CFO, Corporate Executive Officer; Hirotoshi Korenaga, Senior Vice President in charge of Accounting; Naoya Horii, Senior Vice President in charge of Corporate Planning and Control. First, we will take questions from the media. [Operator Instructions] The first one person to ask question is [indiscernible] from NHK.

My name is [indiscernible] from NHK. I'm sure you're so busy to take care of the aftermath of Kumamoto earthquake. So let me ask the first question about the Kumamoto earthquake. I think the semiconductor facilities in Kumamoto, you announced that from next month onwards, you're going to resume the production. 10 years ago, when there was a Kumamoto earthquake, I think it took about 3 months to go back to the previous level of production. And now by the end of mid-August, you're going to resume -- go back to the previous level. And why could you shorten the time for restoration and BCP countermeasures.

Now but I understand this is the question about the impact of the earthquake. As has been announced in the press release. Starting on the 4th of August, Kumamoto Technology Centers will start resumption of the production gradually. And by mid-August, we are scheduled to go back to the pre-earthquake level. And other than that, Kumamoto, those production sites in Kyushu, Nagasaki, Oita and Kagoshima already, they have resumed the production. Compared to 10 years ago, simply put, the damage -- the level of damage so different this time. Of course, BCP and other matters, we learned lessons from the previous earthquake and we accumulated the expertise and knowledge how to quickly restore the operation. But simply put, this time around, the level of damage is so different from 10 years ago. The buildings and production facilities for improving the antiseismic strength that we have been doing this for the last 10 years. And also not only our in-house efforts, but our collaborations and cooperation with partner companies have helped us because we discussed with them on these matters. And let me add that for this restoration this time, we enjoy the cooperation from the employees and also our business partners. This contributed to the fact that we can resume the production quickly this time around. So I thank them very much.

Next question, please. Nikkei Yoshida, please.

Yoshida from Nikkei Newspaper. Yes. Two questions. First, following up on the previous question, impact to the semiconductor business. So last time, it took about 3 months. This time, it's expected to be relatively short time to resume to pre-earthquake level operation. But I don't think you have the full scope yet. And I don't think you have stated the monetary impact. Compared to the last time, the monetary impact would be less. Is that your outlook? So give us a qualitative response on that, please. Second, about the game business, PS5, so you're going to end the disks products. I think that you made a comprehensive decision on that. And there was some movement against that. And some of the consumer organizations have criticized you. Some have sued you. And so how did you come to that decision? And how do you respond to the criticism? And so was this a decision that was necessary for the next-generation game device? Or was it intended for enhancing the margin? So was that a sales decision?

Thank you for the question. So to address the first question about the semiconductor business impact of the earthquake, as I said earlier -- so we are checking various things, and it's difficult to estimate the overall impact, but we'll be resuming more quickly than before. And also the annual performance of semiconductor, we think that the impact will not have a major impact to the full year results for the semiconductors. So PS5 ending disk production, the second question. So on this point, so we announced that January 2028 onwards, we will no longer be manufacturing game disks. So 1.5 years ahead. So we made this announcement at this time. There are various reasons we made this decision. The biggest being that the digitalization of contents overall has been progressing. That's the big factor. It's not just for PlayStation, but for all kinds of content, digitalization is progressing. And so when we think about the future, and we put in a lot of thought and time and we cautiously considered this, and we came to this conclusion, and we're going to cautiously move this forward. And to this decision, we have received various opinions and people have strong views. And we understand that the community has put forth those views to us. Games are loved by many people. It's a form of entertainment that's loved by people, and it's connected to people's fond memories in many cases. And so we understand those emotions. We want to consider that. And in the future digital ecosystem, how do we engage the gamers is something that we would like to continue to explore. Thank you very much.

The next question, please. [indiscernible]

[indiscernible] speaking. I also have 2 questions. First, well, as was asked about the termination of disc production. At present, for example, are you seeing users and sales going down? Do you have any forecast? Are you saying that you're not in a position to make such forecast yet? So I want to know what you think the impact will be up until 2028. And about imaging, you have made a proposal to acquire Tamron. And is there anything that you can comment on at this point in time?

Thank you very much for your question. About your first question about PlayStation Disc. Well, in -- up until 2028, well, at this point in time, well, we are not seeing any impact on our business as of now. But going forward, the -- about the content sales, I think a large part is already digitized and therefore, as a result of the discontinuation of a disk, we don't see that there will be any negative impact on our business. However, as I already said, the users, the players have attachments, and we have to think about how to respond to those feedbacks. About the second question about Tamron's announcement. Well, about Tamron. As they have disclosed, we made a proposal to make Tamron a 100% subsidiary. Now the thinking behind this, first, Tamron -- for the shareholders of Tamron and also for our imaging business, we think that it is a proposed will lead to the optimum value creation. Our proposal is to enhance Tamron's corporate value. And at the same time, we can combine our strengths and leveraging these strengths, we can lead to this to the development of our imaging business. So this was the assumption in making this proposal. That's all. Thank you.

We will proceed to the next person. From Toyo Keizai, Yamashita-san, please.

Yamashita of Toyo Keizai. I have 2 questions. First is about the proposal to Tamron. Let's say that this -- if you acquire the precision lens manufacturer like Tamron. It seems that this shows a little bit of difference in the orientations of your past investment. So how do you position this investment? Second question about SSS. You talked about the setting up of the joint venture with TSMC and also the cost -- additional cost of JPY 10 billion. How are you going to use this JPY 10 billion? And when -- give me the time line, when is it going to be used?

Thank you for your question. First, about the Tamron's acquisition proposal. For Sony, places so much emphasis in creativity and technology to deliver [indiscernible]. That's our purpose. Therefore, on this creativity, in the past, we have acquired various entities concerning IPs, but for technology, the creativity of the creators have to be supported, and that is one of the pillars of our strategic investment. In that sense, this is a priority area of Sony's strategic investment. So we have maintained our consistency in our investment thesis. For the details of the proposal, I am not in the position to make a comment at this moment in time. And the next question about the TSMC joint ventures with the TSMC and its preparation cost and Horii will answer this.

Thank you for your question. This time around, JPY 10 billion was located or posted for the full year forecast. In starting up the production in the new site, this is going to be a cost to be incurred. And that's why we posted this. So this is the cost required for the production preparation in a general sense of the word. Well, we have not reached the definitive agreement stage but our discussion has been advancing smoothly. And from the second half of this year, we would like to see the specific preparation work to [indiscernible]. If we successfully conclude the agreement for the next failure onwards we would like to make investment with the current level or even more in order to make the preparation definite.

Time's running out. So the next person will be the last person test question. From Asahi Shimbun [indiscernible].

[indiscernible] from Asahi Shimbun. I want to also ask about the earthquake on clarification. So you said that the extent of the damage was smaller than the earthquake of 10 years ago. So in terms of the seismic intensity, Kikuyo Town's intensity compared to a decade ago was slightly less and damage was less. And also, I think that you have increased seismic resistance of the production facilities. I think that's my understanding. Is that correct?