SoftBank Corp. (9434) Earnings Call Transcript

Thank you very much for your patience. We will now begin SoftBank Corp's Investor Briefing for the first quarter of fiscal year ending March 31, 2027. I would like to introduce today's speakers, Senior Vice President and CFO, Akiyama; Head of Corporate Planning, Yuki; Head of FP&A Corporate Planning, Sasaki; head of Accounting and Finance, [ Onoguchi ]; General Manager, Strategic Finance and IR, Kawamura. Today's briefing is also being streamed live over the Internet. Now CFO Akiyama, will present an overview of SoftBank Corp.'s consolidated financial results.

Good evening, everyone. Thank you so much for joining us today. I would like to brief on our results, and we would like to take questions from you later on. First, there are 4 points as summary. Revenue and profit increased, building a strong momentum toward the full year forecast at the beginning of fiscal year, the first quarter and the second quarter were expected to go be under the target. However, as a result, first quarter, we landed on both revenue and profit increase. And we are now in a position to be able to exceed our full year forecast as well. The second is about cloud and AI. This business drove revenue growth in enterprise and enterprise operating income grew by 28%. The third as CEO, Miyakawa, presented earlier, we actively executed strategic growth investments under the financial disciplines and we would like to continue our strategic growth investments. The fourth, for our first time, we issued euro-denominated senior and secured notes to diversify our funding base. This slide shows the results for the first quarter of FY 2026, building a strong momentum toward full year forecasts and we have 27.5% of operating income increase. This is the by segment. The changes in segments, I would like to brief on this. So as AI businesses started in the monetization phase, so until FY '25, AI business was under Other. However, this will be -- this has been under enterprise business from this fiscal year. I would like to go to the revenue. So increased in all segments and hitting a record high. Enterprise, distribution, financial, these 3 segments reached 2 digital -- the double-digit revenue growth. Next, adjusted EBITDA increased in all segments, hitting a record high. Next, operating income. Steady progress toward full year forecast in all segments. Last year, Media and EC segment experienced a onetime factor. So excluding this, we have 18.7% increase and Media EC segment has JPY 4 billion revenue with onetime factor, excluding this, we have the operating income in Media and EC increased 18.7%. This excludes onetime factors. Please refer to the right bottom of chart as the forecast by segment. Next, net income. Net income increased due to increase in operating income, progressing steadily toward full year forecast, JPY 4.8 billion up, at 3.3% increase. Net income increased 6.6%, excluding onetime factors, no major changes. But due to the -- according to financial income and loss, there was the increase in interest expense and so on in SP. So as for the business, we would like to place an importance and increasing net income in all business segments. From here, I would like to explain the results by segment. First, enterprise business. As I touched upon earlier, AI business is now under the enterprise business segment. So we changed it subsegment. The right side is the present enterprise subsegment. There are 3 subsegments. The revenue of Enterprise segment. So the revenue from AI computing infrastructure and related businesses drove growth in cloud and AI. Cloud and AI revenue is expected to grow at CAGR of 30% in FY '26 to FY '27. At the time of announcing our midterm business management plan, CAGR of 15% was announced. However, right now, we can see that we can exceed that target. So now we expect to grow at CAGR of 30%. So on top of cloud AI, also security grew and cloud services, also solutions and as for telecommunications, increased in mobile revenue driven by subscriber growth. Segment income of Enterprise segment -- so the segment income, we would like to explain in details to make you understand better. I would like to explain from the left side of this chart, third graph and -- so telecommunications and solutions, cloud and AI had positive growth in revenue. And telecommunications and solutions, cloud and AI, we separate in these 2. So as for the cost of telecommunications, has decreased slightly. As for solutions and cloud and AI cost increased because of the increase in revenue, and there are some impact in the cost of solutions, cloud and AI as well and depreciation and disposals. This Is mainly due to depreciation of AI infrastructure. And this was accounted in the other, and now it's under enterprise. Other expenses, the major one is that the increase due to personnel expenses, so enterprise business segment is expanding down. Therefore, we are also enhancing the personnel as well. Next consumer segment revenue, both service revenue, including mobile and sales of goods and others increased. So looking at the graph from the top item. First, as for the sales of goods and others, the volume increased, but revenue growth due to increase in unit price of mobile devices, electricity revenue growth due to increase in trading transactions. The third one is the broadband. Revenue growth mainly due to [ open fiber ] Japan Corp commencing operations in June. Open Fiber Japan Corp is a joint venture between SoftBank Corp. and Sony Network Communications, Inc. So this is under our consolidated and it will be accounted in our business segment. And the fourth one is the mobile. Revenue increased by JPY 3 billion, driven by improvements in ARPU. Now mobile revenue. So we focus on increasing the revenue of mobile and here is the consumer segment income. So not only mobile revenue, but improvement gross profit from sales of goods were offset. And also some incentives and that amortization exists. So therefore, due to the impact of that, as a total, it shows minus JPY 0.9 billion. However, this has improved from what we had expected at the beginning of the fiscal year. And right side shows some comments for each one. And -- so the gross margin from sales of goods and others is JPY 5.5 billion increase and electricity income increased due to improved procurement costs. Please also pay attention to the notes within the chart and sales commissions and sales promotion expenses. This increased mainly due to amortization of capitalized sales commissions and expenses for device purchase support program. So a total minus JPY 0.9 billion. This is the result of consumer segment. So to hear was about Enterprise and Consumer segments. From here, you -- using 3 slides, I would like to talk about KPI. First, ARPU. So ARPU increased by JPY 60 billion, driven by penetration of PayToku. So this is as we expected at the beginning of the fiscal year. So we expect that will be increased by JPY 200. So full year, it will be JPY 160 which is the same line as the beginning of the fiscal year. Smartphone cumulative subscribers and net additions. Smartphone cumulative subscribers declined year-on-year following a shift in acquisition strategy to focus on longer-term users. In churn rate reduction and acquisition cost reductions are something that we want to do to make sure that we turn around smartphone subscriber numbers. In churn, smartphone subscriber numbers. In churn, as for the first quarter, due to impact of early churn, we saw slight increase. However, broadly flat. In fact, in June, we saw improvement compared to the same month last year. So we are beginning to see the good trend. So for the second quarter and third quarter, we want to accelerate such improvement. By segment, Media EC. [indiscernible] [ Line ] announced -- excluding onetime factors, profit increased due to growth of account advertising led by media, steady growth toward full year forecast, again, we are in good shape. Now financial segment. PayPay announced earnings results last week. And in financial segment, they are progressing well. In this segment, saw huge growth thanks to PayPay's growth. Distribution segment and other. Distribution revenue and profit increased with steady growth in ICT products for enterprise customers. On the right-hand side, other segment, R&D and upfront investment expanded, but that includes something onetime. So going forward, such onetime investment should not continue. In the meantime, we continue to invest in R&D so long as we believe that, that should contribute to future business. So whenever we saw an opportunity, we want to be open to investment. Next, investment and our financial position. First, CapEx. Telecommunications CapEx are progressing in line with full year plan, which is at the bottom of the graph, IFRS 16 impact increased due to the commencement of operations by open fiber Japan which I touched upon earlier in Consumer segment. This joint venture leased dock fibers. And as a noncash transaction, it was recorded, and it has IFRS 16 impact and for AI-related CapEx, in the first quarter, our numbers were small, but for the full year, we want to execute as planned. So we are on track in terms of leaded capital expenditures. Free cash flow. Since we are actively invest strategically, we saw a negative cash flow compared to last year. More in detail. Operating cash flow JPY 65 billion decrease year-on-year due to impact from the working capital. Adjusted EBITDA is shown at the top of the graph and EBITDA show steady growth. So temporary working capital impact was reflected in operating cash flow, but again, it was onetime. Investment cash flow include investment in telecom equipment, which is in line with last year. And as Miyakawa-san mentioned earlier, in the first quarter, in order to launch a new cloud business, we invested in SP Energy of $1 billion or about JPY 160 billion we established SB NEO, and we have a new framework in place. So we decided to sell the investment and purchase price is USD 1.5 billion. So the gain on sale should be expected in the next quarter. Net interest-bearing debt compared to same term last year, we saw increase by about JPY 290 million -- sorry, JPY 0.2 billion. In June, there was a timing to pay dividend. So at one time, net interest -- sorry, net revert ratio increased, but we do exit investment in SB Energy, and we expect increasing free cash flow. So this net leverage ratio should be improved going forward. And the topics of our financial activity or financing activity, we issued U.S. dollar-denominated notes in July 2020 and now we issued euro-denominated senior unsecured notes. [indiscernible] in Japanese yen after currency swap were equivalent to domestic notes. Going forward, we want to diversify our financing instruments to support our business activities. So again, we want to continue working to strengthen our financial position. And this slide shows the balance sheet. Total assets increased due to financial business expansion. And shareholders' equity increased year-on-year. As of end of June last year, shareholders' equity ratio was 18%, excluding financial businesses. Last but not the least, to summarize, we recorded growth both in revenue and profit and our growth driver, cloud AI delivered good results as expected, and enterprise increased in operating profit by 28%. We executed a strategic growth investment and we issued our denominated foreign bond. That's all for myself. And we'd like to start taking questions if you have. Thank you very much.

[Operator Instructions].

Tokunaga from Daiwa Securities. I have 2 questions. One is about the progress of the first quarter. So this quarter is very strong, and you said that it could be upward even other upward in the first half? And how much is that? So how is the distribution? Is it all segments or enterprise? And so what about any contribution and so on?

So our view, actually, this is the same as what we disclosed at the beginning of the fiscal year. So it will be the improvement in the mid to hundreds of tens of billion improvement. And So [ LY], PayPay already had earnings results presentations, and they also announced positive results. So as for the consumer business, so the second handset sales was stronger than we had expected. So the secondhand handset are mainly sold overseas. Even though there was an impact by the war in Iran considering such circumstance, we were able to sell well in terms of this -- our secondhand device handset and also our efforts in the cost improvement and the cost reduction, I mean, contributed to this positive results. Looking at the segment, basically, all segments had better results than the that what we had expected in the beginning of the fiscal year.

Even though you said that secondhand handset sale did well, but do you think it's a temporary impact?

So regarding the secondhand handset sales, right. Your understanding is correct. So the price of handsets will increase onwards. So depending on how it goes, and we will also have to adjust ourselves how to deal with that, the price increase and other factors. So there is a onetime impact of the advanced investments in our R&D, which is about JPY 10 billion or so.

The second question is about the enterprise business. I was looking at the data sheet, the Page 5, so it shows cloud is increasing in revenue. But depreciation, the first quarter decreased. That's where we are, where we are and -- so what about the margin? And is it going to go down? And also the depreciation is getting wider because some investments that you made has [indiscernible] indeed. So what about the next and fiscal years and onwards. Please make comments on the margin.

As for cloud and AI, the revenue increase is due to the government-related project has started. So that's one factor. And so this -- the profit margin of cloud and AI as CEO Miyakawa explained earlier, minimum 30% or even more. So as for the finance perspective, we also have the same view 30% or 40% margin is what we are targeting. And declining and depreciation.

This is Sasaki. Compared to the previous fourth quarter and this first quarter, the -- you mentioned that depreciation worth but this is going to improve onwards. So the government led projects. We sell to government-led projects do not -- even without that, I think it would get better. So while the government projects, will be reflected in the second quarter onwards. So in the first quarter, providing the revenue from the and the income from the AI computing infrastructure is the major factor.

Any other question? From the venue? Then take questions on Zoom. Kikuchi-san from SMBC Nikko Securities.

I have 2 questions. First, about sales and marketing expenses at the previous earnings announcement. Increased amortization of customer acquisition costs you mentioned and also purchasing on devices, I think each 30 billion should be increased in recorded in first half of this year, I think you mentioned, you didn't clarify how much at that level, was that changed since? And also, you talked increased price of secondhand devices, which was around JPY 16 billion or JPY 15 billion or something. So in the first quarter, expected numbers recorded and the sales from secondhand devices offset? And what did happen in the second quarter? That's the first question.

Sales and marketing and expenses or incentive and [ Tokusuru ] Support, I think you are talking about that. So amortization of our sales incentive or marketing sales expenses. Schedule-wise, we did execute amortization as schedule. So nothing was changed since the beginning of the year about expenses or costs for [ Tokur ] support. That reflected the impact from the sales of secondhand devices. So in the first quarter, better than what we expected at the beginning of the year. Going forward, about amortization of sales incentives, as I mentioned earlier, we already had a schedule. So no change is expected. And for [ Tokusuru ] Support, we to see how the global market goes in terms of secondhand device sales. And also our competitive landscape is something that we need to keep watching on. So at the moment, we have not changed any expectation in the second quarter, but we will keep watching how it goes. About secondhand devices and sales of secondhand devices, I'm not familiar with. So for my understanding, I think if you have not sold devices as much as expected, maybe because of ForEx impact and also price of secondhand devices go up as new devices price go up. If that's the case, the sales price of secondhand devices is something equivalent to new devices Well, of course, ForEx should have an impact on the sales of secondhand devices and how the market goes is something also we need to keep watching on. It's hard to predict how the market goes due to some geopolitical dynamics. We expect improvement, but again, it's too early for us to be too optimistic. If I may clarify in May, when we announced the previous quarter's earnings. The volume of sales was very small, but it's been improving. So compared to last year, we see improvement in terms of volume of sales of secondhand devices.

Next question is SB Energies sell on -- sorry, gain on sales should be expected in the second quarter? Is my understanding correct? You invested in July -- sorry, in the first quarter, and you decided to sell SB Energy in July. It's very short term of holding, do you still expect gain on sales? And the gain will be booked on your balance sheet.

It [indiscernible] gain on sale, it is expected, and we consider revising the forecast in the second quarter afterwards, it's something to be considered. So whenever we have a gain on sales, it should be incorporated in our consolidated financial results.

Next, Tanaka-san from BOA Securities.

Two questions. One is related to what Kikuchi-san asked earlier. So if now JPY 160 billion, or USD 1.5 billion is the purchase price. So I believe there will be some coordination onwards, but should we understand that there will be a big [indiscernible]. How much impact this sale would be?

So initially, we invested USD 1 billion. So basically, it will be purchased by 1.5 years. So that means that we will have the income of USD 0.5 billion. So this purchase price we are still assessing, and we are still under the process of assessing the purchase price to finalize that would make a difference in terms of a capital gain.

The second question is about 180,000 decrease in subscribers and so I believe that you had mentioned in the briefing that [indiscernible] measurement was a bit severe. And how is the impact after taking the measurements against serial switches and so how about the churn after you have taken the measurement against the serious switches?

So this net decrease in the subscribers has been -- will be improved. So there is -- we don't say that there is 0 impact, but basically, we were able to make our customers well understood of the price increase. So I could say that there is no major impact.

Next, Masuno-san from Nomura Securities.

First, on Page 15, Consumer expenses, compared to the first quarter last year. For acquisition, billion increase compared to last year. Advertisement, JPY 7.5 billion increase total JPY 50 billion. So cost of goods and gross margin of device assets grew. You talked about amortization of sales incentives and [indiscernible] provisioning increase. So compared to last year, we do -- are they included compared to last year -- compared to the first quarter last year, if I want to see which is up, which is down, amortization of [indiscernible] or sales of secondhand devices and amortization of sales incentives where we tag and how much would it be?