Sony Group Corporation (SNEJF) Management on Q4 2021 Results - Earnings Call Transcript

Sony Group Corporation (OTCPK:SNEJF) Q4 2021 Earnings Conference Call April 28, 2021 3:00 AM ET

Company Participants

Hiroki Totoki - Executive Deputy President and CFO

Sadahiko Hayakawa - Investor Relations

Conference Call Participants

Takuya Suzuki - Asahi Newspaper

Nishida Munechika - freelance

Junya Ayada - JPMorgan Securities

Ryosuke Katsura - SMBC Nikko

Yasuo Nakane - Mizuho Securities

Masahiro Ono - Morgan Stanley

Unidentified Company Representative

Ladies and gentlemen, it's now time to start this Sony Group Corporation's Financial Results Briefing for the Fiscal Year Ended March 31, 2021. I'm Ida as the emcee for this session. Thank you very much for coming.

And today, that -- as we have announced beforehand, we have invited media members and analysts and institutional investors. And this -- the conference will be streamed through the Internet from our site. Executive Deputy President and CFO, Mr. Totoki, will present this financial results of the fiscal year ended March 31, 2021. And later, we have a Q&A session.

And the total program is about 70 minutes. Thank you very much. We'd now like to turn to Mr. Totoki.

Hiroki Totoki

Thank you very much. So this is the topic that I would like to cover today. The consolidated results for the fiscal year ended March 31, 2021, and so forth. And the consolidated sales grew -- increased 9% compared to the previous fiscal year to JPY 8,999.4 billion, and consolidated operating income increased JPY 126.4 billion to JPY 971.9 billion, both record highs, primarily due to the improvement of valuation gains and losses on the investment securities and other income and expenses. Income before income taxes increased JPY 392.9 billion year-on-year to JPY 1,192.4 billion.

And net income attributed to Sony Group Corporate stockholders increased JPY 589.6 billion year-on-year to JPY 1,171.8 billion. Adjusted operating income before income taxes and net income attributable to Sony Group Corporate stockholders, which excludes extraordinary items can be found on Page 4 through 10 of the materials.

FY '20 consolidated operating cash flow, excluding the Financial Services segment, was JPY 1,122.2 billion, approximately JPY 2.6 trillion cumulative for the last 3 fiscal years, a level that significantly exceeds the target we established with the third mid-range plan.

The cash flow of each of our business segment in FY '20 is shown on this slide. This slide shows the results by segment.

Next, I will show the consolidated results forecast for FY '21. Sales are expected to be JPY 9,700 billion. And operating income is expected to be JPY 930 billion. We have changed our accounting standards to International Financial Reporting Standards, IFRS, from FY '21. Therefore, the FY '20 results I will explain today are based on the U.S. GAAP, while our FY '21 forecast is based on IFRS.

As a result of the adoption of IFRS, the impact of the fluctuations in the market for financial instruments is expected to result in variances with U.S. GAAP in the results of our Financial Services segment and in consolidated other income and expenses. However, since we do not incorporate into our forecast any impact from the fluctuation in the market conditions, we believe that the variance in the forecast resulting from the difference in accounting standards are limited.

This slide shows our forecast by segment for FY '21. I will now explain the situation in each of our business segments. First is the Game & Network Services segment. Sales in FY '20 increased a significant 34% year-on-year to JPY 2,656.3 billion.

Operating income increased a significant JPY 103.8 billion year-on-year to JPY 342.2 billion, a record high for the segment. The increase in operating income was primarily due to the increase in sales of same -- game software, Network Services, partially offset by an increase in selling, general and administrative expenses associated with the launch of the PlayStation 5.

FY '21 sales are expected to increase 9% year-on-year to JPY 2,900 billion. And operating income is expected to decrease JPY 17.2 billion to JPY 325 billion.

Now I will explain in a little more detail the assumptions we made in the fiscal year forecast. As for hardware, supply has not been able to keep up with extremely strong demand for PS5, although constraints on the supply of components, especially semiconductors, are expected to continue this fiscal year. Our current target is to exceed the 14.8 million units we sold in the second year after the launch of the PlayStation 4.

In order to meet the strong demand from our customers, we will continue to work to secure components and strive to do our utmost to produce and sell more units than target. Primarily due to improvements in the profitability of the PS5, we expect hardware and peripherals together to contribute to the same level of profit for the full year as they did in the previous fiscal year.

Next, I will talk about software. Total gameplay time of PlayStation users in March 2021 continued to be quite high at approximately 20% above March 2019, which had no impact from COVID-19. We believe that this level of strong user engagement will continue in FY '21. Software sales in the first quarter ending June 30, 2021, are expected to be below the same period of the previous fiscal year when lockdowns were widespread worldwide. But we expect the same or greater revenue year-on-year from the second quarter ending September 30, 2021, onward.

Regarding Network Services, we do not anticipate a significant increase in subscribers as was the case in the previous fiscal year, resulting from stay-at-home demand. But we do aim to maintain and expand the number of subscribers to PlayStation Plus, which increased throughout the previous fiscal year.

In terms of costs, we plan to increase development personnel and other costs in our in-house studios by approximately JPY 20 billion year-on-year as we further strengthened our in-house product -- produced software. On the other hand, we plan to keep costs in all other areas at the level similar to the previous fiscal year despite the increase in sales.

To enhance our software offering, we intend to continue investing in our partnering with external studios in addition to aggressively investing in our in-house studios. As I just mentioned, we aim to strengthen the PlayStation platform through action such as the recently announced partnership with Haven Entertainment Studios, which was established by Jade Raymond, the creator of the famous game, Assassin's Creed, and our additional investment in Epic Games. Along with the rest of the Sony Group, we will also work to enhance the social and platform capabilities of Games.

Next is the Music segment. FY '20 sales increased 11% year-on-year to JPY 939.9 billion, mainly due to the growth of streaming revenue and Demon Slayer -Kimetsu no Yaiba- The Movie: Mugen Train, which was a blockbuster hit.

Operating income increased a significant JPY 45.7 billion year-on-year to JPY 188.1 billion chiefly due to the impact of the increased sales and recording of onetime gains of JPY 11.9 billion from the transfer of businesses.

In Recorded Music, streaming revenue for the fiscal year continued to grow at the high rate of approximately 22% year-on-year. The profit contribution from Visual Media and Platform, which includes Mobile Game applications and anime, mainly in Japan, accounted for a little less than 30% of the operating income of the entire segment.

FY '21 sales are expected to increase 5% year-on-year to JPY 990 billion. And operating income is expected to decrease JPY 26.1 billion to JPY 162 billion. The decrease in operating income is mainly due to a conservative view as to the profit contribution of mobile game applications this fiscal year, while the previous fiscal year had onetime gains and historic blockbuster hit, Demon Slayer, that I mentioned earlier.

On the other hand, in the Recorded Music and Music Publishing businesses, we expect continued profit growth as we capitalize on the growth of streaming revenue.

We are steadily improving our ability to discover and nurture artists and continuously create hits, and we aim to continue to increase our profitability going forward.

Opportunities for investment in the Music segment are steadily increasing and we are

aggressively pursuing them. To capture more of the growth in emerging markets, we recently announced the acquisition of Som Livre, an independent music label in Brazil. Like the acquisition of AWAL, an artist services business in the independent space that we announced in February, regulatory approval is necessary, but we believe both these transactions will contribute to the further growth of the Music segment.

Next is the Pictures segment. FY '20 sales decreased a significant 25% year-on-year to JPY 758.8 billion, chiefly due to a significant decrease in theatrical releases and delays in TV show productions and deliveries resulting from the impact of COVID-19. Despite the impact of the lower sales, operating income increased JPY 12.3 billion year-on-year to JPY 80.5 billion, mainly due to a significant decrease in marketing costs and strong home entertainment and television licensing revenues in Motion Pictures as well as a decrease in portfolio review costs in Media Networks.

FY '21 sales are expected to increase a significant 50% year-on-year to JPY 1,140 billion. This increase is mainly due to a resumption of theatrical releases in Motion Pictures and a recovery in TV Productions and Media Networks. Operating income is expected to increase JPY 2.5 billion year-on-year to JPY 83 billion chiefly due to the impact of the increase in sales for the entire segment, including license revenue for the popular U.S. TV series, Seinfeld, partially offset by an increase in marketing costs associated with the reopening of theaters.

In Motion Pictures, theaters in major U.S. cities are reopening. And from June, we plan to release into U.S. theaters sequels to hit films like Peter Rabbit and Hotel Transylvania. Theatrical releases remain important to Sony, but taking into account the crowded schedule of release post theater reopening, we will be flexible when selecting the channel through which we will sell our product depending on the content, scale and timing of the work so as to maximize long-term value of each work.

In addition, license agreement negotiations for films and TV shows are proceeding smoothly against the of backdrop increasing demand for content.

As we announced the other day, we have signed long-term license agreements on good terms with Netflix and Disney for U.S. distribution of theatrical releases from 2022.

Next is the Electronics Products & Solutions segment. FY '20 sales decreased 4% year-on-year to JPY 1,920.7 billion, mainly due to a decrease in unit sales, especially of digital cameras, and the impact of foreign exchange rates.

Operating income increased a significant JPY 51.9 billion year-on-year to JPY 139.2 billion, mainly due to a reduction of operating costs, mainly in Mobile Communications and an improvement in the product mix for TVs and other products, partially offset by the impact of the decrease in sales. FY '21 sales are expected to be JPY 2,260 billion, and operating income is expected to be JPY 148 billion. Excluding the impact of the change in segmentation resulting from the recent organizational change, we expect that sales will increase 9% year-on-year, and operating income will increase JPY 13.9 billion year-on-year.

Throughout FY '20, this segment was significantly impacted by intermittent disruptions in the supply chain of components caused by the various factors such as COVID-19. However, we were able to respond swiftly to these changes and secure a high level of profit.

Moreover, the Mobile Communications business, which had been an issue for us, was able to record a large profit which exceeded our initial expectations. From this April, the businesses within EP&S have been combined into the new Sony Corporation.

The operating environment remains unpredictable. But the new management team, which is comprised of people who helped manage through the difficult operating environment of the previous fiscal year, are expected to continue to manage this business with a high degree of resiliency to change.

Next is the Imaging & Sensing Solutions segment. Fiscal year '20 sales decreased 5% year-on-year to JPY 1,012.5 billion, primarily due to lower sales of image sensors for mobile.

Operating income decreased a significant JPY 89.7 billion year-on-year to JPY 145.9 billion, primarily due to an increase in research and development expenses and depreciation as well as the impact of the decrease in sales.

Fiscal year '21 sales are expected to increase 12% year-on-year to JPY 1, 130 billion, and operating income is expected to decrease JPY 5.9 billion to JPY 140 billion.

In fiscal year '21, we expect that our market share on a volume basis will return to a similar level as it was in the fiscal year ended March 31, 2020, thanks to our efforts to expand our market -- our customer base in the mobile sensor business. We will manage the business in a more proactive manner while keeping an eye on risk. We plan to increase research expenses in fiscal year '21 by approximately 15% or JPY 25 billion year-on-year to expand the type of products we sell and to shift to higher value-added models from the fiscal year ending March 31, 2023.

We expect Image Sensor capital expenditures to be JPY 285 billion, part of which was postponed from the previous fiscal year. We plan to shift to higher value-added products that leverage Sony's stack technology in preparation for an improvement in the product mix from fiscal year '22 and we will concentrate our investment on production capacity necessary to produce them.

The other day, we held a completion ceremony for our new fab 5 building at our Nagasaki factory. Expansion of production capacity is progressing according to plan, and we'll be able to expand and equip facilities in line with the expansion pace of expansion of our business going forward.

Shortages of semiconductors have become an issue recently. But with the cooperation of our partners, we have already secured enough supply of logic semiconductors used in our image sensors to cover our production plan for this fiscal year. However, there's a possibility that the semiconductor shortage will be prolonged, so we are accelerating the shift to higher value-added products that we have been advancing here before.

We are also continuing to proactively pursue mid- to long-term initiatives in the automotive and 3D sensing areas, and we'll explain more details at the IR day scheduled for next month.

Last is the Financial Services segment. Fiscal year '20 Financial Services revenue increased a significant 28% year-on-year to JPY 1,668.9 billion, primarily due to an increase in net gains on investment in the separate accounts at Sony Life insurance, partially offset by a decrease in single premium insurance.

Operating income increased significant JPY 35 billion year-on-year to JPY 164.6 billion, primarily due to an improvement in valuation gains and losses on securities at Sony Bank and a decline in the loss ratio for automobile insurance at Sony Assurance, partially offset by an impairment charge against long-lived assets in the nursing care business. New policy amount in force at Sony Life in fiscal '20 was below that of the previous fiscal year due to the impact of COVID-19, but it has trended higher year-on-year from the second quarter ended March -- September 30, 2020.

Fiscal '21 Financial Services revenue is expected to decrease 16% to JPY 1,400 billion, primarily because we do not incorporate into our forecast an increase in net gains and investments in the separate account of Sony Life, resulting from strong market conditions as was the case in the previous fiscal year.

Operating income is expected to increase JPY 5.4 billion to JPY 170 billion, primarily due to an increase in policy amount in force at Sony Life.

Now I would like to discuss the financial directions of fourth mid-range plan, which starts this fiscal year. In previous mid-range plans, we have prioritized the improvement and enhancement of the profitability of each business. But in the fourth mid-range plan, we aim to grow both sales and profit.

We will adopt adjusted EBITDA as the group key performance indicator for the fourth mid-range plan. EBITDA is a metric that enables us to confirm that all of the businesses in the Sony Group, including Financial Services, which is now a wholly-owned subsidiary, are expanding over the mid to long term through cycles of investment and return and it is often used to calculate corporate value. Our target for the cumulative total of the new -- next 3 fiscal years is JPY 4.3 trillion.

For more details, including the definition of the adjusted EBITDA, please refer to Page 23 of the presentation materials.

Now I will update you on our capital allocation plan. During the third mid-range plan, we used the consolidated operating cash flow, excluding the Financial Services segment and the cash we generated from asset sales, to invest JPY 1.2 trillion in capital expenditures; to invest JPY 1.4 trillion in strategic investments, including share repurchases and issued JPY 170 billion in dividends.

In the new mid-range plan, we have established a capital expenditure target of JPY 1.5 trillion and a strategic investment target of JPY 2 trillion or more as we aim to grow our business over the long term beyond the duration of the plan. Regarding dividends, our policy is to increase dividends in a stable manner over the long term. We expect to fund our allocation of capital through consolidated operating cash flow, excluding the Financial Services segment, including cash left over from before. If additional funds become necessary, we might also sell assets and borrow with a strict eye on financial discipline.

Operating cash flow includes dividends from the Financial Services business. And we expect that the Financial Services business will contribute to the growth investment capacity -- capability of the Sony Group through a stable increase in its dividends as its own profit grows over the mid- to long term.

Lastly, I would like to touch on share repurchases. Today, we announced the establishment of a facility to repurchase up to JPY 200 billion of the shares of Sony Group Corporation over the period of 1 year. In the previous fiscal year, we did not avail ourselves of the share repurchase facility we had in place because of a steady increase in growth investment opportunities and the price of our shares. But we continue to view share repurchases as a part of the strategic investment, and we will implement them in an opportune manner.

This concludes my remarks.

Unidentified Company Representative

Thank you very much, Mr. Totoki, the Executive Deputy President. And at 16:25, we would like to start this media question and answer. At 16:50, we have a Q&A session for the analysts and the institutional investors and then about 20 minutes each allocated to each Q&A session. And then -- so those -- the media members and investors and analysts who have already registered to ask questions, you have a designated phone number and then please link to that number.

If you have not made any prior registration, through the international streaming, you can listen to the Q&A session. So please wait a moment while we get ready for the Q&A session. Thank you.

We will soon start the question-and-answer session for the media. Please wait for a few minutes.

Question-and-Answer Session

Unidentified Company Representative

Thank you very much for waiting. Now we'd like to entertain questions from the media. The responder is Mr. Totoki, the Executive Deputy President and CFO; and Ms. Naomi Matsuoka, Senior Vice President in charge of Corporate Planning and Control, Finance and IR; and Mami Imada, the VP -- Senior General Manager at the Corporate Communications.

[Operator Instructions] Thank you for your cooperation. [Operator Instructions] Thank you.

The first question from Toyo Keizai, [Mr. Takahashi], please.

Unidentified Analyst

I hope you can hear my voice.

Unidentified Company Representative

Yes, we can.

Unidentified Analyst

I have 2 questions. First of all, the games, this year, the PS5, the unit volume was presented. But in that -- this number, for example, within this year, at certain times, there could be maybe the solution of a problem of the semiconductor and then maybe the number might be different and maybe increased. In conjunction to the EP&S, you also talked about the possible impact by the semiconductor shortage. So is that the likely scenario of the shortage of semiconductor? That's the first question.

The second one is capital allocation, your outlook. Maybe on the IR Day, you might give us more details of capital investment in the facility and equipment. In the previous MRP, the semiconductor was the major focus of investment. But in the fourth MRP, where do you give emphasis in your capital investment? Do you have any change in your policy?

Strategic investment, some of the acquisition candidates were mentioned. What's your philosophy? And would that be different compared to MRP 4 -- 3 versus the new MRP 4?

Hiroki Totoki

Thank you very much for your question. You gave us 2 questions. And then as to the first question, Game & Network service, in PS5, the launch and the sales unit and EP&S might be impacted by the shortage of semiconductor supply. The second question is about capital allocation and our capital investment in equipment. In the third MRP, semiconductor was forecast, but whatever the MRP for in that investment strategy.

That was my understanding of your question.

So let me respond to this question by myself. As to the PS5, the sales scenario estimate, of course, as I said earlier, the PS4 and there should be more than the PS4 sales volume. That's what we aim at. But can we drastically increase the supply? No, that's not likely. So the shortage of semiconductor is one factor, but there are other factors which will impact on the production volume.

So that at present, we'd like to aim at the second year sales that is 14 million -- 14.8 million units. That is the second year of the PS4 sales.

As to the EP&S, the semiconductor shortage might have some impact. Well, within this fiscal year, there are different devices and the supply was rather limited or constrained. For example, we could find maybe second resource, or by changing design, we could cope with them. In EP&S, we can -- we took a flexible maneuver. So in fiscal 2021 that we would like to flexibly adapt to the situation.

To the second question about the capital allocation. Well, capital investment -- or capital allocation, as I explained to you, in the MRP 4, in upcoming period, JPY 1.5 trillion of capital investment is scheduled. In that plan, about JPY 700 billion will be dedicated to semiconductor. So when you think of that, the percentage in the -- compared to the MRP 3, there's not a major change in this next MRP 4.

Thank you.

Unidentified Company Representative

From Asahi Newspaper, Suzuki-san, please.

Takuya Suzuki

Suzuki of Asahi Newspaper. Can you hear me?

Unidentified Company Representative

Yes, we hear you.

Takuya Suzuki

I have 2 questions as well. One, EP&S, the Image Sensor, the semiconductor, a certain customer of China because of its influencer impact, do you get enough inquiries from other manufacturers to compensate for the particular Chinese customer? In IS&S segment, certain Chinese customers, are we getting enough inquiries to offset that portion?

Hiroki Totoki

Last year, what we tried to achieve is that, by FY '21, we try to recover the market share in volume and the profitability should be recovered in 2022. But FY '21, recovery of market share in volume, as far as this is concerned, we are getting a very good feel about it. So in FY '21, to a certain extent, we will strengthen CapEx.

Takuya Suzuki

One more question about the Electronics Products. The improvement of the product mix, in what way are you going to shift toward the high value-added products? If you could elaborate more on this shift, I would appreciate it.

Hiroki Totoki

EP&S product mix improvement, what is it specifically. I think that's the question. As you rightly said, basically, TV getting larger screens and a shift towards high-end products, those were most conspicuous examples or achievements. Thank you.

Unidentified Company Representative

Nishida-san, please.

Nishida Munechika

Do you hear me?

Unidentified Company Representative

Yes, we do.

Nishida Munechika

Freelance, Nishida. Two questions. One, about the Game business, particularly in this fiscal year, download business revenue will grow because mainly of, well, PlayStation 5 or stay-at-home demand. In fiscal '20 and thereafter, what is the impact? What's happening to maintain the download revenue? And number two, Electronics business. Mobile profitability is improving. Could you elaborate on the reasons for the profitability improve? And is there a possibility of product mix and others? If you can talk about something around this area.

Hiroki Totoki

Game & Network service in fiscal '20, download ratio you said, we call it a digital ratio in our explanation. So let me, well, regard that as digital ratio to explain this. Now here, stay-at-home demand was not small. And particularly in Q4, we are -- please take a look at the material as externally announced. It appears that digital ratio is increasing.

And partially because of the titles, at the beginning, stay-at-home demand, well, there was a lot of contribution from the older titles in Q1. But at that time, well, there were not many new releases. That was a big impact.

And to answer your second question about the Mobile profitability improvement. Why did it happen? Well, broadly, I think there are 3 reasons. The first is we have narrowed down on the areas for business, where broadly it's now concentrating in Japan. With this, we saw an improvement of the profitability. And secondly, the high value-added products have been forecast.

In terms of volume, it's not so large, but again, high value-added products do have high profitability. And also another reason is the huge reduction of expenses. On this point, design efficiency improvement, with that, we have reduced the expenses quite dramatically.

And so these are mainly the 3 reasons that drove the improvement of the Mobile profitability. Thank you.

Unidentified Company Representative

Any other question? [Operator Instructions] From Nikkei, [Mr. Bam], please.

Unidentified Analyst

I hope you can hear me.

Unidentified Company Representative

Yes.

Unidentified Analyst

The first question is maybe abstract question. The net profit of JPY 1 trillion, because of different factors, maybe it is an important input-making stage for your company. Compared to over 10 years ago, your sales mix has changed. As Sony Group, Mr. Totoki became the leader, but what changed? Why your profitability has become so much better compared to a dozen years ago?

The second point is the strategic investment or capital allocation. As you mentioned, the content IT investment and some of the projects were announced. So high value-added one through the net streaming. So acquisition, the value -- or valuation might have increased because of that. So because when you consider that you would choose the appropriate candidate at the proper pricing and valuation, so you have actually acquired at a good timing.

Is that maybe some beneficial effect upon your good performance?

Hiroki Totoki

Thank you for your question. As to the net profit of JPY 1 trillion was achieved, on behalf of Sony Group, what has -- what kind of changes made it possible for you to achieve such a good result?

Well, it didn't happen overnight. We have accumulated steady steps and that outcome turned out to be this JPY 1 trillion. So maybe that JPY 1 trillion figure just stood out there.

But these changes take place every 10 years. Every year, you make some progress, every year and then you accumulate that. So when we reflect upon the last 10 years, of course, at the business -- the policy meeting that the CEO will present to you, Mr. Yoshida will give you more details. So maybe he will explain at the corporate -- the strategy -- strategic management meeting as to the strategic investment focused on IT.

Well, attractive IP -- sorry, attractive IP, there are some merchandising channels and opportunities and scale will increase, and that reflects this valuation and that's something you have to keep up with. It's inevitable.

But on the other hand, a lot of attractive products and candidates might appear. So in terms of M&A and IP and then other things, this market, I think, has become quite activated or vigorous. So we'd like to find a good candidate and we'd like to take active stance to try to continue investment.

As to the past investment, well, the time is still premature to evaluate how we did it. But as to the past investment projects, the estimation or the quotation or the -- was out of the -- deviated from the strategy, we didn't have such a case. So that was a reflection.

Unidentified Company Representative

Well, time is running out. So the next question will be the last one for this Q&A session from Newsweek's [Hiraoka-san].

Unidentified Analyst

My name is [Hiraoka] from NewsPics. Do you hear me?

Unidentified Company Representative

Yes, we hear you.

Unidentified Analyst

My first question as a midterm forecast. In the past, operating cash flow and ROE were disclosed as an indicator, but now you are talking about adjusted EBITDA as a KPI. Operating cash flow and EBITDA are closer in concept. What's the difference between these two? What's the background of adopting EBITDA this time?

Now at Sony, there are many businesses with creativity. Those investments not included in the investment cash flow seems to be increasing, for example, recruiting talents with creativity is one such example. That can push up the personnel cost and this is not exactly investment from us, an investor's viewpoint, as an advanced investment that may have the impact on your balance sheet or financial statements.

Where should we focus? At Sony, what's your idea on the investment?

Second question is about your Game business, at least from PlayStation 2 to 3 and from PlayStation 3 to PlayStation 4, as the generation is upgraded, the level -- profit level declined. Probably the hardware sales towards the end of its life cycle was down. And in the beginning, the cost was higher. Now from PlayStation 4 to PlayStation 5, I think the level of profit remained at a high level. What's the difference from the past practice? Probably network service may be the main driver?

But as you look back on this PlayStation's history, could you comment on this?

Hiroki Totoki

Thank you. I think you gave me 2 or 3 questions.

First about KPI. From operating cash flow to ROE to adjusted EBITDA, why did we change? In concept, they are very similar to each other. However, it can be used in a different way. The operating cash flow, for example, in a certain period of time, you have to look at tax and working capital. These 2 may affect the cash flow.

So there's a lag of time period. So on a long-term basis, we can have a good view. But if you look at a certain period of time, these 2 factors affect too much and difficult to use.

Another thing is that because Financial Services is now wholly owned and they don't have the operating cash flow idea, so the Financial Services is consolidated now. And then because of this, adjusted EBITDA would be easier to use and give us a clearer view. That's why we chose EBITDA.

Now ROE, when profitability was low and the capital efficiency had difficulties, then we had to look at ROE and use it as KPI. However, our profitability has improved and the balance sheet has improved. Therefore, ROE, itself, is now rather than calling it KPI, we just recognize the cost of capital as a hurdle rate to look at each one of the businesses. I think that's more important for us.

Now about acquiring talents, excellent human resources. In order to attract them, we need investment. But for this, where do we look on our financial statements or balance sheet? There's a cash compensation and there's stock equity-based awards. In order to attract good talents, we need to launch appealing projects or programs, various things. But for us, we want talented people to come and we want to be such a company which attracts those talented people.

The investment in human resources, the focus is not on the number of people. We want to target people with high talent in recruitment. I think going forward, that's the direction we are going.

Now the past PlayStation, when there was a change of generation, the level of profit declined oftentimes, as you rightly said, because of the increase in network service and we carry on the customer base from the older generation to the new generation. So in case of PS4 and PS5, we secured compatibility so the users can enjoy seamlessly. So this is what we intended to achieve.

Now hardware's profitability, we take that into consideration so that we shouldn't have a very drastic negative margin. And that's why this segment contribute to the group's overall profitability. Thank you.

Unidentified Company Representative

Now it is time to conclude the Q&A session with the media people. To change the responders, the Q&A session with analysts will start at 4:50 p.m.

Unidentified Company Representative

We will begin a Q&A session with analysts and investors shortly. Please wait just for a few minutes until resumption.

Sadahiko Hayakawa

Thank you for waiting. We would like to answer questions from investors and analysts. I will serve as the moderator. My name is Hayakawa with Finance and IR. The responders are Executive Deputy President, Chief Financial Officer, Senior Vice President, Totoki; Senior Vice President in charge of Corporate Planning and Control and Finance and IR, Naomi Matsuoka; Senior Vice President, Senior General Manager, Global Accounting Division, Hirotoshi Korenaga.

[Operator Instructions]

We're going to call the questioner. And when your name is called, please start speaking. [Operator Instructions]

JPMorgan Securities, Ayada-san, please.

Junya Ayada

Ayada with JPMorgan. I have 2 questions, if I may. Question one, about I&SS. Wafer, the input and capacity, what's the track record and also outlook about capacity at the end of the year. If you have the number, we appreciate that. And relatedly, Totoki-san earlier on said fiscal '21 you have a good outlook, prospect for recovery for volume. But with respect to improvement of product mix, what is your, well, view? In the second half, are you going to have larger, well, products qualitatively? So if you see -- have any prospect?

Question two, in the MRP 4, the adjusted EBITDA of JPY 4.3 trillion. Just thinking around it, if possible, in this fiscal year, based on the plan, the adjusted EBITDA, what is it? And the pretax profit, that's JPY 900 billion-plus. And D&A, that's JPY 450 billion. So perhaps JPY 1.4 trillion or JPY 1.5 trillion. But I would like to ask you about the number. If it's JPY 1.4 billion, JPY 1.5 trillion, then in terms of math, in 3 years, it will be flat, it appears. So in 3 years, the growth -- or beyond that, how do you look at the growth?

So in terms of adjusted EBITDA, well, with respect to the balance, with the growth, if you have any message to the market, I'd be appreciative to hear that.

Hiroki Totoki

Thank you for your question. Two questions. The first question is with respect to I&SS, early wafer input and the capacity and product mix improvement prospect, qualitative point, in my understanding. And your second question, adjusted EBITDA. Based on this fiscal year's plan, what would be the level of EBITDA.

So first, to answer your first question. Regarding capacity, in fiscal '20, in Q4, at the end of Q4, the mask -- well, installation, it's about 139,000. That was the capacity. And the previously, it was 131,000. So it's up.

The plan was to start operating it in April. But because of, well, earlier preparation, we started the operation partially. That's why we have this number. And in fiscal '21, at the end of Q1, it will be 141,000 in our prospect.

So what about the increased capacity? Well, increased -- or the building for increase, that's just for some production lines. So that doesn't mean -- it doesn't mean that there going to be huge a increase in the capacity.

With respect to the wafer input in, well, 4Q, the track record was 128,000. That's the average, well, simple math. It was expected. And our in-house capacity is in full operation.

And in fiscal '21, in Q1, the wafer input, the 3-month average is 138,000. And again, in-house capacity is expected to be in full production. We have a lot of inquiries these days. In addition, in fiscal '21, the -- well, in preparation for the shipment of new models of smartphone, we are increasing our production.

With respect to the prospect of product mix improvement, in fiscal '21, in the second half of this fiscal year, 0.7, well, a small product will pick up. And so when it picks up in fiscal '22, higher value-added types will be launched. That is the prospect at this moment. So with respect to product mix improvement, that is the idea that we have.

Also about adjusted EBITDA, well, this is just a ballpark. Please understand it's just proximation. But in fiscal '21, it should be JPY 1.3 trillion in fiscal '21. But in a single year, well, evaluation of that in a single year, given our, well, mid- and long-term plan, well, we should look at it -- we should look at the total.

So if you just look at a single year, we'll launch something. That kind of a discussion should not be done in my view.

Sadahiko Hayakawa

SMBC Nikko, Mr. Katsura, please.

Ryosuke Katsura

I hope you can hear me.

Sadahiko Hayakawa

Yes.

Ryosuke Katsura

Music is something I have one question about and the second one I have a question on, semiconductor. In Music, as Mr. Totoki explained at the media and platform, the profit, about 30% of that is related to this Aniplex. But anyway, according to this year's plan, what is the assumption? Is it that the more optimal solution will be chosen? But in this fiscal term, what's your philosophy and idea? That's my idea on this.

The second question is related to semiconductor investment philosophy. For this fiscal -- over the upcoming 3-year plan of investment, could you -- and that's what you have given us, some of the ideas. But about 6 months ago or maybe 3 months ago or so, compared to that timing, more active stance -- you have shifted to more active investment. Could you please give us a background for that investment? By that investment, how is market share or the capacity share that you'd like to achieve? Now the details will be explained at the IR meeting with regard to the MRP 3 -- 4.

Hiroki Totoki

Thank you for your question. Music, the percentage of media platform for 2020, about 30%. That's something we have indicated to you. When you break it down to that breakdown, naturally, you hear the version of the Demon Slayer is a big hit. So in 2021, it doesn't happen again.

And mobile game as well, the content was very good. So there could be deceleration in that area. And those factors -- excluding those factors, JPY 11.9 billion is income from the sales of the business, transfer of business. Taking that into account, year-on-year, JPY 14 billion or so is the reduction.

So that is a reduction to be felt. So anyway, when you compare overall the income, of course, the other part will enjoy the growth. That is thanks to the increase of the revenue from the streaming. And that's how we see the growth of the profit.

As to the I&SS, this is area last year, 2020, fiscal 2020, there was original planned investment and I explained to you earlier. But some of the investment plan was postponed to the future. As of now, 2022 and afterwards, there is strong demand we expect. So in that sense, some of the capital investment in 2020 and afterward, some are to be implemented as well. So this is JPY 283 billion, JPY 283 billion.

And 2020, the volume share is recovered and we are almost to achieve it till 2022. Further strength of ours will be achieved. In other words, we will get this profit and then the sales. And we need to have a capacity prepared to produce. So that's why we started to invest for the capacity building and additional facilities.

And as of now, in the fourth term, the final year capacity and its size, we expect -- it's not a simple increase of the capacity for investment. But rather, we are shifting to the high value-added products. The process itself need to be increased and enhanced. Investment in there is quite voluminous. And then by enlarging the size, it might change.

So when we talk about the relation between capacity and then investment, it's not a linear relationship. So we cannot specifically just talk about capacity because of the complexity.

Sadahiko Hayakawa

From Mizuho Securities, Nakane-san, please.

Yasuo Nakane

Nakane speaking. Two questions. First, in the text about the Games, what I wanted to ask, hardware, software, network, if you divide this, what would be the profit for each? And the backdrop, the contributing factor is the improvement in hardware. PS5 and peripherals may give this uplift. When the volume is increasing, the gross deficit may increase.

That will push down, we thought, the level of profit. But the network profit is not included. What would you say?

Second, R&D is JPY 610 billion, which is a large increase. You talked about I&SS, but any other areas that there will be an increase under MRP -- in the new MRP?

Hiroki Totoki

Thank you very much for your questions. First about the Game & Network Service, I couldn't really hear you clearly. So let me confirm. We improved the profitability of hardware. When the PS5 unit sales increases, that may lower the profitability.

Was that what you're asking? Including the peripherals, probably you could achieve the profitability. That's what I thought. Now profitability -- profit contribution of hardware in FY '20, inclusive of the peripherals, is positive. That's what we have been saying. And then the amount of the contribution in this fiscal '21 will be about the same or even above the previous year's level. That's the assumption of the plan. Why is it the case? Compared to last year, PS5's profitability will improve.

That's how we forecast. That's why this change will be brought about.

Second question about R&D expense. Your question about the R&D cost, on a consolidated basis, as you rightly say, JPY 610 billion from the -- compared to the previous year, it is an increase by more than JPY 80 billion. Game & Network Services, EP&S and I&SS, every segment increased. Game & Network Services, the development cost increased by JPY 20 billion, and that had the impact. Also, I&SS, JPY 25 billion or so increase is expected.

And the remainder will come from EP&S. Thank you.

Sadahiko Hayakawa

Now we're running out of time. So the next question will be the last question. Morgan Stanley, we have Ono-san.

Masahiro Ono

My name is Ono with Morgan. First, well, this may overlap somewhat with Nakane-san's question. Game & Network, JPY 17.2 billion reduction in profit. The game development expense, that's about JPY 20 billion.

I think you said that in your comment. But the positive factors and negative factors in terms of scale, could you give us more hint? And on content, negative factor, game development, the in-house software and also the hardware as related with Nakane-san's question. So that's my first question.

Sadahiko Hayakawa

Ono-san if you could also give us your second question.

Masahiro Ono

My second question, EP&S, JPY 13.9 billion reduction in profit. Well, if possible, by product category, the sequence, what are the items, if you could explain that.

Hiroki Totoki

Thank you for your questions. Now with respect to Game & Network service fiscal '21 reduction in profit, positive factors, negative factors. That's what we would like to know. Now we're including some qualitative aspects, I would like to give you an answer.

Number one, as I have been saying all along, with respect to hardware, basically, we are moving positively the entire hardware. We ask you to look at it positively. And including investment in studio, the development of games, we're going to increase that. So that's part of investment that will increase.

And third-party software reduction in profit, we do anticipate it somewhat. But again, last fiscal year, first quarter, I think, well, it just increased dramatically because of stay-at-home demand last year. So I think we have to discount it. I think that's a reasonable way to look at it.

So that's the way we should look at it. And the end result of our calculation is that. I think that is some -- one way to look at it. Regarding currency, I think that should work positively.

And EP&S, EP&S increase in profit by product categories. Well, it's not all that complex. From camera, the increased profit and revenue coming. Well, last year, because of pandemic, the negative impact was given on the digital camera. And here, we are on a path for recovery.

And by country, it differs. But the pandemic as it abates, there are strong products and they will, again, grow. Thank you.

Sadahiko Hayakawa

Now -- thank you. Now it's time to close it. We would like to conclude the Sony Group Corporation's financial results briefing. Thank you for your participation today.