SoftBank Corp. (SOBKY) Q4 2024 Earnings Call Transcript
SoftBank Corp. (OTCPK:SOBKY) Q4 2024 Earnings Conference Call May 9, 2024 5:00 AM ET
Company Participants
Kazuhiko Fujihara – Executive Vice President & Chief Financial Officer
Yudai Sasaki – Management Planning Division, Deputy Director, Vice President
Conference Call Participants
Mitsunobu Tsuruo – Citigroup
Satoru Kikuchi – SMBC Nikko Securities
Daisaku Masuno – Nomura Securities
Operator
We would like to begin the SoftBank Corporation Investor Briefing for Earnings Results for the Fiscal Year ended March 31, 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, Akiyama; Finance and Accounting Division, Onoguchi (ph); Management Planning Division, Deputy Director, Vice President, Sasaki.
Today’s briefing will be broadcast by the Internet. Now CFO, Fujihara will give an overview of SoftBank’s consolidated financial results.
Kazuhiko Fujihara
This is Fujihara from SoftBank. Thank you for your attendance today. We’ve just finished the earnings results presentation. So I would like to add some more information on this investor briefing.
Here is the Executive Summary. In February, we upwardly revised forecasts. We exceeded that forecast and a mobile revenue increase achieved one year ahead of the target set out in the midterm management plan. PayPay’s consolidated EBITDA achieved full year profitability. We aim to achieve mid-term targets while investing in growth during FY 2024 and FY 2025. We would like to keep its balance.
First, consolidated results. As you can see on this slide, from revenue to net income, excluding PayPay remeasurement gain, we achieved revenue and profit increase. We also exceeded all upwardly revised forecast announced in February.
Let me break down. First, revenue. The revenue as shown in this graph, non-telecommunication business and other than consumer is driving the revenue, overall, JPY 172 billion, up by 2.9%. So we achieved a rate to full year revised forecast of JPY 6.06 trillion. So electricity revenue decreased in consumer. I will explain later.
Next, adjusted EBITDA. Year-on-year, we increased by JPY 100 billion. This is also other than consumer, is driving its EBITDA. So against the revised forecast, we achieved the rates to full year. So it will be overlapped in operating income. I will explain in details there.
So now operating income, so that landed at ¥876.1 billion, which is ¥110.7 billion up, and all the segments contributed to its increase, and consumer also greatly contributed against the forecast ¥36.1 billion plus, so it is increased by February and Media and EC and Enterprise. So there was some gain on the litigation so which contributed to its increase.
Other than that, the business improvement contributed greatly — so on the right side, you can see that each business is — has a steady growth. So now consumer segment, the revenue was minus ¥59.1 billion.
Let me touch upon one by one. First, sales of goods and others, both unit sales price and number of mobile devices sold improved year-on-year, especially in Q4 due to the amendment of Telecommunications Business Act. So expenses for sales promotion measures improved. That was the driver of the increase.
Now electricity is minus ¥131.5 billion, which is due to the revenue decrease due to a decrease in electricity trading business. Broadband was had a steady growth. And with mobile, this year, ¥8.3 billion, up we greatly improved. On the right-hand side bottom shows that even though we still have some impact on the mobile service price reductions, which shows minus ¥44 billion, but — which has been covered by other such as subscriber increase and increase.
So therefore, it landed at plus ¥8.3 billion. I would like to see by quarter results. So the left side shows the mobile revenue quarterly trend. And excluding customer acquisition measures, it shows on the graph. On the right side, it shows mobile revenue year-on-year.
So we finally turned around to positive. In the fourth quarter, the improvement would be greater. So as you can see, we landed better than we had expected. So therefore, we are one year ahead from medium-term management plan.
Now about Consumer segment income. So, due to the depreciation decrease. So therefore, it shows plus ¥33.1 billion against the revised the forecast. We exceeded the upwardly revised full year forecast. Now sales of goods and other cost of goods sold, is plus ¥14.9 billion. In Q4, alone, ¥20.2 billion improvement, that was led by revision of sales promotion measures.
Now about the Electricity, profit decreased due to decrease in electricity trading, which shows a little bit decline of the gross profit. So Electricity business alone, has contributed a bit to the improvement of the business.
And now Sales Commission and Sales Promotion Expenses and Depreciation, so as for customer acquisition-related costs increase due to, deferred expenses in the past years. So Consumer segment shows improvement is a good result of our businesses.
And now Enterprise segment, solution revenue was greatly — was a great contribution. So it was up ¥37.2 billion. So we have a double-digit growth. After February revisions, we have some gain on the reversal of provision for litigation. Since 2018 to 2023, profits doubled in five years.
On the right graph shows, segment income against ¥134.1 billion in FY 2022. FY 2023, it was — the one-time factors, was ¥11.9 billion, and the total expense was ¥22.6 billion, which landed at the ¥161.5 billion and year-on-year, excluding ¥14.6 billion.
So we can — we landed at double-digit growth. So as for Enterprise segment, recurring revenue in Business Solutions and others showed continuous growth. We would like to keep updating on this. This also shows a steady growth.
Next, about Media & EC segment, yesterday, LINE, Yahoo! made an earnings presentation. So I would like to just briefly to touch upon. So it was ¥52.4 billion, up by 3.4%. So segment income, ¥159.7 million in fiscal year 2022, one-time factor was ¥5.2 billion and Commerce, because of the cost optimization, it’s contributed and strategy impact of deconsolidation of LINE Securities and so one contributed to the improvement. So, total ¥198.0 billion, up by ¥38.2 billion, up by 23.9% since the upward revision. So, it was ¥3 billion compared to revised forecast.
Financial segment, 63.6% growth year-on-year, but PayPay is still losing money. But in terms of consolidated point of view, we saw a good number. Looking at the segment income on the right-hand side, last year was a negative ¥12.4 billion. And in the first quarter — last half year of last year, PayPay was not included. For the last half, we can compare apple-to-apple, which we see ¥13.7 billion plus. All-in-all, negative ¥5 billion is this the segment income. For the far right, assuming PayPay has been consolidated from FY 2022 first quarter year-on-year, ¥21.6 billion increase.
Distribution segment and others. Revenue increased by ¥56.6 billion. So, it’s been steadily growing and others are shown here as well in numbers. Net income, significant increase due to increase in operating income and absence of impairment or valuation loss recorded in the previous year. So, we saw a huge improvement in net income. With our LY is focusing more on our core businesses and that contributed to better performance.
The results including our minority shareholders’ interest. We see a year-on-year growth by ¥152 billion and against the revised forecast, we see ¥27.1 billion increase, mostly due to litigation recorded last year. CapEx, ¥330 billion was the announcement and actual was ¥382 billion, a reduction by ¥94 billion year-on-year. And even though we invested ¥13 billion in gen AI, but it was included in ¥330 billion CapEx.
Free cash flow, we talked about ¥580 billion last time, but we generated over ¥600 billion. Investments in Cubic Telecom and for long-term growth in super part (ph), if we took them out, we saw ¥532 billion of adjusted free cash flow.
Continuing on adjusted free cash flow, you see this waterfall chart starting from operating cash flow, securitization impact is JPY 110 billion, and CapEx was deducted and JPY 600 billion adjusted free cash flow is generated, which can really address our dividend by deducting long-term growth investment and also deducting IFRS 16 impact. And total dividend. Still, we have JPY 14 billion free cash flow after dividend.
As you can see on the far right, second bullet point, Cubic Telecom investment was addressed by free cash flow. But this investment should be for long-term growth. And JB or Japan Bank for International Corporation and the four major banks gave us a syndicated loan.
Net interest-bearing debt and net leverage ratio JPY 115 billion reduction of debt compared to last year and EBITDA improved. Thanks to that, our leverage ratio was 2.4, a little bit better than last year. So you see we are in the process of improving our net leverage ratio, balance sheet Total assets if we see JPY 1.5 billion — and talking about the KPI.
In the smartphone subscribers, we see increase by JPY 1.4 million year-on-year. And churn rate, 1.23% for smartphone and main subscriber, 1.28%. By the quarter 520,000 net addition, we achieved in smartphone, which is pretty good. And ARPU 3,750 was actual or JPY 40 decline compared to last year. But compared to the latest quarter, JPY 10 difference, up compared to last year, if you can take a look at bottom right, it’s improved to JPY 40 compared to over JPY 200 and full year FY 2022, minus 220 FY 2023 120. We revised a port in the second quarter, and we thought that we would hit 230, but actually IT was 120. For FY 2024, I think we can expect a breakeven. Now about broadband and electricity. As for broadband users steadily its growing and subscribers. As for electricity it’s still in the decreased phase.
Next to Media and EC, I would like to make some points on this. Last Q4 was the e-commerce from Q1 to Q4, it was a declining trend. In Q4, it was bottoming out. And towards this year, this fiscal — this year, so we’ll be improving slowly. The right side shows, the advertising revenue in Q4, minus JPY3.0 billion. And this fiscal year, it has improved. So the business has been improving. I would like to have a further expectation on this.
Next is on PayPay. We were able to increase the number of users of 6.4 million and the number of payments increased by 23.8%. We were able to grow the number of payments higher than the number of users. And next GMV, 27% up and unit price also improved, so it’s about PayPay standalone.
Now PayPay consolidated total 22.2%, which includes PayPay card results, we would like to further improve this consolidated GMV and PayPay revenue also alone, 26.1% up. This is for consolidated, and EBITDA also showed the positive lending in all quarters. So for PayPay operating income still shows negative figure. But in the new fiscal year, we would like to aim for profitability.
Now SB Payment Service, the GMV was up by 18.8%. We were aiming for more than 15%. So we are doing better than our expectation, our target and the non-telecom GMV is driving the growth. The revenue, 6.8% up, and operating income was up by 11.5%. It is — it has a continuous growth improvement.
Now it’s about ESG topic. FY 2023 summary is shown, here we have received a number of awards and we have received high evaluations, which makes us more and more motivated. We would like to keep obtaining all these great awards. And FY 2024 topics about corporate governance system, we invited new external directors. So we are the company which is talked about by the big name of our parent company, but we would like to ensure the independence of the board. So this was all about the consolidated results.
Now I would like to talk about the approach to consolidated forecast for FY 2024 and targets of medium term management plan. As CEO Miyakawa stated in the earlier presentation, the revenue is ¥6 trillion and we would like to forecast increased revenue and profit and dividends per year should be maintained at ¥86. So we would like to maintain high level of returns by segment. Consumer, ¥530 billion. We would like to achieve 7 (indiscernible) enterprise, 1.7%.
Excluding last year’s litigation in one time factor plus 7.4%. For enterprise, we start investing for the future distribution. We want to have ¥30 billion media EC, ¥230 billion or 16% increase is expected. So we further promote selection and focus of businesses of finance. Thanks to expected improvement of KP, we expect ¥3 billion and other include future investment. So total, we want to hit ¥900 billion in FY 2024.
For the enterprise, SoftBank technology which we announced to make it 100% subsidiary is included in enterprise. And as Miyakawa mentioned in the previous session, this is our view on FY 2024 forecast. We announced that our target for FY 2025 was ¥970 billion and this year, although there are some one-time impacts, we hit ¥876 billion which means that we are capable enough to hit ¥930 billion. But again, we want to also investment for future, so we want to keep the guidance at ¥900 billion.
Likewise, in FY 2025, we are capable of hitting over ¥1 trillion. However, we want to do some investment for the future growth. We want to keep the guidance of ¥970 billion for FY 2025. For net income, for FY 2024, guidance was JPY500 billion. Mid-term Management Plan progress status is here. I’m not going to go into detail, but revenue, we increased in sales earlier than forecasted. And also, we achieved upwardly advised targets for FY 2023. Enterprise in FY 2023, we achieved double-digit growth — in solutions sales is going well. Distribution, we hit a JPY30 billion target. We already were aiming to hit JPY30 billion target. Media and EC beyond FY 2024, we want to demonstrate our growth of this business. For finance, we want to turn profit in FY 2025, but we want to hit much earlier than FY 20 25.
CapEx. 5G investment has run its course and the CapEx will be controlled. JPY330 billion should be the same continuously. And for proximately JPY150 billion to be invested and generative AI in FY 2024, which has not reflected potential subsidy from the government. Free cash flow, again, we are committed to hit JPY600 billion. And our dividend payout should stay the same as about JPY400 billion
We want to make sure that our consolidated net income is achieved. And the second, we want to make sure that we have enough cash, free cash to pay dividends. And also, we want to make sure that net income — last year was JPY520 billion. We have been building JPY520 billion of the dividend capacity. JPY150 billion of investments are net subsidiary — subsidy excuse me.
We have money financed by crush share. So I think we can have a full capacity of investment with subsidy and the finance fund. And we want to keep the dividend JPY86 per share. Total Shareholder Return or TSR is an indicator for our directors, medium-term performance-based remuneration.
Year-on-year, we increased 26% and — last but not the least, as Miyakawa mentioned, stock split was announced, and the shareholder benefit program will be established so that we want to have more younger shareholders. And also, we want to make sure that the shareholders can enjoy TP as a part of our ecosystem.
That’s all of all my presentation. Thank you very much. And we would like to take your questions if you have. Thank you.
Question-and-Answer Session
A – Yudai Sasaki
We will now open it up to Q&A session. We will take questions first from the floor, then from the Zoom. If you wish to ask a question by Zoom, please access Zoom by the previously announced procedure and click raise your hand button and please wait. Once you have access Zoom, please turn out the live webcast to prevent Hauling. We’d like to receive as many questions as possible from as many people. So please limit your questions to two per person. Please raise your hand from the floor. In the left side of the floor, and the first — this is Yoshio Ando from Daiwa Securities. I have two questions. First is about the number, Page 36, the growth investment on generative AI. When I look at the business plan, the ¥55 billion minus and what’s the realization between this ¥50 billion? And — so the R&D, which we were working on initially, so adding the debt, the figure would be like this. And also, we still have some room here. So we have — this figure is a little bit higher than the — what we see as actual.
Kazuhiko Fujihara
So for generative AI, as Miyakawa mentioned, it will be below ¥30 billion or so. Just to confirm, so ¥30 billion is for generative AI and so other business like mobile. So the ¥20 billion will be used for that? Yes. Also for HAPS and also future R&D, we are working on. So the ¥20 billion we had already initially, so that was also included. So other factors are also included. And the last year’s figure does not — does include only — does not include only generative AI.
Yudai Sasaki
So now the second question is about Q4 operating income. So now improvement of — improvement on product cost and I see that improvement was driven by this. So how would you continue this improvement?
Kazuhiko Fujihara
Yes, the Q4 is the high season and the volume and also the measurement result. So the impact would come greater in Q4, so compared to last Q4, the acquisition and also including the device sales. So we — these also contributed to the improvement. So — the device would be also expected to be improved and acquisition cost will be also expected to improve. So we also have a revenue increase on communications. So therefore, we expect to be able to cover this.
Yudai Sasaki
So on mobile revenue and especially acquisition measures, what’s you plan for that?
Kazuhiko Fujihara
Yes, it will be included, but it will be absorbed by the mobile revenue. So in the latter half of the fiscal year, so it always shows the impact. So for the past years, we have gone through the same trend. So as for the base, you could look at in the same way.
Yudai Sasaki
Any other questions from the floor? If not, we want to take questions from Zoom participants. If you wish to ask us a question, please raise – please press raise hand button. First, Tsuruo from Citigroup Securities. Please unmute and speak. Thank you.
Mitsunobu Tsuruo
I missed Miyakawa sans question-and-answer session fully. So if I may ask you a repetitive question, sorry about that. First, at some point, we assume that you are going to acquire Naver’s stake. So to what extent do you want to use your company’s balance sheet more specifically? Whether that could have an impact on other capital allocation or dividend CapEx, for example? That’s the first question.
Unidentified Company Representative
Thank you very much. As you mentioned, dividend and CapEx and the investment in Gen AI, we want to make sure that anything we do with NAVER will have a negative impact. We are still discussion with NAVER, and we are not sure how much we can do. So I’d like to make no comment. But our ratio is going good. And EBITDA is going well. So I think we have the capacity to finance more. In fact, I think we could issue type shares, if necessary. There are a lot of options for financing, but business is more important and the business should come first. So I think it’s too early for us to tell anything about what we do with the NAVER’s stake.
Mitsunobu Tsuruo
Thank you. Then the second question about the data center. This year and next year, ¥30 billion cost, I think, is expected. As you announced you made a new investment in data center. So data center business is related to which line of P? And could you share with us your view about the data center business? And of ¥30 billion, how much is non-cash, which means subject to amortization?
Kazuhiko Fujihara
I think as we go, we can share with you updates in FY 2024. We are still in the building phase. So research and development is a focus. We may need to hire engineers. So FY 2024 needs more cost. And FY 2025 and onwards, I think we can gradually expect some revenue or income. And as Miyakawa-san said in his presentation, IAAFAR (ph) or lending infrastructure.
On top of that, we want to build service offerings as a platform. So until FY 2025, we don’t have high expectations — big expectation in terms of revenue. About depreciation or non-cash item and ¥30 billion at this moment, we can’t tell you any details, because we have to take into account our potential subsidy. Once things are clearer, I will give an update.
Mitsunobu Tsuruo
So when can you expect profitability in data center business?
Kazuhiko Fujihara
Definitely, FY 2024 is still in the process of investment. So at some point of next mid-term plan as early as possible, I think we can expect some profit in data center business.
Operator
Kikuchi-san from SMBC Nikko Securities. Please unmute and ask your question, please.
Satoru Kikuchi
This is Kikuchi. Thank you so much for your briefing. Two questions. One is billed mobile is improving, which is great to see. However, in the previous fiscal year, the cost had negative impact on that. So in this fiscal year, what was the driver for increased profitability, so the improvement and the efficiency of acquisition measures could be one? And what are other factors, please share if you may have and with the figures and the breakdown.
In next fiscal year, ¥970 billion as target, but mobile has to grow and profitability to exceed ¥1 trillion. The next fiscal year onwards, what would be the mobile increase profitability would be driven by the incremental number of subscribers or how would you see the growth of mobile? How you think it could be a growth? What would be the structure for mobile growth?
Kazuhiko Fujihara
As for mobile, of course, the subscribers is the key, but ARPU is what we need to pay attention to. So therefore, we would like to see both subscribers and ARPU and 2024 — and fiscal 2024 and 2025 will be the same structure, and we would like to earn at a certain level. And so it’s been negative for the past few years.
But compared to the past years, the new fiscal year, it will be turning positive a bit. And mobile price also will be contributing to. So the total JPY 30 billion of increase, it could be expected. And so the acquisition, through the acquisition measures, the number of subscribers will be increased. So that’s one thing.
Satoru Kikuchi
Regarding the acquisition cost alone cannot be decreased?
Kazuhiko Fujihara
Well, yes, the number of subscribers is growing steadily, but we could say that it’s a bit in a shortfall. So we are not expecting a big improvement.
Satoru Kikuchi
The second, by investing in various areas like AI, and that would be reflecting 2PL or balance sheet. I think many of them could be reflected on balance sheet. If on PL, and then which segment it could be on mobile.
Kazuhiko Fujihara
So right now, we are in the phase of advanced investments, including R&D. As Miyakawa stated, we need to review once we see more in which segment it would be and which products would be focused on and which product would be sold by enterprise and the cost would be this and that. We could be seeing more clearly. Of course, for consumers, if there are opportunities, we would like to explore that. But enterprise product sales and that could be a major driver, which we also have expectation that.
Satoru Kikuchi
Under Other, it is hard to imagine what could hit PL by the level of like level like JPY 10 billion.
Kazuhiko Fujihara
So I think there is some upward room too. Or I still see that there is too big buffer for investment, because there is some uncertainty. Maybe we would say, it will be better if we could say that the buffer was too much. So for fiscal year 2025, maybe we could have a different way of expression. So right now, we are in the phase of building and then we would like to make the number one product. So that’s what we are aiming for right now. So therefore, R&D cost, we would like to also maintained at ¥970 billion level. We also like to maintain the debt free cash flow at a certain level. So that’s what we would like to be attention to upside. Thank you.
Operator
Next, Daisaku Masuno from Nomura Securities.
Daisaku Masuno
I have two questions. First, about the CapEx again. In your classification, investment in telecommunications and investments in Generative AI. CapEx for telecom, data center in Nara and data center in Tomokomai, are included, I believe. Tomokomai, ¥65 billion, half are subsidized by the ministry and also — by implementing 5G virtualization. Your CEO mentioned that he wanted to invest in NVIDIA’s Grace Hopper. So again, Nara, Tomokomai data centers are included in the investment for telecommunication and the GPU investment is also included all in all, ¥110 billion or so. My understanding is that can you confirm that?
Kazuhiko Fujihara
For Nara data center, definitely included in the CapEx for telecommunication. Tomokomai, depending on time, which I think is over FY 2026 or later. So in the next midterm business plan, I think we can talk about that. In the meantime, we need to make sure that data center business can be up and running for future profitability. And the Edge, I think the investment in Edge is considered as CapEx for telecom infrastructure — and expected revenue from Gen AI can be utilized for recouping investment, but it takes time and issuance of Class A share can be one option for funding and syndicated loan by a JV and other banks, that we use for Cubic acquisition is something that we can consider, so ¥330 billion investment and investment that should be recouped for long term are I think separately thought.
I think Tomokomai, you need to invest in this year. Otherwise, you can’t have a Tomokomai center up and running soon. Of course, we do a substantial amount of investment this year and onwards.
Daisaku Masuno
And 800 and Grace 200, total ¥150 billion of investments. So long as you finance, ¥150 billion is going to be the full year CapEx?
Kazuhiko Fujihara
Financing, already we have done. In reality, I think it takes time to spend ¥150 billion fully this year.
Daisaku Masuno
For Phase 1, 800 — Grace Hopper 800 is half of ¥150 billion or how much?
Kazuhiko Fujihara
For 800, I think it can be depreciated. But GBX 200 is — depreciation of GBX 200 cannot be recorded in the last half of this year, then a different story.
Daisaku Masuno
So how much is 800 and G200?
Kazuhiko Fujihara
I don’t think investments in G200, is not included a lot.
Daisaku Masuno
Looking at the fourth quarter, due to revised business law, it was harder for you to aggressively sell, but you — despite that revised business law, deduction of revenue was recorded in the fourth quarter. My question is what kind of accounting treatment do you have used?
Kazuhiko Fujihara
I think depending on how we utilize incentives. We didn’t do anything new or strong. In FY 2024, I think sales exemption is not that big as last year. But usually, from January onwards, I don’t expect you to spend a lot of — expenditures for sales. I think you should look at improvements on the device side as well. So going forward, I’d like to see the combined number sales exemption and device side treatment as well.
Yudai Sasaki
Those who have any questions on Zoom attendance, please, raise your hand button. We would like to conclude the Q&A session. We would like to end the SoftBank Corporation Investor Briefing for Earnings Results for the Fiscal Year Ended March 31st, 2024.
