Sony Group Corporation (NYSE:SONY) Q2 2024 Earnings Conference Call November 8, 2023 2:00 AM ET
Company Participants
Sadahiko Hayakawa – General Manager, Finance Department
Hiroki Totoki – President, COO, CFO, Representative Corporate Executive Officer & Director
Conference Call Participants
Kentaro Tsutsumi – Nikkei Newspaper
Masahiro Ono – Morgan Stanley
Kota Ezawa – Citigroup
Junya Ayada – JPMorgan Chase & Co.
Ryosuke Katsura – SMBC Nikko Securities
Unidentified Company Representative
The time has come. FY 2023 Q2 financial results announcement for Sony Group Corporation.
I am Okada, Corporate Communications. I will be serving as master of ceremonies. Let me introduce the people on the stage. First, Mr. Hiroki Totoki, President, COO and CFO; Naomi Matsuoka, Senior Vice President, Corporate Planning and Control Ned Group DE&I support for Finance, Business and Entertainment Area; Sadahiko Hayakawa, Senior Vice President in charge of Finance and IR.
Today, 3 persons will be explaining the consolidated results for the second quarter FY ’23 and full year consolidated results forecast, after which we are going to have a Q&A session. We are scheduled to have a total of 70 minutes [Foreign Language]. Today, after Ms. Matsuoka and Mr. Hayakawa explained the content on here, I will summarize the entire earnings briefing.
Mr. Hayakawa, please go ahead.
Sadahiko Hayakawa
From here, Ms. Matsuoka, and I will explain. Consolidated sales for the quarter were JPY2,828.6 billion, an increase of 8% compared to the same quarter of the previous fiscal year. Consolidated operating income significantly decreased JPY106.4 billion year-on-year to JPY263.0 billion, mainly due to the JPY64.3 billion decrease in the operating income of the Financial Services segment. I will explain the details in the parts devoted to each business.
Adjusted EBITDA decreased JPY60.8 billion year-on-year to JPY426.4 billion. Income before income taxes decreased JPY113.5 billion year-on-year to JPY257.6 billion. Net income attributable to Sony Group Corporation stockholders decreased JPY81.6 billion to JPY200.1 billion. Results by segment for the quarter are shown here.
Next, I will explain the full year consolidated results forecast for FY ’23. The assumed exchange rate for the second half of the fiscal year have been revised to approximately JPY142 for the U.S. dollar and approximately JPY152 for the euro. The full year forecast is for sales to be JPY12.4 trillion, an increase of JPY200 billion from the previous forecast for operating income to be unchanged at JPY1.170 trillion. And for net income attributed to Sony Corporation’s stockholders to be JPY880 billion, an increase of JPY20 billion from the previous forecast.
Adjusted EBITDA is expected to be JPY1.785 trillion, an increase of JPY35 billion from the previous forecast. The consolidated operating cash flow forecast, excluding the Financial Services segment is expected to be JPY1,160 billion, a decrease of JPY90 billion, mainly due to the impact of the foreign currency conversion adjustment resulting from the change in the foreign exchange rate assumption and the increase in working capital in the G&NS segment. The FY ’23 results forecast by segment is shown here.
Now I will move on to an overview of each business segment. First, the G&NS segment. FY ’23, Q2 sales increased a significant 32% year-on-year to JPY954.1 billion mainly due to increased sales of PlayStation 5 hardware and an increase in third-party software sales.
Operating income increased JPY6.8 billion year-on-year to JPY48.9 billion, mainly due to the impact of increased sales despite the deterioration in profitability of PS5. Adjusted OIBDA increased JPY18.9 billion year-on-year to JPY83.1 billion.
The FY ’23 forecast is for sales to be JPY4.36 trillion, an increase of JPY190 billion from the previous forecast. Operating income to be unchanged at JPY270 billion. Adjusted OIBDA to be JPY385 billion, an increase of JPY10 billion.
The overall number of monthly active users for the PlayStation in September was 107 million accounts, an increase of 5 million from the same month last year. And the proportion of PS5 users who have high user engagement increased to a little over 40% of the total. In addition, total gameplay time during the quarter increased 4% year-on-year, a stable level of growth.
PS5 hardware unit sales for the quarter were 4.9 million units, basically in line with our expectations and a 25% increase over the number of PS4 units sold in the second quarter FY 2016 when we sold 20 million units for the year. We have kept unchanged our high target of 25 million units for PS5 sales this fiscal year.
To achieve this target, we plan to release a new PS5 model that is smaller, lighter and data storage capacity. We also plan to introduce to the market PS portal through which users can enjoy remote play in combination with the PS5. This is expected to assist us in increasing the sales momentum during the year-end selling, which is the largest opportunity to sell products.
On the other hand, while carefully monitoring the results of our sales promotion activities during the year-end selling season, we are proceeding with business operation that aims to balance the penetration of PS5 with profitability. As for software, the PS5 exclusive title, Marvel Spiderman 2, which is released on October 20, sold through more than 5 million units worldwide as of October 30, and it has become a big hit.
Regarding PlayStation Plus, by continuing to offer attractive new features and content to our users such as starting cloud streaming of PS5 title from October on our top-tier service premium, we aim to increase engagement while further expanding the composition ratio of our top-tier services, extra and premium.
Next is the Music segment. FY ’23, Q2 sales significantly increased 14% year-on-year to JPY408.7 billion, mainly due to the increased streaming revenue and the impact of the foreign exchange rates. Mainly due to the impact of the sales increase, operating income increased JPY2.3 billion to JPY81 billion compared to FY ’22 Q2, in which a onetime gain of JPY5.7 billion was recorded due to the receipt of litigation settlement.
Adjusted OIBDA increased JPY9.6 billion to JPY97 billion. Profit contribution from visual media and platform was approximately 20% of the operating income of the segment. The FY ’23 forecast is for sales to increase JPY70 billion from the previous forecast to JPY1,560 billion and operating income and adjusted OIBDA to each increase JPY15 billion to JPY295 billion and JPY350 billion, respectively.
On a U.S. dollar basis, streaming revenue for the quarter increased 9% for recorded music and 10% for music publishing, which is stable growth. During the current quarter, we had the hits shown here, including Doja Cat’s, latest single, Paint the Town Red, which was #1 for 4 consecutive weeks on the Billboard Global 200 chart.
Moreover, the new album released in October by Rima Entertainment artists, Bad Money, has become a huge hit debuting at #1 on the U.S. Billboard Album Chart and having 21 songs from the album ranked in the top 100 of 45s rankings immediately after that release.
In order to achieve growth that outpaces the market over the mid- to long term, the Sony Music Group is focused on strengthening its competitiveness in growth areas. In the rapidly expanding field of indie labels and independent artists, we are building an ecosystem across SMG, including expanding our repertoire and service capabilities for artists through the Orchard and Al.
We are also focusing on expanding our business in growing global markets. In Latin America, where the market size last year increased significantly, 26% year-on-year to USD 1.3 billion SMG has established itself in the #1 position in recorded music as growth in places like Brazil has accelerated due to the acquisition of some give in March 2022.
In other growth markets such as China, India and Southeast Asia, we are also actively discovering and developing artists, acquiring catalogs and expanding artist services through the Orchard and AI.
Next is the Picture segment. Sales for the quarter increased significantly, 18% year-on-year to JPY399.6 billion, and operating income increased JPY1.8 billion to JPY29.4 billion, mainly due to an increase in the number of delivered works in television productions and the impact of foreign exchange rates.
Adjusted OIBDA increased JPY2.2 billion year-on-year to JPY42.6 billion. The FY ’23 sales forecast is JPY1.460 trillion, down JPY10 billion from the previous forecast. Operating income is forecasted to be JPY115 billion, down JPY5 billion. And adjusted OIBDA to be JPY165 billion, no change.
The Writers Guild of America strike ended on September 27, following an agreement with the American Association of Motion Picture and Television Producers.
In addition, an agreement was reached on November 8 local time in the negotiation with the Screenactors Guild, and we expect that the protracted strike will come to an official end after certain processes are undertaken within the union. Due to delays in production and constraints and promotional activities, we are seeing negative impact such as a delay in the release of certain motion pictures and a delay in the delivery of television productions.
We have incorporated the impact that can be assumed at the present time into our forecast for the fiscal year. Even after the strike ends, it will take time for business activities to normalize due to the concentration of production and theatrical releases. So we expect this to have a negative impact on next fiscal year’s results. However, we plan to engage in cost control and other measures to try to reduce the impact.
Additionally, Quanta’s business is growing steadily. And last month, it finalized a global distribution agreement with Amazon. As a result, Amazon Prime video members can now subscribe to the service as an add-on channel and enjoy more than 1,300 titles of annual content provided by Crunchyroll. This service has already been launched in the U.S., Canada, Sweden and the United Kingdom, and we plan to further expand the service area in the future.
Next is the EP&S segment. Sales for the quarter were JPY613.5 billion, down 9% from the same quarter of the previous fiscal year in which demand for TVs increased due to a recovery from lockdowns in Shanghai.
Operating income significantly decreased JPY16.8 billion year-on-year to JPY61.0 billion mainly due to the impact of the lower sales of TVs. Adjusted OIBDA decreased JPY15.0 billion year-on-year to JPY87.6 billion.
FY ’23 sales are expected to be JPY2,440 billion, an increase of JPY10 billion from the previous forecast and the forecast for operating income and adjusted OIBDA remain unchanged at JPY180 billion and JPY280 billion, respectively.
The market environment for major product categories during the current quarter continued to be difficult for television, while products such as digital cameras and headphones remained strong.
Regarding televisions, in response to service demand and increasing price competition, we are proactively revising our sales plan conservatively and controlling sales risks and inventory risks as well as focusing on cost reduction measures.
Regarding the digital camera market, especially in China, which is strong, we will aim to maximize sales and profits during the year-end selling season and further expand market share in each region through the sales of new mirrorless single-lens cameras and interchangeable lenses, which we introduced in the current quarter and October and which are selling well.
Regarding inventory levels, we have thoroughly managed everything from production to sales, and we have further reduced inventory levels compared to the same period of the previous fiscal year across all our major product categories and have been able to control inventory at appropriate levels.
Next is the I&SS segment. Sales for the quarter increased 2% year-on-year to JPY406.3 billion. Operating income decreased significantly by JPY27.6 billion year-on-year to JPY46.4 billion, mainly due to an increase in expenses, including depreciation and amortization expenses despite the positive impact of foreign exchange rates.
Adjusted OIBDA decreased by JPY15.0 billion year-on-year to JPY107.1 billion. FY ’23 sales are expected to be JPY1.590 trillion an increase of JPY30 billion from the previous forecast, and operating income and adjusted OIBDA are expected to be JPY195 billion and JPY440 billion, respectively, an increase of JPY15 billion each.
In the smartphone product market, although we see signs that the demand decline is bottoming out in China and emerging markets, the North America market shows a significant year-on-year decline. And at this point, there is no change to our view that a recovery in the market will take place from next fiscal year. Smartphone manufacturers are incorporating larger die size sensors into their new products, mainly at the high end. And the mobile sensor market by value, driven by this is expanding as expected.
Regarding the yield rate of our new mobile sensor product. We have achieved a certain level of improvement through the initial measures taken so far, and although unit shipments are increasing, the impact on profit remains unchanged from the previous assumption and is expected to push down the operating income forecast of the segment for the fiscal year by approximately 15%.
Regarding automotive sensors, the market as a whole continues to show high growth due to the normalization of the supply chain and the progress of electrification in the automotive industry but intensifying competition in the Chinese market is resulting in some of our customers capturing a low share. This, combined with the fact that the shift to higher ADAS functionality by our major customers is lower than we expected, has resulted in us slightly revising downward our forecast for the current fiscal year.
Furthermore, regarding the image sensor market for industrial and social infrastructure, we have further reduced our forecast for this fiscal year, mainly due to the effects of the slow economic recovery in China. Despite these factors, by incorporating the positive impact of foreign exchange rates and additional cost reduction measures, we have upwardly revised our operating income forecast for FY ’23 for the segment.
Here, I would like to explain our current view of next fiscal year and beyond. Looking ahead to next fiscal year, although we expect the sluggish smartphone market, which is pushing — putting pressure on profits in the current fiscal year to recover, we believe that the improvement will progress slowly.
Regarding the yield issue, which is another factor, putting pressure on profits, we are reexamining our processes and systems from design through manufacturing, but the impact is expected to remain into next fiscal year.
Next fiscal year, deterioration from our original plan resulting from yield cost per our new mobile sensor is expected to decrease significantly from the current fiscal year to approximately 1/3. However, the production volume of the sensor is expected to grow significantly as our main model. So we expect that the impact on profit for the next fiscal year will be approximately 70% of the impact demand on profit for the current fiscal year.
There’s no change to our view that the trend toward larger die size mobile sensors will drive the overall growth of the image sensor market in the mid to long term. And that the business will steadily expand in automotive as well as in industrial and social infrastructure applications, which are expected to grow in the midterm due to labor saving and automation.
Last, is the Financial Services segment. Financial Services revenue for the current quarter was JPY103.9 billion, a significant decrease of 42% year-on-year, mainly due to deterioration in gains and losses from market fluctuations associated with variable life insurance despite steady growth in insurance profitability at Sony Life.
Operating income was JPY15.7 billion, a significant JPY64.3 billion decrease year-on-year, mainly due to a deterioration in net gains and losses at Sony Life and the impact of revaluation pursuant to the application of the new accounting standard on the results of the same quarter of the previous fiscal year, as well as a JPY22.1 billion recovery of an unauthorized withdrawal of funds recorded in the same quarter of the previous fiscal year.
Adjusted OIBDA decreased JPY41.8 billion year-on-year to JPY22.7 billion. Sony Life’s new policy amount significantly increased 49% year-on-year to reach JPY2.579 trillion and policy amount in force continues to steadily increase in the current quarter.
Regarding the FY ’23 forecast. Based on the results of the current quarter, we are forecasting Financial Services revenue to be JPY1,210 billion, a decrease of JPY110 billion from the previous forecast. And operating income and adjusted OIBDA to be JPY155 billion and JPY180 billion, respectively, a decrease of JPY25 billion each.
Please note that this forecast does not take into account the impact of market fluctuations from the third quarter onwards. Also, the application of the new accounting standard has affected valuation gains and losses due to market fluctuations, we expect Sony Life’s insurance service results, which is a core business of the segment to continue to grow in a stable manner.
Finally, I would like to summarize everything. First, I would like to discuss the growth of the Sony Group. Three-year cumulative adjusted EBITDA, which is the KPI of our current mid-range plan is expected to be approximately JPY5.1 trillion or 19% above the target of JPY4.3 trillion. This is an average annual growth rate of approximately 9% compared to the results of the fiscal year ended March 31, 2021, the final year of our previous mid-range plan.
In particular, during the current quarter, the operating income of the 3 entertainment businesses of G&A, our growth areas, all increased year-on-year and accounted for 61% of consolidated operating income. We are steadily making progress on the evolution to a growth business portfolio.
On the other hand, we need to continue to pay close attention to the business environment surrounding Sony, which includes economic slowdown around the world as well as geopolitical risks and the division of the global economy as a result. In the second half of the fiscal year, we intend to focus on responding to this business environment in each business and to establish a foundation for growth for the next mid-range plan and beyond.
In particular, we plan to focus our efforts on the top priorities of increasing the market penetration of PS5 and expanding the PS5 user base as a result in the G&NS segment as well as an improvement of the product yield and measures for improving profitability such as operational efficiency in the I&SS segment. We will put the finishing touches on the current mid-range plan in order to address any negative factors before the next fiscal year. That’s all for the explanation.
Question-and-Answer Session
A – Unidentified Company Representative
Thank you for waiting. Now we’d like to entertain questions from the media. As for the case of the presentation, the people who will be responding to questions as shown on the slide. [Operator Instructions] The first question Toyokeizai — megas, please.
Unidentified Analyst
Uegaki from Toyo. Can you hear me?
Unidentified Company Representative
Yes, please.
Unidentified Analyst
I have two questions. About the game segment. Page 11, hardware loss increase question. Can you elaborate upon this more? Also another point ISS. In the press explanation, share in the society will be increased by FY 2025 in a major way. If you look at the appendix, the current situation is not that good. And in your presentation, ALS, its progress is not as much as expected. About the target, you are not going to change the target? These are my 2 questions.
Hiroki Totoki
Thank you for your questions. First, game and network service hardware loss an increase of loss was your question. Second quarter results, I think you are referring to the second quarter results. There’s some technical aspect to this. Last year, there was a temporary FX gains occurred on the yen basis as compared to that — the year before that, there was an increase in the same period last year from the purchase of the parts to the complexion, the lead time is long. And in the meantime, yen depreciated rapidly. So there was such a special factor. That is first, that my answer to the second question — the first question.
Second one, at the beginning, two FY ’25, automotive share is going to be increased according to plan. And what is the current situation? What’s your question? In the automotive market, itself, it is getting more normalized. So in the medium to long term, the growth target remains unchanged.
In some OEMs, the circumstances of specific OEMs and changes of the share are the factors. And it doesn’t change the medium to long-term trend. That concludes my response.
Unidentified Company Representative
All right so next question.
Kentaro Tsutsumi
Yes. So I’m Tsutsumi of Nikkei Newspaper. So I have 2 questions. So Page 5. So the target — and so the figure is our target is rather high, but I’d like to ask in this quarter was about the attainment of 17 million. How do you think that you can attain this goal in the unit terms? And the small models, well, the size actually has been the bottleneck here, but the Skayma and how do you see this going forward? Can you elaborate on that, the Spiderman?
And the second one is maybe not so related, but the current clear, the game subsidiaries and studios. And I think I have seen this in the mass media reporting, but the labor cuts has been talked about, cutting personnel. So in the game, the cost control. Have you changed the management policy for cost control? Or are you being more severe about cost control? So if you have any particular thoughts on this, can you share with us?
And then related to this, in mid- to long term, the live service games. So the live service games well, I had heard last year about this, but to FY ’26, that it is going to be 12 trillion. But have you ever changed the policy or thinking about changing the policy? So if you have any thoughts on this, please tell us.
Hiroki Totoki
Okay. So for myself, I would answer your questions. About the first question. So PS5, about the target of PS5. Well, 250 — JPY25 million, so it is rather a high target. So it’s not something that we can attain very easily. And we think that the year-end sales is the most important sales period. And towards this year-end sales, we want to have holiday sales season. We want to have the new models for the holiday sales. So the Spider-Man is also aimed for the year-end holiday sales. So 25 million yes, we want to keep as a target. But in this holiday season, we will take a look at how much. So it’s not that we want to increase the installed bases, but we want to have the profitability balance as well. So that’s for the first question answer.
And the second question here, so this is based on the reporting in the media, but I think it’s about Bungie. And last year, July, we acquired this Bungie and SIE, the Bungie management and testing franchise to be strengthened, and new game titles to be developed. And studios, the live science games to support development and also the studios to have the competitivity increased and made more efficient. So those has been our attempts and initiatives.
And as part of that, Bungie to have the efficiency throughout the company. So the indirect divisions, we had about 100 people. We had cut as the labor so personal cut. And the impact on the profitability is already incorporated into the current forecast. So PlayStation Studios. So the indirect system, we have a review on this. And so we had had personnel cuts regarding this.
And the live service last year, in FY ’25, we have 12 titles. But this is the third question, I think, about the 12 titles. And then we are reviewing this. So the titles for the gamers’ expectations, we have not been able to meet the game’s expectations, but we are trying as much as possible that this would be played by the gamers and liked by gamers for a long time. So the 12 titles — so 6 titles would be released by FY ’25. That’s our current plan. And the remaining 6 titles, as for when to be released, we are still working on that.
And the live service games and multiplay titles, that’s the total of that. So in mid- to long term, we want to end this kind of service, and that’s the unchange policy of our company, but it’s not that we stick to certain titles, but for the gamers and game titles quality should be the most important. That’s how I feel about it. Thank you.
Unidentified Company Representative
Next, we’d like to take the next question. The Weekly Diamond, in Madasa, please?
Unidentified Analyst
I hope you can hear me?
Unidentified Company Representative
Yes, we can hear you.
Unidentified Analyst
I have two questions. The first question is about AT&S earlier in your presentation, you said that the demand on TV is going down. And as a result, you are working on the cost reduction effort. So which kind of cost are you trying to reduce? Please talk about this initiative.
The second question is about imaging and sensing solution, the Slide 15. FY ’23 forecast says that the additional cost reduction. So more specifically, what is your cost reduction effort like.
Hiroki Totoki
Thank you very much for your question. First, on ET&S. So the sales and market condition will continue to be difficult. So our sales cost will be reduced and operation cost will also be cut down. So we have moved up this initiative. The sales amount will go probably go down slightly. But in terms of profitability, we believe that we can maintain the same level. So with that in mind, we will work on the cost reduction.
As for I&SS, on this, the additional cost reduction that we are mentioning here, we have several points included here. The equipment, we are reviewing the equipment condition. So we are also reviewing the situation for next year, and we are reviewing the outsourced work as well. These are the main things that we are working on. That’s all.
Unidentified Company Representative
I’d like to move on to the next question. [Operator Instructions] Are there any questions? There seems to be none. So with this, we’d like to conclude the Q&A session for the media.
Q&A for investors and analysts will start at 4:42.
Unidentified Company Representative
We’ll begin the Q&A session for investors, analysts shortly. Would you kindly wait until the Q&A session begins.
Thank you very much for waiting. Now we’d like to entertain questions from the investors and analysts. I am Kondo of Finance and I group reserving master ceremonies. The people on the slide, so on the slide will be responding to your questions as was the case of media session. As for the operation of telephone set and attention point for attention, please look at the invitation that in advance. [Operator Instructions] We set aside about 20 minutes for Q&A session. Now we’d like to begin the question-and-answer session. [Operator Instructions] Morgan Stanley, MUFG Securities, please.
Masahiro Ono
Ono from Morgan Stanley. One question for a game and one for the films. First, game network. FY ’24, the factors for increase or decrease of revenue and profit. Can you explain these factors. For example, the small lighter Vaden will be launched, and they will have impact upon the result, the price increase of hardware and the plan change of the PlayStation Plus. About half of the year, there will be impact, simply calculated it will be in the latter half of JPY20 billion. What is your view on this? And Bungie’s acquisition cost will be significantly decreased, you said. If you can comment on the size of the impact. And first-party titles, to number of titles are pushed out to the next fiscal year, is that also a factor for increasing profit? Are there any other factors which might impact decrease in the profit for the game sector?
As for the pictures, long last, strikes are about to be complete — to be ended, and we feel relieved. Towards next year, fiscal year pipeline, and together with the release, depreciation costs might occur as well, there may be pluses and minuses for this year and next fiscal year. In the Pictures segment, is it possible to achieve increased income and increased profit? Or is that going to be difficult for next fiscal year? These are my questions.
Hiroki Totoki
Thank you for your questions. First, Game & Network Services, next fiscal year, what are the factors for pushing up or pushing down the income and profit? First, starting from PS Plus. As you pointed out, it will have full year impact from FY ’25. 12-year package, then that’s how the impact will be. True math package, which means about 60% of the users you can think in that way.
And then acquisition-related cost, not only Bungie but number of acquisition-related costs occur. It — the cost peaked in FY ’23 in FY ’24, on a dollar basis as compared to this year, about 20% decrease will be the level of acquisition costs. That is about the acquisition.
And then hardware-related costs, this fiscal year, in terms of selling units of volume, it is going to be the peak this year. Sales, promotion-related costs and logistic-related costs will be reused. We are expecting that there will be a reduction. And this will be a factor for increase in profit.
On the other hand, for content, continuing on additional investment will be made. And this will be partially offsetting the increase in profit. That’s my response to the first question.
With regards to pictures, news there that the strike has come to a close in the morning of Japan time. So how it is coming to a close, we do not know the specifics yet. But no doubt that it is going to come to an end.
So for the fiscal year’s forecast, what we are showing now, we are likely to come very close to that or there may be a bit more upside opportunities, but we have to examine in more detail.
This year, the launch impact and comparing this with FY ’24. And is it possible to see increased revenue and increased profit? It’s not that simple calculation. Strike ends then there will be a resumption of the theatrical release and the windowing in FY ’24, there are more windows, then for that, marketing promotion costs will be incurred to be prepared for that. So we cannot just simply compare fiscal year one — fiscal year to another fiscal year and say whether it’s possible to see increase in both revenue and profit.
But the fact that the strike has come to end is indeed a positive factor in the medium to long term, and we’d like to increase the profit accordingly.
Unidentified Company Representative
Thank you. All right. So next question. From Citigroup, Ms. Ezawa, please.
Kota Ezawa
Yes. So my name is Ezawa from Citigroup Securities. Can you hear me?
Unidentified Company Representative
Yes.
Kota Ezawa
And I want to ask one on game and one on semiconductors. But games, this period, PlayStation 5 hardware, so to 25 million units target. So according to what Tecan told us, so 25 million unit would be kept. But the profitability, we should look at the balance with the profitability and this 25 million target.
So specifically, how do you see it? How much profitability change would there be? So that 25 million units would not be kept? Or to what extent can we try to aim for 25 million objective. So the selling cost, how much more would there be necessary? So how much profit would you like to see? So can you elaborate on that and tell us how you think about it?
And the second question is about semiconductors. So the yield and next term. So there is going to be fruit. So the new products, and there is going to be having issues of yield, I think. So about the yield, can you elaborate on this so that what’s happening in the yield of semiconductor? So it’s not going quite well. So now in the improvement phase, you say, but the improvement, is it a structural improvement that’s happening or that because you are changing to the different kind of products. So is it some kind of a more over — onetime kind of a treatment? So just by changing the product.
So — and another additional question, if I may, about the impact of profit. So if you can review this. So 15% impact on the — for free. So JPY35 billion in numbers, is that right? So can you tell us about it?
Hiroki Totoki
Okay. Thank you for your questions. So first of all, on the game network services, so 25 million units and the balance with the profitability. So well, if I put it successfully as a company, we are having the guidance for this year. So this guidance, the operating profit, we are going to keep this operating profit according to the guidance for this year. And the profitability is not going to be too much of a downside from the current estimated profitability. So we don’t do such a drastic discount sales or the promotion. That’s my answer to the first question.
And I&SS about the yield. Well, technical content, it’s really the competitivity — source of competitivity. So it’s going to be a quite a detailed discussion. So I would like to refrain from going into that detailed discussion at this point. But generally speaking, for the semiconductors, so the new wafer, the new product and then the yield to stabilize, we would require a certain amount of time.
So it starts from low yield, and then with the improvement, then the targeted level can be achieved. That’s how the new product of semiconductor would go. So I think it’s taking more time than we first initially thought. So we are challenging new technology here. And it’s not just one new technology, but we have several issues here. So that’s keeping us from advancing.
And our semiconductor is with a long touch so the wafer in. So the improvement situation, we cannot see the total picture very easily because that is quite long. And that is causing this yield issue, and that’s at the bottom of the yield issue. So the improvement is not structural, but we have to look at each phenomena, and we have to accumulate the solutions and to make it optimal.
And if we have changed to a new different product? No, that’s not what we are doing. That’s my answer.
Kota Ezawa
And the impact on the profit, well, the 15%, how much would that translate into amount?
Hiroki Totoki
Yes, that’s just as you said, JPY35 billion. Thank you.
Unidentified Company Representative
We’d like to entertain the next question. SMBC Katsura, please, SMBC Nikko Securities, Katsura-san. Please go ahead.
Ryosuke Katsura
This is Katsura from SMBC Nikko Securities. And I have 2 questions as well. in GNS and INSS. First, on game, next year in March, Ranson is going to leave and Totoki-san going to have this role concurrently. So the background has already been explained in the press release, but — in the mid- to long term, NS top management, what is your vision? That is what I’d like to ask. That’s the first question.
And the second question on I&SS. Next fiscal year, or looking at the supplementary sheet, wafer capacity is 154,000 already. And next fiscal year, the number of models will be expanded. So I think that is one of the reasons. But on the other hand, you will be reviewing the lines and also reducing the number of lines. So next fiscal year, the depreciation of the investment. What is going to be the scale? And depending on that, will it impact the improvement of profitability and to what extent? That is what I’d like to understand.
Hiroki Totoki
Thank you very much for your questions. First, on G&NS this time, starting October 1, I became Chairperson and then in April — on April 1, I will be the provisional CEO for interim. And this has already been published, but it will be for a maximum 1 year will be an acting CEO. And during this time, my most important mission will be to find the successing CEO and assigning the person and transitioning to the person smoothly.
So game and networking services is a strategically important business for Sony. So — of course, employees and other stakeholders have high expectation towards this business. So we want to address the expectation by selecting the appropriate CEO and transition to the person as soon as possible. That is the answer to the first question.
And second question on I&SS, FY ’24 our view. The investment has been continuing and depreciation expenses will increase next fiscal year as well because we are moving to dice size — large-sized equipment. And as a result, the demand will be increasing, but the — we will be discerning the market condition recovery. And so next fiscal year onward, we’d like to make decision on investments.
I believe that next fiscal year, for the next mid-range plan, I believe that we can talk about our next mid-range plan thoroughly to use. So as we talk about that, I think that we can talk about the size of investments that we will be making in the next 3 years. That is all. Thank you.
Unidentified Company Representative
Thank you. The time is running short. So from now, I’d like to ask questions to be limited to 1 question per person. Next, JPMorgan Securities, Ayada-san, please.
Junya Ayada
Ayada from JPMorgan. One question. Game. I have a question regarding game. Second quarter operating profit an increase and decrease. — thinking behind that, can you explain in a quantitative fashion — excluding FX impact, JPY8.5 billion decrease in profit on a year-on-year basis. The factors for this hardware negative was large and software was an increase in promotion and others is SNG was large. So what is the impact for each of these factors?
And if it’s difficult to say in a quantitative manner, the profitability of software remains — whether the profitability of software is not changing from the before.
Hiroki Totoki
Quantitatively, we are not disclosing. So I would like to highlight the important points. First, operating profit and the factors for increase. The largest contributor is software. Simply, software sales was good. First party, slightly weak. Third party is strong. On a net basis, there will be contribution — positive contribution.
And then the second is the positive impact of the exchange rate. And next is network service. Simply, network service revenue increased. And the negative factors are the following: there are two factors. One is hardware. PS5 selling is increasing and related to that. And then sales is increasing this much. And SG&A is increasing accordingly. So these are the positive and negative factors.
Sadahiko Hayakawa
Thank you. All right the next question and this will be the last question. So from Matsui Securities [ph].
Unidentified Analyst
The cash flow I would like to ask and 1.16 trillion and so at the year-end the inventory doubled and the GNS and INS, what kind of level would that be and for the next year onwards, so the working capital would be more pressurized and so obviously it would be better. So for the game and INSS, would you tell us how it’s going to be or how you view this?
Sadahiko Hayakawa
Yes, thank you for the question and ask for the question. So as I would answer this question. Yes. And for your question. And this issue that you raised. So JPY90 billion for the cash flow is because of the foreign exchange impact and also the inventory and the working capital — sorry, not the inventory, but working capital for the debt we have and the PlayStation 5 and also the semiconductor.
The second quarter and the third quarter, the sales to be increased, so we have more inventory on hand. And as of much and it’s going to be normalized. And especially game, the inventory would be much less in March, okay? And for the next year, so it’s going to be a compressed inventory.
So how is the operating cash flow would be? So midterm plan, we are reviewing this now closely. And about the working capital, it’s going to come back. And here, the cash flow would be positively impacted. And what you had asked the inventory level as of year-end, G&NS and I&SS is different. So about the game, PlayStation 5 sell-in would be increased so that inventory would be largely decreased. And I entices, as has been explained, the revenue is increasing quite rapidly. In that case, the inventory is going to be at a level that’s appropriate to that. Thank you, and that’s all for me.
Unidentified Company Representative
As such, we would like to close the Sony Q2 FY 2023 consolidated results meeting. Thank you so much.
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