Main Q&A at Earnings Investor Briefing for FY2023 | About Us

Date	Thursday, May 9, 2024 6:00 pm - 7:00 pm
Speakers	SoftBank Corp.: Kazuhiko Fujihara (Board Director, Executive Vice President & CFO) Osamu Akiyama (Vice President, Head of Strategic Finance Division) Wataru Onoguchi (Head of Finance and Accounting Division) Yudai Sasaki (Deputy Head of Corporate Planning Division)

It appears that the operating income in the Consumer segment for the fourth quarter of FY2023 improved significantly. What were the contributing factors? What is the outlook for FY2024?: Compared with the same period of the previous fiscal year, the device gross margin and customer acquisition-related costs contributed to the improved profitability. Fourth quarter is a peak season at the end of a fiscal year when the impact of customer acquisition measures becomes significant. Looking ahead to FY2024, we expect further improvements in device gross margin and customer acquisition-related costs as well as an increase in mobile revenue, anticipating an improvement in operating income by over ¥30.0 billion in the Consumer segment.

In FY2024, do you expect the same level of impact from customer acquisition measures (deducted from mobile revenue) as in the previous period?: It depends on the customer acquisition measures to be implemented this year, but our baseline approach is to continue with the similar trend as in the past two years. With the increase in mobile revenue, we aim to achieve a profit increase of ¥34.5 billion and work towards that goal appropriately.

I understand that the decrease in depreciation and amortization significantly contributed to the profit growth in the Consumer segment in FY2023. What are the factors contributing to the profit growth in FY2024?: We expect that the mobile ARPU will remain flat while the net additions in the number of subscribers will drive the profit growth. We also expect that the negative impacts from the deferral of acquisition-related costs in the past years will diminish, leading to a turnaround to a slight increase. Furthermore, we expect an improvement in device gross margin. With these three factors, we expect that the operating income for the Consumer segment in FY2024 will increase by ¥34.5 billion year on year. On the other hand, customer acquisition remains on track but there has been some slowdown in its growth, which leads us to not anticipate an increase in the absolute amount of acquisition expenses.

In the fourth quarter of FY2023, aggressive sales were restricted due to the amendment to the Telecommunications Business Act. Why was the deduction amount from mobile revenue related to customer acquisition measures significant? Is there any special accounting treatment being applied?: No special accounting treatment is being applied. The impact of customer acquisition measures, which are deducted from Sales of goods and others, has improved due to the amendment to the Telecommunications Business Act. Taking these into consideration, we expect a decrease in the impact from customer acquisition measures.

Regarding the operating income forecast for FY2024, the growth investments in generative Ai, etc. will be a downward pressure factor of ¥30.0 billion. However, the operating income forecast by segment shows that, under “Other”, there will be a decrease by ¥55 billion year on year. What is the relationship between these two figures?: Growth investments in generative AI, etc. will amount to approximately ¥30.0 billion. In addition, there will be approximately ¥20.0 billion for various R&D and other investments for the future such as HAPS, which has traditionally been included in the “Other”. Furthermore, there are provisions for new investments during the period and a small buffer, which collectively result in a decrease in operating income by ¥55 billion.

Regarding the operating loss forecast of ¥-61.0 billion under “Other” in FY2024, the growth investments appears to be significant. Is the buffer substantial?: We have set it up this way due to uncertainties. We consider is desirable to look back later and be able to evaluate that the buffer was ample. Currently, we are focused on becoming the domestic leader in generative AI. We aim to work towards maximizing operating income and free cash flow.

Which segment's income will be affected by the growth investments in generative AI, etc.?: Currently, as it is an advance investment in the stage of research and development, it is recorded under “Other” in the segment profit. However, we believe that once we have a specific product or business model in place, we need to review the segment in which to record. We will continue to seek opportunities in the Consumer segment, but at present, we also anticipate many cases where revenues and expenses shall be recorded in the Enterprise segment, and we are indeed hopeful of such outcomes.

Regarding the investments in generative AI, etc., you are anticipating expenses of ¥30.0 billion each for in FY2024 and FY2025. What is the profitability of the investments? Also, when will it turn profitable, and what is the breakdown of expenses?: We are currently in the process of developing a large-scale language model based on the Japanese language. In FY2024, various initial expenses, including the initial costs of hiring engineers, will be incurred. From FY2025 onwards, we expect to generate revenue incrementally. Initially, we expect to generate revenue by leasing out the AI computing platform that we have developed, with additional services added on top thereof. The period of advance investments will continue until FY2025, and we expect the business as a whole to turn to profitability during the period of next mid-term management plan, from FY2026 to FY2028. As for the breakdown of expenses, we would like to provide details when it solidifies a bit more.

Please provide overviews of the investments in telecommunication equipment and the investments in generative AI, etc., the latter of which is not included in the former. The investments in telecommunication equipment include the investment in Data Centers located in Ikoma and Tomakomai, as well as the investments in NVIDIA's “GH200 Grace Hopper Superchip” for Edge Data Centers. Taking these investments into consideration, wouldn't the investment amount be close to ¥100.0 billion?: The FY2024 investment plan for telecommunication equipment includes the Ikoma Data Center. Regarding the investments in the Tomakomai Data Center and Edge Data Center, if additional ‘beyond telecommunication’ revenue can be expected, we believe it may be acceptable to treat them outside the investment plan at the level of ¥330.0 billion (which is CAPEX plan for the Consumer and Enterprise segments), and is primarily planned to be sorted out in the next mid-term management plan, starting from FY2026. We consider that these investments are more suited to equity-type financing methods such as Bond-Type Class Shares, as a considerable period of time will be needed to recoup the invested funds.

Will the entire investment of approximately ¥150.0 billion in NVIDIA's AI computing platform (NVIDIA H100/B200) be implemented in FY2024?: It would be challenging to implement the entire investment in FY2024. However, because we have already secured funds through the issuance of Bond-Type Class Shares, we are able to accelerate the investment depending on business conditions.

What level of impact would SoftBank's acquisition of A Holdings Corporation shares that are currently held by NAVER Corporation have on SoftBank's balance sheet? Also, how should we consider the impact on capital allocation, such as dividends and CAPEX?: As discussions are still ongoing, we are unable to provide detailed comments at this stage. However, we do not anticipate any significant impact on our business, including dividends and investments in areas such as generative AI. Our net leverage ratio has improved, and EBITDA remains robust, indicating ample financing capacity. We have various options available, including Bond-Type Class Shares.