Sony Group Corp

TSE:6758

Earnings Call Analysis

Sony's Strong Performance Across Segments Amid Economic Fluctuations

Sony reported a solid Q1 FY'24 with consolidated sales up 12% year-on-year to JPY 2.574 billion and an operating income increase of JPY 50.6 billion. The annual revenue forecast was revised upward to JPY 12.610 trillion. Notably, the Gaming segment saw a 12% increase in sales to JPY 864.9 billion, driven by first-party software sales and foreign exchange benefits. Music sales surged 23% to JPY 442 billion, attributed to higher streaming and box office revenues. Despite economic uncertainties, including fluctuating exchange rates, Sony remains optimistic with robust strategies in place for future resilience across its diversified business segments.

Solid Quarterly Performance

In the recent earnings call, the company reported solid performance for the first quarter of fiscal year 2024. Consolidated sales increased significantly by 12% year-on-year, reaching JPY 2.574 billion. Operating income also saw a significant boost, increasing by JPY 50.6 billion to reach JPY 249.1 billion. This is an indication of the company's strong financial health and operational efficiency.

Revised Full-Year Forecast

The company has optimistic expectations for the full year, revising its forecast upward. Consolidated sales excluding Financial Services are expected to increase by 3% to JPY 11.700 trillion, with operating income also being revised upward by JPY 35 billion to JPY 1.165 trillion. Net income forecast has been increased by JPY 55 billion to JPY 875 billion. This suggests strong confidence in continued revenue growth and profitability.

Gaming Segment Highlights

The Gaming and Network Services (G&NS) segment showed considerable growth. Despite a decrease in hardware sales, the segment's Q1 sales increased by 12% year-on-year to JPY 864.9 billion, driven by strong first-party software sales and positive foreign exchange impacts. Operating income for the segment grew by JPY 16 billion to JPY 65.2 billion. The segment also reported the highest number of monthly active users at 116 million, a 7% increase from the previous year. This reflects strong consumer engagement, especially with the expanding PlayStation 5 user base.

Music Segment Growth

The Music segment had an outstanding performance with a 23% year-on-year increase in Q1 sales totaling JPY 442 billion. Operating income jumped by JPY 12.5 billion to JPY 85.9 billion. Increased live box office revenue and streaming revenue were key contributors. The segment expects full-year sales to rise by JPY 50 billion to JPY 1.740 trillion and operating income to increase by JPY 15 billion to JPY 330 billion. This indicates robust growth driven by a strategic focus on capturing market expansions in emerging regions.

Challenges in Financial Services

The Financial Services segment faced challenges with Q1 revenue decreasing by 34% year-on-year to JPY 448.6 billion, primarily due to market fluctuations impacting Sony Life. Operating income also dropped by JPY 24.5 billion to JPY 30 billion. Despite these challenges, the fiscal 2024 forecast for this segment remains unchanged, with expected revenue of JPY 910 billion and operating income of JPY 145 billion.

Impact of Foreign Exchange and Market Fluctuations

The company expressed concerns over sudden fluctuations in exchange rates and potential economic downturns, particularly in the U.S. It acknowledged that the financial forecast does not account for recent market changes but will closely monitor and swiftly respond to these impacts. The forecast sensitivity analysis suggests that significant exchange rate depreciations could worsen consolidated financial outcomes by JPY 70 to JPY 80 billion.

Significance of Strategic Investments

During the call, the company emphasized the importance of strategic investments and share buybacks as part of their long-term growth approach. They have increased the total payout ratio to 40% to strengthen shareholder returns. This shows the company's commitment to enhancing shareholder value and maintaining a healthy balance sheet while being agile with investments.

Outlook and Strategic Focus

Looking ahead, the company aims to enhance its resilience against market uncertainties by focusing on inventory control and cash flow management. They are also placing a strong emphasis on diversity and innovation, driven by their diverse workforce and a broad portfolio of operations. This approach is expected to generate new ideas and improve the company’s ability to navigate through various economic challenges.

Earnings Call Transcript 2025-Q1

[Unknown Executive]

It's time. We'd now like to start the Sony Group Corporation Consolidated Earnings Announcement Meeting. I'm Okada from PR. I'll be serving as emcee. I'd like to introduce the presenters. President, COO and CFO, Hiroki Totoki; Senior Vice President in charge of Corporate Planning and Control, Lead of Group DEI, Support for Finance Business and Entertainment Area, Naomi Matsuoka; Senior Vice President in Charge of Finance and IR, Sadahiko Hayakawa; Sony Financial Group, Inc., Senior Managing Director and CFO, Kazuhiro Yamada.

These 4 will be making presentations about the results of the first quarter fiscal '24 and forecast for the full year. And afterwards, we'll have Q&A. Total session time expected to be about 70 minutes. Mr. Totoki, please.

[Hiroki Totoki, executive]

First, I would like to briefly discuss the recent changes in the financial market environment. We are extremely concerned about the sudden fluctuations in exchange rates and possibility of economic downturn, particularly in the United States. The result, the forecast we are presenting today does not incorporate any of the recent rapid market changes. I believe that your interest in foreign exchange, the assumption assumed rate is evaluated at the rate very similar to today's rate. And with that, we evaluate our performance. However, we will closely monitor the impact on the real economy and our business going forward and aim to take any necessary actions swiftly and provide an update if any significant changes occur. The -- now we will explain this content. Starting from this time, Mr. Yamada from Sony Financial Group will provide an explanation of the Financial Services segment in addition to Ms. Matsuoka and Mr. Hayakawa and I will then give a summary at the end. Now Hirakawa-san, please? .

[Sadahiko Hayakawa, executive]

Consolidated sales, including the Financial Services segment for the quarter increased a significant 12% compared to the same quarter of the previous fiscal year to JPY 2.574 billion, and operating income increased a significant JPY 50.6 billion to JPY 249.1 billion.

Consolidated sales increased 2% year-on-year to JPY 3.116 trillion. Operating income JPY 26.1 billion to JPY 279.1 billion. And the income -- net income increased JPY 14.1 billion to JPY 231.6 billion. The results by segment for this quarter are shown on this slide.

Next, I will explain our consolidated results forecast for FY '24. The consolidated sales forecast excluding Financial Services has been upwardly revised by 3% to JPY 11.700 trillion. The operating income forecast has been upwardly revised by JPY 35 billion to JPY 1.165 trillion and the net income forecast has been upwardly revised by JPY 55 billion to JPY 875 billion. Our operating cash flow forecast remains unchanged from the previous forecast at JPY 1.400 trillion.

Consolidated sales are expected to increase 2% from the previous forecast to JPY 12.610 trillion. Operating income is expected to increase JPY 35 billion to JPY 1.310 trillion and net income is expected to increase JPY 55 billion to JPY 980 billion. The net income forecast is JPY 9.4 billion, higher than the recorded in the previous fiscal year.

Operating income on both on a consolidated basis, including financial services and the consolidated basis expected to be record highs. The full year forecast by segment is shown here. Now I will move on to the explanation of the overview of each business. The first is the G&NS segment.

Although hardware sales decreased FY '24 Q1 sales increased a significant 12% year-on-year to JPY 864.9 billion, primarily due to the impact of foreign exchange rates and increased first-party software sales. Operating income increased a significant JPY 16 billion year-on-year to JPY 65.2 billion, mainly due to the benefit of increased revenue from the first-party software and network services despite increased cost including expenses resulting from the restructuring we undertook on a global basis.

For FY '24, we are now forecasting sales to be JPY 4.320 trillion, an increase of JPY 120 billion from the previous forecast and operating income to be JPY 320 billion, an increase of JPY 10 billion. Despite not releasing any attainable titles, user engagement during the quarter remained high, driven primarily by expanding PlayStation 5 installed base and contributions from the solid franchise software titles.

The number of monthly active users of PlayStation was 116 million accounts, the highest number ever recorded for June, up 7% compared with the same month of the previous fiscal year and total play time also increased 8%. In terms of our software titles, Hill Diverse 2 is performing better than our May forecast and PC version of Ghost of Tsushima and the Destiny 2 expansion content, the final shape are also contributing to earnings.

This month, we plan to launch a live service game [indiscernible] followed in September by Astrobot and the PC version of our Smash hit title, God of War: Ragnarok. As for the Network Services, U.S. dollar-based sales increased 13% year-on-year, driven mainly by a steady shift to premium services and increase in ARPU average revenue per user, resulting from price revisions in PS Plus.

Under the new management structure, the Platform business group is steadily maintaining and expanding the number of active users and user engagement as priority initiatives and intends to work to further strengthen the PS platform and establish a stable earnings base.

Additionally, the Studio business group is strengthening its development schedule, the management and optimizing development projects in order to consistently and continuously release hit titles.

Next, the Music segment. FY '24 Q1 sales increased a significant 23% year-on-year to JPY 442 billion, primarily due to the impact of foreign exchange rates as well as increased life box office revenue and the streaming revenue in recorded music.

Operating income increased JPY 12.5 billion year-on-year to JPY 85.9 billion, mainly due to the benefit of the increased sales and favorite impact of foreign exchange rate, JPY 6 billion remeasurement gain resulting from the consolidation of company previously accounted for using the equity method was recorded during the Q1 of the previous fiscal year.

On a U.S. dollar basis, FY '24 Q1 streaming revenue in the recorded music increased Music Publishing increased 20% year-on-year, 19% and 36%, respectively, on a yen basis. For FY '24, we expect sales to increase JPY 50 billion from the previous forecast to JPY 1.740 trillion and operating income increased JPY 15 billion to JPY 330 billion.

Global market growth in calendar year 2023, it was 10% higher in recorded music and 11% high-end music publishing, both compared to the previous year. In addition to an increase in the number of paying subscribers for streaming services and market expansion in emerging markets, recent price revision by music distributors have led to market growth for the ninth consecutive year in recorded music and the 11th consecutive year in Music Publishing.

In the midterm, the market is expected to continue to grow at a mid- to high single-digit average annual growth rate, driven by increased ARPU, A-R-P-U, and further growth in emerging markets. From early on, Sony Music Entertainment has been strategically focusing on capturing the expansion of the India market and building a robust ecosystem as seen from the 100% consolidation of the orchard in 2015 and the acquisition of AWAL in 2021.

Through the arches approximately 50 locations around the world, we are expanding our business rapidly growing emerging markets, we're providing a wide range of services such as digital music distribution and data analysis using the latest technology.

By actively pursuing strategic investments in emerging markets, including the Brazilian label and Sam Libre and Remus Entertainment and the label of Latin Music [indiscernible] to which the Orchard has been providing services, we have established a strong presence in Latin America, India, Africa and other markets around the world.

As can be seen with the success of Sony Music Entertainment Japan, it's artists, UOB and overseas markets, we have been able to create hits that transcend national regional borders through the Orchard.

Next is the Pictures segment. FY '24 Q1 sales increased 5% year-on-year to JPY 337.3 billion due to the impact of foreign exchange rates, despite a decrease in U.S. dollar-based sales, primarily resulting from a decrease in the number of television programs delivered and a decrease in the number of theatrical releases. Operating income decreased JPY 4.7 billion year-on-year to JPY 11.3 billion, primarily due to the impact of the decrease in U.S. dollar-based sales. For FY '24, we forecast sales to be JPY 1.520 trillion, an increase of JPY 40 billion from the previous forecast and operating income to be JPY 125 billion, an increase of JPY 5 billion.

In the first half of the calendar year 2024, theatrical box office revenue in the U.S. remained at a level approximately 20% lower than the previous year, primarily due to the impact of the strikes. However, from June onwards, the release of tentpole films from major studios, including ours, has increased, and we expect Box Office revenue to gradually improve. . During the quarter, we let SQL to our popular franchise, Bad Boys: Ride or Die and The Garfield Movie, which we distributed worldwide have both been hits. It Ends With Us, a film adaptation of a best-selling novel is scheduled to be released on August 9. The trailer set a record of approximately 130 million views in the first 24 hours following its release. And we are hopeful that it will be an indicator of the success of our efforts to discover excellent original works and turn them into films.

As for Crunchyroll, the number of paying subscribers exceeded 15 million in July. In order to capitalize on the rapid expansion of the animal market, we have signed a global distribution agreement with Amazon Prime Channels. And after launching in the U.S. and the U.K. in October last year, we began distribution via Amazon in Brazil, France, India and other countries since April this year.

In addition to further expand opportunities for engagement with Anime fans, we've announced our plan to expand our e-commerce site, Crunchyroll store, which was previously only available in North America and Australia to 34 European countries. On June 12, Sony Pictures Entertainment completed its acquisition of Alamo Drafthouse Cinema.

Alamo operates 41 theaters across the U.S., where customers can enjoy a movie while dining. And the company is a leader in the dine-in cinema industry and rank 7 in North America in terms of box office share. It has approximately 4 million enthusiastic loyalty members over indexing on younger demographics. By building upon Alamo's connections with the spend community, we look forward to creating synergies with the content IP, including not only movies, but also games, music and anime.

We also look forward to opportunities for Alamo and Crunchyroll to collaborate. With this acquisition, SB established a new business division, Sony Pictures experiences and aims to further strengthen its efforts in the experiential live entertainment business.

And next is the ET&S segment. Although television sales decreased, FY '24 Q1 sales increased 5% year-on-year to JPY 600.9 billion, mainly due to the impact of foreign exchange rates. Operating income increased JPY 8.4 billion year-on-year to JPY 64.1 billion primarily due to the favorable impact of foreign exchange rates.

For FY '24, we forecast sales to be JPY 2.420 trillion, an increase of JPY 50 billion from the previous forecast and operating income to be JPY 190 billion, unchanged from the previous forecast. With regard to operating income, despite the favorable impact of foreign exchange rates, we are maintaining our previous forecast by incorporating the risk of the worsening market environment and the impact of rising logistics cost.

Looking at the market environment during the quarter, our key product categories in Japan, Europe and North America trended accordingly -- according to our expectations. While in China, the television market contracted significantly and the digital camera market, including solutions grew significantly.

As for the television business, we were able to achieve highly resilient operations during the quarter by focusing on inventory control and cost-cutting initiatives. We will aim to continue to do so while also focusing on high value-added products, such as the new Bravia9 Series, which we believe will further enrich the cinema viewing experience at home.

And as for the imaging business, which includes digital cameras, we intend to pay close attention to demand trends in China, where the market is growing rapidly and aim to further expand profitability by further diversifying a greater audience primarily through the launch of the new [indiscernible] product ZVE-10 Mark. In addition, by emphasizing inventory control across the segment, we were able to further reduce inventory at the end of the quarter compared to the same quarter of the previous fiscal year, which is also contributing greatly to the stabilization of profitability in the business segment.

In preparation for possible future change in the business environment, we aim to focus on managing inventory and accounts receivable based on conservative demand forecast as early can't control cash flows.

Next is the I&SS segment. Fiscal '24 Q1 sales increased significantly by 21% year-on-year to JPY 353.5 billion, mainly due to the impact of foreign exchange rates and increased sales of image sensors for mobile devices. Operating income increased significantly by JPY 23.9 billion year-on-year to JPY 36.6 billion, mainly due to the favorable impact of foreign exchange rates and the increased sales.

For fiscal '24, we expect sales to increase JPY 10 billion from the previous forecast to JPY 1.850 trillion. We expect operating income to increase JPY 5 billion from the previous forecast to JPY 275 billion as the favorable impact of foreign exchange rates is partially offset by the impact of a significant decrease in demand for micro OLEDs used in AR and VR.

The global smartphone product market during the quarter continued to show a gradual but steady recovery like in the previous quarter. In addition, the trend toward polarization of price ranges in the product market particularly in China continues.

This has accelerated the expansion of the high-end smartphone market, which has led to further progress of the expansion of the size of the sensors we ship. As such, the market environment is progressing generally in line with our previous forecast.

From the second quarter onwards, we expect the trend towards larger sensors for ultra-wide angle and telephoto cameras to continue. We believe that this trend, together with improved sensor performance to improve camera video capabilities will be medium-term growth drivers for the mobile sensor market.

In terms of production, improvements in yields for mobile sensors are progressing as planned in May and we aim to achieve a normal run rate during this fiscal year. Additionally, we will aim to make maximum use of existing production capacity and be selective in making new investments, together with other development and operational efficiency measures we intend to work to improve profitability, a key theme of this midrange plan.

Last is the Financial Services segment. Fiscal '24 Q1 Financial Services revenue decreased significantly by 34% year-on-year to JPY 448.6 billion primarily due to the impact of market fluctuations at Sony Life. Operating income decreased significantly by JPY 24.5 billion year-on-year to JPY 30 billion compared to the same quarter of the previous fiscal year, which benefited from the recording of a gain on the sale of bonds at Sony Life.

Insurance service results at Sony Life, which are the baseload of profitability for the business continued their stable trend at JPY 41.8 billion. Fiscal '24 forecast remains unchanged from the previous forecast with financial services revenue of JPY 910 billion and operating income of JPY 145 billion.

With regard to financial services revenue, gains from the separate account at Sony Life exceeded our main forecast due to the impact of market fluctuations. However, taking into account factors such as uncertainty about market fluctuations, we are maintaining our previous forecast.

Now we will discuss the opportunities and challenges for growing our Life Insurance business. Sales of insurance products at Sony Life have grown significantly over the last 5 years. In terms of sales channels, the agency channel has grown significantly in addition to our mainstay, Life Planner channel. And in terms of customers, our business with corporate customers has grown significantly in addition to our traditional strengths in individual customers.

The new policy amount for the agency channel and with corporate customers in fiscal '23 grew 2.3x and 3.7x, respectively, compared to fiscal 2019. Due to this growth, Sony Life's share of new policy amount in fiscal '23 reached 16%, continuing to rank first in the industry for 2 consecutive years.

Even though Japan's population is declining, we have continued to increase our sales of insurance products by expanding our share and we believe that we have ample opportunities for growth going forward. On the other hand, we believe that there is an issue with how easily our business performance and financial soundness are affected by market fluctuation factors, particularly interest rates.

Regarding new policies currently being sold, we have already reduced the sales ratio of so-called high capital load products, such as whole life insurance, and we are also preparing to further enhance hedging against market fluctuation risks.

Regarding our efforts to address financial issues, including existing contracts, we plan to present our progress to date and future initiatives at the second quarter earnings announcements. In the Financial Services segment, at the business segment meeting we held in May, we said adjusted net income of JPY 120 billion as a key performance indicator for the fiscal year ending March 31, 2027.

As a result, from this quarter, we have begun disclosing adjusted net income, the details of the adjustments and other metrics. Finally, I would like to give you a general summary. As I mentioned, in at the beginning, looking whether it's uncertainty or instability of the market, making it more difficult to forecast the future performance.

But we have the fifth MRP and we have a strategy to enhance our resilience to changes in the environment. And we recognize that we've entered in the period in which the real value of that strategy is being called into question.

So in terms of our business portfolio, our entertainment area is the biggest. Relatively speaking, impact of macroeconomics is not so large. It's not so direct, but we have to think about various risks and carefully conduct our business. So no change in that thinking.

The key performance indicators for the entire group laid out in our mid-range plan include a 10% or higher growth rate of operating income and a 10% or higher 3-year cumulative operating income margin on a consolidated basis, excluding financial services.

Our Q1 results represent steady progress toward that goal. That we can say. We plan to make every effort to maintain these targets and our goal of strengthening shareholder returns and we intend to regularly provide updates on our progress. That's all from my presentation.

[Unknown Executive]

So those are the presentations by Totoki, Matsuoka, Hayaka and Yamada. From 4:27, we'll have a Q&A session with the media. From around 6:50, we'll have Q&A with investors and analysts. Will take approximately 20 minutes for each of those QA sessions. Those who have preregistered to ask questions, please connect to the phone number provided. And please read the material provided for how to ask questions. Now please wait until we are ready to resume.

[Break]

[Unknown Executive]

Thank you very much for waiting. So now we would like to answer the questions from media. Those who answer the questions are the same as the speakers that made a presentation previously. So now we would like to begin question-and-answer session. [Operator Instructions] So the first question is from Toyo the Securities, [indiscernible].

[Unknown Analyst]

So Maki from Toyo. And I have a question about G&NS. For you conducted the restructuring, the exercise and for studio, the business group, the for instance, management of the development project, et cetera, over the last 3 months. And going the forward now is in August within this fiscal year. What kind of the restructuring you are going to conduct? What is your plan for that?

[Hiroki Totoki, executive]

Thank you for your question. So at this moment, Banji restructuring has been already announced -- and at this moment, as you correctly pointed out, for this restructuring, the purpose is cost structure and portfolio optimization. Those are the purposes. And simultaneously, we have to enhance the efficiency of the business. So back office functions there should be integrated with the studio of SIE. So the band itself as it is considered best to and new live service Marathon -- titled Marathon, the headcounts and also resource will be concentrated there. So high quality and wonderful games game experiences should be developed. So we would like to concentrate resources there. And functions other than that, and other types of development, the title development will be transferred to the PlayStation, the PS -- the studio group. And so there will be some reallocation of the resources. So in any case, the organizational, the structure will be changed. And so we would like to optimize our overall studio structure. That's all. Thank you.

[Unknown Executive]

Sato-san, please?

[Unknown Analyst]

This is Sato-san, Nike. I have 2 questions. First, about the IT strategy in general. Paramount's acquisition. Why do you not submit another proposal? And the entertainment IT sector, what sort of size of investment are you planning for? And of the operating income, how much of the proportion will be IP hold? What is your final vision?

And the second is about the global economy. Well, there's a slowdown. And also, we see a division of the U.S. and China. How do you see this? And what are the measures you have in place to address this? And what I expect is towards the next President Administration of the U.S. and what concern do you have.

[Hiroki Totoki, executive]

Well, about the IP strategy, well, in general, I believe that your question was asking about the general strategy. But as the reason why I do not propose again a proposal to acquire Paramount. Well, we believe that at this point in time, Perma acquisition. It does not fit well with our strategy. And that is a judgment that we have handed down. And the proportion of IP earnings within our operating income is still difficult. But the entertainment business, in some way or other, IP is related. And so IP is at the core based on which we carry out our business and generate revenue. And therefore, the proportion or the targeted proportion of IP earnings is difficult for me to say. So entertainment on the whole, we would like to focus on strengthening the IP. And this remains unchanged.

But do we have a target? Well, we, as much as possible, we want to grow the business and then a consolidated basis with with CAGR. The operating income at 10% and also the profit margin, 10%. We have this target. So we would like to put in different measures to achieve these goals. And about the global economy. Well, currently, the global economy itself is is led driven by the U.S., especially the consumption in the United States. And in our business, what we must focus on is economy and consumption in the United States. And currently, we see that there is -- are some signals indicating an economic slowdown. As the macroeconomic numbers, figures, we do see that signal, but how deep this will be, how long it will continue, it's very difficult for us to foresee. But there are such signals, and therefore, we must watch closely the developments. And about the expectations towards the next U.S. administration, well, Sony in any way, want to respect the choice of the American people. And what changes would result as a result of the election is something that we will keep an eye on. That is all. Thank you

[Unknown Executive]

Next question, [indiscernible] from Nike Business.

[Unknown Analyst]

[indiscernible] from Nike business. Two questions. [indiscernible] Control, so surpass 15 million you said. So I think that is a good news. That kind of momentum do you think will continue for the time being? So what's the current situation? And what's the future growth prospect? And in the presentation, you talked about enhancing resilience. So that's the strategy of the MRP and you said that the true value of that is being put into question. So with the high uncertainty, in trying to enhance resilience, what will be the most important factor you think?

[Hiroki Totoki, executive]

Thank you for the questions. First, about Cruncyroll, current situation. and our expectations. Matsuoka will respond to that question. Matsuoka-san, please.

[Naomi Matsuoka, executive]

For Crunchyroll, earlier, we talked about that. So 15 -- we exceeded 15 million in July. And so we have great works like Yaiba, [indiscernible] all of these works are contributing. And as was mentioned in the -- well, we are using Amazon Prime and platforms. So we have the partnerships with them that's contributing to the increased subscribers. And also we're distributing through theaters, and that is also going well. So an email creators in Japan, we have strong partnerships with them and capitalizing on that, we are expanding our contents. In terms of price, we are providing an attractive price level, very valuable service. And so we have established a very advantageous position. And overseas, we are trying to cultivate great IP, and we have a coproduction with Japanese animators and creators. And so in Europe, Latin America, India, Southeast Asia. So we were expanding and working on multiple languages, we'll focus on that. And so that's one initiative. And also for the expansion of the partnerships that I mentioned earlier that will be harnessed to try to increase number of subscribers.

To respond to the second question, how to strengthen the resilience. So uncertainty is rising. What's the most important to enhance resilience was the question. In the short term, financially, inventory control, cash flow control, those things. What we can do with finance, we certainly will do. And I personally, what I think is most essentially important is diversity of people. We have diverse operations. And that's 1 reason we need diverse people. But with diverse people, you have diverse ideas being generated and we will not be focused on just one idea. We will have the power to generate new ideas and we'll be able to analyze from various angles. So we can have that kind of synergy effect, it's difficult to, of course, manage diversity, but I personally would like to pursue the diversity of our people. That's all.

[Unknown Executive]

So we would like to move on to the next question, Tanaka-san from Asahi Shimbun, please.

[Unknown Attendee]

This is Tanaka speaking from Asahi Shimbun. Can you hear me?

[Unknown Executive]

Yes, we can hear you.

[Unknown Attendee]

This is Tanaka from Asahi Shimbun. In connection to the previous question regarding Paramount. I have additional questions. Up to now, you made a proposal about acquisition. And you did not make it very clear even then -- and if there is anything that you can disclose, what was your motivation or intention to start your move on acquisition? And you also said that you would not repropose because it is not well fitted to your strategy. So can you elaborate on that, please? As a Sony's strategy, what is the place -- what is the point which is unfitted to your business acquisition case?

[Hiroki Totoki, executive]

For each individual project, it's very difficult for me to answer the question. However, as I have mentioned so far, on our part, high-quality IP, and we have been focusing on the asset. And that particular asset at the profit price, and that can be acquired. And if that kind of deal structure is established, we would like to become very serious about acquiring that kind of the target company. But the company, Paramount, that the corporation is quite large in size. And for instance, if we have to acquire the entire organization, it would be quite risky because our capital allocation itself, it may not be well fitted to our capital allocation strategy. That is the primary reason. Thank you.

[Unknown Executive]

Nishikatasan, please, from NHK.

[Unknown Attendee]

Two questions. First, about the Paramount acquisition. If you were able to submit another proposal, if you had thought that you could strike a deal at an appropriate price, would you have done so? And the second is about the CMOS sensor, or EVs are being produced internally in China these days? And are there any concerns that you have in terms of the sales of your CMOS sensors because EVs are mainly being produced in China?

[Hiroki Totoki, executive]

Well, in regards to your first question, I think I will really answer that. So I really don't have anything to add to what I've already responded. I apologize. And secondly, about your second question about the electric vehicles. And the fact that they are trying to produce domestically electric vehicles. well, the sensors for automobiles, I think you're talking about. But we including the Chinese manufacturers, not just doing business in China, but instead, we are supplying to global OEMs, the sensors for automobiles. And therefore, in China also, we have competitors. And we want to make sure that we do not lose out in terms of our technology. But census for Ottawa bills, sensors for smartphones, they are different. And the market is still small for automotive sensors. How much this will grow is something that we have to observe carefully. That is all. Thank you.

[Unknown Executive]

We're starting to run out of time. So we will take one more question. So please make it just one question because of time constraints. Are there no more questions? Seeing none, we will end this Q&A session for the media. Investor Analyst Q&A session will start at 4:48.

[Break]

[Unknown Executive]

Thank you for waiting. I'd like to start the investor analyst Q&A session. I'm with IR Group, Condo. I'll be serving as moderator. And as was the case for the media session, these 4 will be responding to your questions. [Operator Instructions] So first question, BofA Securities, Hirakawa-san, please?

[Mikio Hirakawa, analyst]

Hirakawa of BofA Securities. About games and music question. So about the games, monthly active user 7% Y-o-Y growth. That was a very strong growth. And can you talk about the background in a little more detail because there was an update of large update that last year, and that led to increase the monthly active users. And are there any other factors? I want to ask the background? That's the first question. And should I continue the questions, please? About the music, earlier, you talked about music streaming sales, midterm growth mid- to higher single digits was your forecast. And until Q3 last year was double digit without the ForEx impact. So that was the growth you had. Now 6% in Q1 seems to be slowing down a bit. And so do you think that you've come down to the midterm growth trajectory? Or was there a onetime factor for Q1 and it's slower than this year's overall pace? Because at the beginning of the year, you said that for this year, subscription price rise was expected. So I was expecting a little bit higher. So those questions, please.

[Hiroki Totoki, executive]

Thank you for the questions. So let's take the first gaming network service question. I'll respond to that. The music question, Matsuoka will respond. So for games MAU year-on-year, 7% growth, very good number is how we see it. And of course, the 5 installed base is accumulating PS5. And we have the franchise software contribution. So third-party free to play also strong. I won't go into the individual title names, but those tailwinds have had an effect. I think that's one of the factors. Matsuoka-san, please.

[Naomi Matsuoka, executive]

So streaming service. So if you look at that, the overall growth is in line with the previous trends. And it may seem as if growth is slowing. The factors behind that are for Q1 -- over a year ago, we raised the prices for multiple DSP. And so the impact of that is now diminished. And for -- and we have the ad streaming service revenue of that, that is declining a bit. And however, in a constant currency basis, early, we said 5% in dollar terms. But if you look at that in constant terms, it's higher, 6% -- in the 6% range according to our calculations. So overall, streaming growth rate is in line with our projections.

[Unknown Executive]

Thank you. Next question is from SMBC Nikko, Katsura.

[Ryosuke Katsura, analyst]

Can you hear me? My name is Katsura from SMBC Nikko. So my question pertains to I&SS semiconductor and also regarding the financial services. And regarding I&SS, so mostly supply to major companies in North America. And if you have any plus and minus over the last 3 months, please share that with us. Now at this moment, you increase the production in your supplementary document and production capacity compared to our original. The projection seems to be stronger and bigger. So what is your concept on that? In the mid- to long term, there is a risk of your competitors entering the market. I think that has been discussed in the market. So from mid to long term, what is your view of your position in the market? This is the first question about semiconductor.

And regarding my second question, on the operating income of the second quarter, I think the progress rate is the 21% in its operating income. And of course, there are upside and downside risk under the current market condition. What is your view about that?

[Hiroki Totoki, executive]

Thank you for you question. Regarding I&SS, I would like to answer the question. And about Financial Services, and I would like to ask Imada-san to answer the question. And regarding Well, regarding individual the customers, Setting this aside, Well, we increased the production that you mentioned. The reason is for the high end, the products, we have increased the shipping for that. For that reason, we have increased the production.

And the risk of other companies entering the market, it did not -- it has not started now under the very severe competitive environment, we always have competitors, and we constantly analyze our competitors, and we try to overcome our weakness so that we can be advantageous in technology position. And as for the long term, it's very difficult to make comments. But during the MLP period, the risk from our competitors joining the market. If there is any concrete examples, I believe that the probability of this risk is quite small. That's my answer. And so about Financial Services, Yamada-san, please. .

[Unknown Attendee]

Thank you for your question. The first quarter, the progress rate, 25%, that is a little bit low. There are 2 reasons. The first is at Sony Life, there is a larger number of surrender increased surrender, particularly dollar-based. The rate interest rate is getting higher, and there is a yen depreciation. And for that reason, that reads the surrender of the products policies. And about the Non-Life, for instance, natural disaster that has impacted. And for that reason -- and of course, we try to overcome that in midterm and how we should look at these ups and downs. And for -- during the first quarter, thus, our sales performance has been quite good, and that is considered to be upside potential. But for the life insurance, the sales performance, even that is good, does not lead to profitability. Depending upon the offering of the services, sell the effects have been penetrated gradually. And for the sales activities, there is increase of surrender. And of course, that is mainly due to the market condition, but life planners we have to provide good information to the customers so that they are able to make judgment. I think that will give upside potential. And also for the market downside, the market there is change in conditions. But the -- compared to the end of June, the interest rate falls. And also for the stock stock market, there is some fall in foreign exchange, we see the yen appreciation. So for the interest rate, we are quite positive about that. And foreign exchange and stock price, we are negative. And so this market condition may be reflected in upside and downside. So we have to pay constant attention to the market condition so that we can always constantly control the profitability. Thank you.

[Unknown Executive]

And next, from Mizuho Securities, Nakane-san, please?

[Yasuo Nakane, analyst]

This is Nakane from Mizuho Securities. I also have 2 questions. But it's a related question, but first is of the investor return and buyback, and the next is balance sheet. From May, looking at your buybacks in 3 months, it's closer to JPY 100 billion. And on average, the price is more than JPY 14,000. So relevant to the share price, you are continuing with the buyback and it seems to be that you -- well, there's strategic investments, so it's the best to invest in Sony. And that is the reason why investing in sun. And so I think that was your stance, but have you changed your policy? So that is 1 thing. And also the second is excluding financial service balance sheet. I think we had less than 30% capital ratio, but now it's more than 40%. And when it was 30%, you said that more than 40% would be your target, more or less, I believe. But now you currently exceeds 50%, and the leverage is not working. So excluding Financial Service, the shareholders' equity ratio. What is the minimum that you have in mind? So I'm pleased to tell me about that. So these are my 2 questions.

[Hiroki Totoki, executive]

Thank you very much. There are 2 questions. So Hayakawa-san will first respond.

[Sadahiko Hayakawa, executive]

Yes. Thank you for the question. About your first question, yes, as you said, we as a company have been buying back our shares. And it has been part of our strategic investment. And looking at the financial situation of business performance and share prices have been trying to do it with agility. And so this has not changed. But from this fiscal year, the fifth we like to strengthen our shareholder return. And therefore, we want to increase the total payout ratio to 40%. And therefore, I think we are shareholder return. And this has been incorporated. And also currently, looking at the share prices, we are buying. So I'm pleased to understand that, that is the current case. That's the answer to your first question.

The second, as you say, as of the end of June, looking at -- it's a 50.4% shareholder equity ratio. And we think that -- losing for the shareholder equity ratio, we have not changed our thing and we want to have a healthy balance sheet and looking at the investment opportunity and the market changes. We want to have a competitive finance in place and we want to try to achieve a 40% more financial services. And from that point of view, currently, we -- because of the accumulation of profit, shared equity ratio has increased, but we think that with that was explained, we can try to improve the capital efficiency on our balance sheet. That is all.

[Unknown Executive]

Thank you very much. Next, JPMorgan Securities, Ayada-san, please?

[Junya Ayada, analyst]

Ayada from JPMorgan. I also have 2 questions about games and I&SS. First about games, add-on sales growing substantially in dollar basis, about 20% growth in revenue seems. But the breakdown, I want to know if you can make some supplemental comments about that. What's included here first, add-on and third-party add-on first being less share and large titles that was strong, [indiscernible] last year and others. Within third-party, I think you can have those 3 categorization. So can you show the breakdown? And the 1Q add-on structure, how is that going to reflect in the Q2 onwards? And the second question is about the I&SS inventory. As of end of -- from end of March, it has increased about JPY 100 billion. And so I think there's -- because of seasonal factors, work in progress. But if you look at the final inventory, what's the current level? Is it high? Low? I think the unit price is going up for chips, and that's why the value is going up. But in terms of volume terms, finished product inventory, is it sufficient? And based on that, Q2 onwards, what would be the utilization? What's your view on that, please?

[Hiroki Totoki, executive]

Thank you. I'd like to answer both questions. First, game and network service add-on sales growing. You point out that, that's correct. Most from third-party. First party a little bit, but mostly it's for third party. I think I can say it that way. And also for individual titles, it's difficult to comment. But for -- it's divided into several titles and the biggest title that you can imagine that is growing and that is true. But others as well, there are various titles growing steadily. I think I can put it that way. Also, indices, Basically, as you point out, there's an impact of seasonality, that is the big impact. And finished inventory in terms of volume, is it sufficient? Was your question. Looking at the sales size, it's at a rational level -- reasonable level. Q2 onwards, what will be utilization, mobile image sensors were at full capacity almost. That's my view. Thank you.

[Unknown Executive]

The time is running short. So the next question will be the last question. So please limit your question to 1 question. Yes, so from UBS Securities, please?

[Unknown Analyst]

My question is about economic condition that Aoki-san already explained that the foreign exchange and also U.S. are the major impact factors. And for those 2 factors, well, I believe that the depending upon the categories, I think there is a change in the impact. So what are the categories which are affected? And for instance, U.S. economy and the foreign exchange, you put more emphasis. And in your business model, in a realistic way, if the -- well, I think there are any things that you are worried about. If those things happen, you're worried about that if you are -- how do you define and interpret the feature of economic concerns this time? Thank you very much.

[Hiroki Totoki, executive]

So regarding foreign exchange, the sensitivity issue should be addressed. So Hakan will answer that question. Thank you for your question. And for our forecast for the financial results, by presenting that, in an immediate past, there was the rapid foreign exchange, the fluctuation. But -- so we have updated with yen depreciation for both the euro and the U.S. dollar. And ISS is most affected in terms of sensitivity. And so the immediate forecast we have to update for each category. And thus, for the foreign exchange sensitivity for music and the pictures, the accounting translation is included. For $1, JPY 50, the sensitivity exists. And so including the accounting the the translation. And for JPY 65, so by those numbers, you can see the impact. But that is the sensitivity for the next year -- for the 1 year. And so there is the foreign exchange hedge, the hedge effect, and that will be offset to a certain extent. And on the fifth, there was a yen appreciation up to JPY 140. But currently, the JPY 146 or JPY 147 is high, but we would like to check the factors for fluctuation, and we would like to address this issue properly and manage that. And if it is needed for electronics, the product price revision has been carried out. So we will be very flexible in even including the transferring that impact into price. And so in overall picture, after August, if there is a JPY 10 the yen depreciation in dollar and euro will move in parallel with that, in that assumption in terms of sensitivity on a consolidated basis, the JPY 70 billion to JPY 80 billion worsening is anticipated. But that is just a matter of a simulation. And before foreign exchange moves that way, -- of course, we do have some of the advance the countermeasures taken, and we have to also make some adjustment and also cost will be the cut in accordance with that. So may not directly impact our financial results. And at this moment, overall sales and compared to our business scale. On a consolidated basis, the foreign exchange impact is not that great within a certain range. So we would like to continue to control this and manage this solidly. And from the prospective business model, in the macro picture, the risks, which may impact our business significantly. Well, it's very difficult to think about them, but geopolitical risk is certainly the big risk. And when appears in the macro picture that may give a major impact. For image sensor, U.S.-China relations have significantly impacted our business in the past. We do experiences. So regarding geopolitical risk, we have to be always very cautious about it.

[Unknown Executive]

Thank you very much. It's time for us to end, and we'd like to thank you for taking part in our Q1 earnings announcement meeting. Thank you.