Face change with a future-oriented mindset
and become a compass that illuminates
the destination in difficult times
Board Director, Executive Vice President & CFO
Kazuhiko Fujihara
Financial Forecasts
Financial forecasts and direction for the fiscal year ending March 31, 2023
In the fiscal year ending March 31, 2023, we are committed to achieving our long-promised goal of ¥1 trillion in operating income (announced in August 2020). For the fiscal year ending March 31, 2023, the Consumer segment is expected to see a ¥159.5 billion (25%) year-on-year decrease in profit due to the impact of the mobile service price reduction. The Enterprise segment, in contrast, is expected to increase its profit by ¥21.5 billion (17%) from the previous fiscal year as its solutions and other businesses grow against the backdrop of the advancement of digitalization. We expect year-on-year growth for revenue and profits on a consolidated basis, taking into account the remeasurement gain from the consolidation of PayPay, which has grown significantly due to a Group-wide effort. Recording a remeasurement gain from making PayPay a subsidiary was fortunate in terms of timing, but we do not intend to use this to gloss over our business performance; rather, we aim to increase corporate value on a consolidated basis by generating cash flow that exceeds the previous year, not paper results. I see this situation as an important period preliminary to demonstrating our next stage of growth. I take the positive view that this will be a step toward our next growth, as we can win the confidence of the stakeholders in our management's commitment by maintaining revenue and profit growth by making PayPay a subsidiary even in the difficult time of the mobile service price reduction.
Starting from the fiscal year ending March 31, 2024, the impact of the mobile service price reduction will have run its course, and we will begin to see the impact of cost reduction efforts and decreasing depreciation costs, along with business growth in the Enterprise and the Yahoo! JAPAN/LINE segments. Therefore, operating income on a consolidated basis excluding the impact of PayPay becoming a subsidiary will bottom out in the fiscal year ending March 31, 2023, and then recover from the fiscal year ending March 31, 2024 onwards. In addition, we expect to be able to generate stable cash flow on an ongoing basis as the rollout of our 5G area investment runs its course and capital expenditures decline significantly.
- [Notes]
-
- *1Net income attributable to owners of the Company
- *2Adjusted FCF = FCF + (proceeds from the securitization of installment sales receivables – repayments thereof), excludes FCF of A Holdings Corporation and Z Holdings Corporation and its subsidiaries, loans to Board Directors, and impact of PayPay Corporation consolidation in fiscal year ending March 31, 2023. Includes dividend payments from A Holdings Corporation.
- *3Acceptance basis, excluding rental mobile phones for enterprise customers, shared equipment (contributions by other operators), and IFRS 16 “Leases.”
Reason for disclosing our plan about the fiscal year ending March 31, 2024 and beyond
The fiscal year ending March 31, 2023 is the year in which the impact of the mobile service price reduction will peak. Profit would be lower year-on-year if there were not remeasurement gain from making PayPay a subsidiary. Even though SoftBank has increased revenues and profits continuously since its listing, we are fully aware that our shareholders and investors are anxious about the decline in earnings from our Consumer segment, which is the backbone of our business.
At this juncture, I am reminded of the time when we once posted a loss of nearly ¥100 billion due to our upfront investment in the ADSL service “Yahoo! BB”. At that time, our President Masayoshi Son (currently Representative Director, Chairman, and CEO of SoftBank Group Corp.) related the following story: “In a dark sea, you can't tell the size of the waves, the depth of the water, or where the shore is. Investing in a loss-making company is like swimming in such a sea, and nothing is more unsettling. At such times, you need a light to illuminate the sea.”
To me, the fiscal year ending March 31, 2023 resembles that “dark sea.” Therefore, the reason we have decided to openly disclose our plan for the fiscal year ending March 31, 2024 and beyond is precisely to “illuminate the sea;” in other words, to enable shareholders and investors to understand the future outlook by explaining everything, including the time frame in which the impact of the mobile service price reduction will run its course, our cost reduction measures, and the growth of businesses that drive the “Beyond Carrier” strategy, such as the Enterprise and the Yahoo! JAPAN/LINE segments.
- [Note]
-
- *2Adjusted FCF = FCF + (proceeds from the securitization of installment sales receivables – repayments thereof), excludes FCF of A Holdings Corporation and Z Holdings Corporation and its subsidiaries, loans to Board Directors, and impact of PayPay Corporation consolidation in fiscal year ending March 31, 2023. Includes dividend payments from A Holdings Corporation.
Factors for decrease in profits in the Consumer segment in the fiscal year ending March 31, 2023
First, the negative impact of the mobile service price reduction is expected to be ¥90 billion (¥77 billion in the previous fiscal year). This is because many customers rethink their price plan when they get a new phone, so we expect the impact to peak as this cycle plays out. In addition, sales-related expenses, etc, are expected to increase by ¥60 billion, of which ¥40 billion is due to the deferral of customer acquisition costs (non-cash). Customer acquisition costs are capitalized at the time of their expenditure and are amortized (recorded as expenses) over the period that the device is used. The customer acquisition costs incurred in the fiscal years ended March 31, 2020 and 2021, which were kept low due to the amendments to the Telecommunications Business Act and the COVID-19 pandemic, were deferred to the the fiscal year ended March 31, 2022. In contrast, the increased customer acquisition costs associated with increased sales activity in the fiscal year ended March 31, 2022 will be deferred primarily to the fiscal year ending March 31, 2023 and thereafter. We therefore anticipate an increase in sales-related expenses in the fiscal year ending March 31, 2023 compared to the previous fiscal year.
We are also factoring in a decline in gross profit on handset sales due to a decrease in the number of handsets shipped compared to the fiscal year ended March 31, 2022; a downturn in Electricity following its strong performance in fiscal year ended March 31, 2022; and a cost increase of ¥15 billion due to the termination of PHS service. The Consumer segment is facing a combination of these negative factors in the fiscal year ending March 31, 2023. However, the negative impact of the mobile service price reduction is expected to peak in the fiscal year ending March 31, 2023, shrink to ¥50 billion in the following fiscal year, and then flatten out in the subsequent fiscal years.
On the other hand, the cumulative number of smartphone subscribers is on the rise, with our smartphone users accounting for 47% of “Yahoo! JAPAN” Shopping transaction value*1 and 43% of “PayPay” GMV (gross merchandise value). I want to emphasize the point that our smartphone users are an important foundation for the growth of the Group's various businesses, not limited to the telecommunications business.
- [Note]
-
- *1Total transaction value of “Yahoo! JAPAN Shopping” and “PayPay Mall”
Forecast for ARPU
For the fiscal year ending March 31, 2023, the average total ARPU (average revenue per user per month) is expected to decrease by ¥270 from the previous fiscal year. ARPU declined by ¥280 in the fourth quarter of the fiscal year ended March 31, 2022 compared to the same period of the previous year, which means the decline in ARPU is expected to narrow down in the fiscal year ending March 31, 2023. Going forward, revitalizing the “SoftBank” brand will be a major theme. To make people feel the value unique to the “SoftBank” brand, we need to link the various services within the Group and increase the number of attractive services that 5G offers. I believe that this will increase the number of unlimited data plan users of “SoftBank” brand, and increase the number of users switching brands from “Y!mobile” to “SoftBank”, which will boost our ARPU.
Cost Strategy
Efforts to reduce costs
We expect the cost reduction to become more pronounced from the fiscal year ending March 31, 2024 onwards. First, with regard to fixed costs, the depreciation of large capital expenditures at the ¥700 billion level that were made after 2012, when the company acquired the wide-coverage frequency band (what we call the “Platinum Band”), has come to an end, which means depreciation and amortization expenses are entering a contraction phase. Furthermore, PHS, 3G, and ADSL services will be phased out one by one, and the associated equipment will be decommissioned promptly. By consolidating our networks into 4G/5G and optical lines in this way, we expect to reduce their operating costs by approximately ¥20 billion in total. The negative impact of the mobile service price reduction in the fiscal year ending March 31, 2024 will be largely offset by the decrease of depreciation and operational costs, and we intend to return to an earnings growth trend with business growth in the Enterprise and the Yahoo! JAPAN/LINE segments.
I also serve as head of the Purchasing Department, where we are also promoting cost reduction through our purchasing strategies. I always tell my team to think of themselves not as a purchasing department but as “Purchasing Inc.” I constantly guide the team so that they always aim to expand “Purchasing Inc.'s revenue, which means transaction volume, and its profit, which means cost reduction amount,” by thoroughly involving themselves in every aspect of the Group's businesses and increasing the transaction volume of the Purchasing Department. We have accumulated a wide range of purchasing know-how through various purchasing initiatives, such as using a reverse auction system in which SoftBank, the buyer, presents the starting price and terms and condition and then selects a supplier, as well as through joint Group purchasing and by having our Purchasing Department employees undertaking the tasks for the Group companies or work on loan for them. Based on this know-how, we have been actively working to reduce costs across the entire Group since 2019, when Yahoo Japan became a subsidiary. In the fiscal year ended March 31, 2020 the results of such cost reduction measures amounted to about ¥7 billion, mainly for Yahoo Japan, but each year we covered more Group companies, and by the fiscal year ended March 31, 2022, the annual savings reached ¥16 billion. Our aim is not to meddle in the cost reductions of Group companies as the parent company, but rather to encourage each Group company to take the initiative to be more effective, realizing that the pursuit of smarter purchasing activities can generate a considerable amount of money and lead to business improvement, and in fact this is exactly what has been happening recently.
Cash Allocation
Capital expenditure plan and growth investment policy
Capital expenditures (in the Consumer and Enterprise segments) are set to increase by 8% year-on-year to ¥430 billion in the fiscal year ending March 31, 2023. As of the fiscal year ended March 31, 2022, our 5G network achieved population coverage of over 90%, and in the fiscal year ending March 31, 2023, we will make concentrated investments to further expand our 5G rollout, in terms of both area and demand-driven spot enhancement, to complete our 5G network ahead of our competitors. Once that milestone is reached, I expect capital expenditures in the fiscal year ending March 31, 2024 and beyond to drop sharply by ¥100 billion to around ¥330 billion and then remain flat.
Smartphone users are still not very aware of the difference between 4G and 5G, but this final intensive investment will complete the 5G core network and usher in a phase in which services that take full advantage of the benefits of 5G will become widely available.
Meanwhile, funds for growth investments, which are kept separate from capital expenditures, reached ¥88 billion in the fiscal year ended March 31, 2022, an increase from the previous fiscal years , due to additional investment in PayPay as well as investments in Treasure Data, Inc., which has a dominant market share in customer data platform (CDP) services in Japan, and Axiata Digital Advertising Sdn. Bhd., which operates digital marketing businesses in ten Asian countries and is a Group company of Axiata Group Berhad, one of the largest telecommunications carriers in Asia . Even in normal times, about half this amount is budgeted, and we are always on the lookout for new business opportunities.
Approach to future adjusted FCF levels
As the starting point for all financial targets in our planning, we use adjusted free cash flow (FCF), which is calculated by operating cash flow, less capital expenditures and investments for growth. Of course, all business activities involve cash, and cash flow conditions also affect our management options to achieve growth, which is why I believe that the idea of focusing on adjusted FCF is very important.
For the fiscal year ending March 31, 2023, while capital expenditures will increase to ¥430 billion, we aim to control growth investments to reach a target of ¥600 billion in adjusted FCF, a 3% increase from the previous fiscal year. I want to make sure we can accomplish this while also making continuous improvements to our working capital and other indicators. Our policy is to steadily generate adjusted FCF at this level from the fiscal year ending March 31, 2024 onwards.
Financial Strategy
View on the status of the balance sheet
- [Note]
-
- *1Net leverage ratio = Net interest-bearing debt / Adjusted EBITDA (LTM)
We currently have long-term issuer ratings of A+ and AA− with Rating and Investment Information, Inc. (R&I) and Japan Credit Rating Agency, Ltd. (JCR), respectively. We will continue to maintain this high rating while preserving both our earnings capacity and financial soundness. In monitoring financial soundness, we emphasize net leverage ratio as an important indicator. This is the ratio of net interest-bearing debt to adjusted EBITDA.
As of March 31, 2022, the Group's net interest-bearing debt increased by approximately ¥360 billion from the end of the previous fiscal year to approximately ¥4,380 billion. Although the mobile service price reduction has a negative impact on adjusted EBITDA, we are committed to controlling the net leverage ratio within the 2x range.
With regard to earnings capacity, although ROE is well over 30%, I am well aware of the issue of our low shareholders' equity. However, because we have committed to a high level of dividends, it would be difficult to raise shareholders' equity at one bound. On the other hand, our shareholder's equity ratio as of March 31, 2022 was 13.2%, an improvement of 0.6 percentage points from the end of the previous fiscal year, and we intend to steadily improve this ratio going forward. I also believe that making PayPay a subsidiary will have a positive impact on improving our shareholder's equity ratio on a consolidated basis.
At the beginning of the COVID-19 pandemic, from a crisis management perspective we focused on expanding securitization of receivables to increase cash on hand. Now, however, we are able to steer our cash position to a stable and optimal state. About fund-raising methods, we are working to lengthen the average remaining maturity of interest-bearing debt and improve financing costs by increasing the ratio of direct financing, especially bond issuances. Although the impact of the mobile service price reduction is significant, I believe that our financial position is secure.
Approach to capital costs and initiatives to enhance corporate value of portfolio companies
As a basic policy, when we execute investments, we use the internal rate of return (IRR) as the hurdle rate. Because the Company makes maximum use of its liabilities, our weighted average cost of capital (WACC) is roughly 5%, but when making investment decisions, we look for investment returns that are commensurate with business risks well above that level. In calculating the IRR, the Corporate Planning Division, which I head, carefully examines the business plan from the business unit, takes into consideration multiple risk scenarios, and calculates the IRR based on approximately five years of cash flow and terminal value. After the investment is executed, Board Directors and Audit & Supervisory Board Members are dispatched as necessary and quarterly monitoring is conducted to check the progress against the approved business plan and take necessary measures.
Shareholder Returns
Future shareholder return policy
Regarding dividends, in the fiscal year ending March 31, 2023 we are committed to a total annual dividend of ¥86 per share, maintaining a total shareholder return ratio of approximately 85%*2. Our target for adjusted FCF is also based on this assumption. From a cash management point of view, there is a trade-off between growth investments and shareholder returns, but we want to be a company that pursues both. We have been consistent in this approach since our listing as a publicly traded company. While our policy of high levels of shareholder returns will remain unchanged in the fiscal year ending March 31, 2024 and beyond, we will be setting and disclosing new medium-term targets amidst the current abundance of business opportunities, and we will continue to consider where to strike the balance between growth and returns, taking into account the dialogue with the capital markets.
- [Note]
-
- *2Total amount of dividends paid and treasury stock retired during the three years from the fiscal year ended March 31, 2021 through the fiscal year ending March 31, 2023 / total amount of net income attributable to owners of the Company during the same three years
The Significance of the CFO
The role of the CFO at SoftBank
An ancient Japanese proverb cautions us to “cut your coat according to your cloth,” or in modern terms, “consider your income before spending.” In other words, you must reliably anticipate revenues and keep costs in line with your budgets. I believe that the basic principle of any business is to first generate proper cash flow through solid operations. On the other hand, when a great opportunity presents itself, you must seize it, even if you have to leverage it with borrowing. In other words, I believe that the most important role for a CFO is to set a firm target and then serve as a compass to guide the company on a growth trajectory by controlling cash while judging when to use the gas pedal and the brake.
The fact is that Yahoo Japan and LINE are indispensable for advancing the “Beyond Carrier” strategy, and the Finance Division played a central role in making them subsidiaries of SoftBank. The same is true of our investment in PayPay. In the future, if there is an opportunity to acquire a major growth engine, we want to be able to allocate funds and invest them without hesitation, and for this reason, we thoroughly manage our cash flow on a daily basis.
SoftBank is a unique company that has grown by spotting trends early and changing its business domain accordingly. This is why our DNA is rooted in a spirit of freedom and challenge, with no barriers between the possible and the impossible, and this dynamism is our strength. While I am committed to building a sound and stable financial foundation, I also place great importance on the DNA that compels us to rise to these challenges.
Ideas I value as a personal philosophy
I believe it is very important to face change with a future-oriented mindset. Thinking about this from the standpoint of the Finance Division, I think there are three components of this mindset: (1) Analyze change as the accumulation of differences; (2) Shorten the clock cycle; and (3) When in doubt, look further ahead.
To navigate as a compass, you must be clear about where you are going, measure the path from your current location to the goal, and consider what it will take to reach it. However, the business environment changes from moment to moment. I define this change as the accumulation of differences. It is important to “Analyze change as the accumulation of differences” to consider what actions are necessary, that is, to compare your situation to the initial budget, the previous month, and the previous year, carefully analyze the extent of the difference, why it occurred, why it has grown, what will happen if we ignore it, and discuss what actions we should take to achieve the goals. That is the first component.
The second, “Shorten the clock cycle,” means shortening the cycle in which the forecast is revised. Rather than being forcibly tied to a budget decided at the beginning of the period, I believe it is more important to respond to changing conditions and frequently revise our forecasts based on our analysis.
Finally, “When in doubt, look further ahead,” is really more like SoftBank's slogan than my personal philosophy. For example, by discussing what is coming 10 years from now, we can have a common understanding of what we should aim for in the long term and what we should be working on to achieve that, rather than just facing the issues that are currently piling up in front of us. Having a long-term perspective for the future is extremely important for a group like ours to move forward. With this future-oriented mindset as my personal philosophy, I would like to fulfill my role as a compass guiding SoftBank's sustainable growth.