Sony Group Corporation (NYSE:SONY) Q1 2022 Earnings Conference Call July 29, 2022 3:00 AM ET
Company Participants
Hiroki Totoki – Executive Deputy President and Chief Financial Officer
Naomi Matsuoka – SVP in charge of Corporate Planning and Control, Support for Finance Business and Entertainment Area
Sadahiko Hayakawa – SVP in charge of Finance and IR
Conference Call Participants
Yuri Furukawa – Bloomberg
Masahiro Ono – Morgan Stanley
Junya Ayada – JP Morgan
Yasuo Nakane – Mizuho Securities
Ryosuke Katsura – SMBC Nikko Shoken
Operator
Now it’s time to start Sony Group Incorporated consolidated announcement. My name is Okada from PR, and I’ll be facilitator for this meeting. I’d like to first ask Mr. Totoki, Executive Deputy President and Chief Financial Officer, Senior Vice President, who will be giving the presentation about our projections for the rest of the year, and the result of first quarter of 2022. We are planning to finish this in about [indiscernible].
And with that, Totoki-san, we will.
Hiroki Totoki
Thank you very much. I would, now, today, I’ll start with discussing business environment around our company. The forecast announced in May was based on growth outlook of the global economy as of January, as well as major risks at the time of forecasting, such as direct impact from the situation in Ukraine and the impact of COVID-19 in China.
Business in Iran had changed significantly since then and there were concerns about more slowdown of global economy, primarily due to rapid inflation as well as responding monetary policy by different countries. We are working to assess the impact from those environmental changes. I will take prompt actions to address them as a top priority in managing our business. And the forecast we disclose today incorporates those impact to reasonable degree based on current circumstances.
ET&S and I&SS are highly sensitive to changes in macro environment. But we are also paying close attention to all other segments including G&NS, Music, Picture and Financial Services, and we are taking steps to mitigate risks in managing our business.
Now I will explain the following topics. FY22 Q1 consolidated sales increased 2% year-on year to ¥2,311.5 billion, and consolidated operating income increased ¥26.9 billion to ¥307 billion, both of which were record high for the first quarter. Income before tax increased ¥8.2 billion year-one-year to ¥291.4 billion and net income attributable to Sony Corporation — Sony Group Corporation shareholders increased ¥6.4 billion to ¥218.2 billion. Consolidated operating cash flow excluding the financial services are an outflow of ¥167.4 billion primarily driven by increasing working capital and impact from currency adjustment due to a weaker Japanese yen. The slide show result by segment of FY22 Q1.
Now I will explain FY22 consolidated results forecast. Consolidated sales are expected to be ¥1,500 billion, ¥100 billion lower than the previous forecast and operating is expected to be ¥1,110 billion, ¥50 billion lower than the forecast. Q1 operating profit was higher than the forecast. But in order to cover uncertainties in business environment from second quarter and onward, we decided to maintain full year operating income forecast, as announced in May for the five segment except G&NS where we have revised our view for general gaming market.
Consolidated operating cash flow excluding Financial Service is expected at ¥820 billion, ¥230 billion lower than the previous forecast to reflect actual result in Q1. The assumed foreign currency rates have been updated to approximately ¥130 to the US dollars, and approximately ¥130 and to euro. This slide show our forecast by segment for FY22. I’ll now explain the situation in each of our business segment.
First one is G&NS Segment. FY22 Q1 sales decreased 3% year-on-year to ¥604.1 billion primarily due to a decrease in software sales, including add-on content, partially offset by favorable impact from foreign exchange rates. Operating Income decreased significantly by ¥30.5 billion year-on-year to ¥52.8 billion, primarily driven by decrease in software sales and increase in gaming software development costs.
Despite an upside of bigger sales due to currency, FY22 sales are expected to decrease by ¥40 billion from previous forecast to ¥3,620 billion primarily due to revised forecasts of software sales for the year, reflecting the result of Q1. Because of the factors such as decrease in software sales and negative impact of foreign exchange rates, together with the earlier than expected closure of Bungie acquisition resulted in ¥13 billion additional yen for transaction for the year. FY22 operating Income is expected to decrease by ¥50 billion from our previous forecast at ¥255 billion.
PlayStation user’s total gameplay time declined 15% year-on-year in quarter one. Gameplay time in June improved 3% compared with May and was down only 10% versus June 2021. But this is a much lower engagement level than we anticipated in our previous forecast. We believe the main reason for this is that the growth of the overall game market has recently decelerated as opportunities have increased for users to get out of home as COVID-19 infections have subsided in key markets.
With this in mind, we intend to take action to increase user engagement in the second half of the fiscal year, during which major titles including first party software are scheduled to be released primarily by increasing the supply of PlayStation 5 hardware and promoting the new PlayStation Plus services. For now we have made no change to 80 million unit sales forecast for PS5 hardware in FY22. But since we are seeing recovery from the impact of the lockdown in Shanghai, and a significant improvement in the company’s supply, we are working to bring forward more supply in the end holiday selling season.
Sony Interactive Entertainment completed its acquisition of Bungie on July 15th of this year and collaboration between the two companies have begun. In addition, the acquisition of Haven Entertainment Studios announced in March was completed on June 27th. In addition to the content development capability enhancement at our existing studios, we are working to strengthen our first party software by creating new IP and accelerating the rollout of the live game services and multiplatform titles through synergies with the studios we’ve acquired.
Next is the Music Segment. Q1 sales increased a significant 21% year-on-year to ¥308.1 billion, primarily due to the forex rate impact and the streaming revenue increase. Operating income increased ¥5.6 billion year-on-year to ¥61.0 billion primarily due to the positive impact from exchange rate. The contribution to operating income from Visual Media and Platform accounted for the slightly more than 10% of the segment operating income for the quarter. FY22 sales are expected to increase ¥40 billion from previous forecast to ¥1,280 billion mainly due to the forex impact. The operating income forecast IS unchanged from our previous forecast.
Q1 Streaming revenue continue to grow with Recorded Music growing 27% and Music Publishing growing 42% year-on-year, 8% and 20%, respectively on the US dollar basis. We are monitoring the impact of the global economic slowdown on streaming services. But we have not changed our view that the global music market, including both Recorded Music and Music Publishing will grow steadily over the next several years at a growth rate in the high single digit.
In Recorded Music we are producing many hits such as Harry Styles album Harry’s House, which has become a huge hit worldwide. As a result, we averaged 47 songs in Spotify’s weekly global Top 100 songs for the quarter, a significant increase from the average 36 songs we recorded last fiscal year. In addition to strengthening our ability to continue to generate hits, we are working to expand and diversify our profitability foundation by enhancing artists services through The Orchard and AWAL, expanding our business in emerging markets and collaborating with business partners in new areas such as social and gaming.
Next is the Picture Segment. FY22 Q1 sales increased a significant 67% year-on-year to ¥341.4 billion, primarily due to the foreign exchange rate impact, and the increase in the delivery in Television Production and revenue increase from films released in the previous fiscal year in Motion Pictures. Operating income increased a significant ¥25.3 billion year-on-year to ¥50.7 billion due to increase in the overall sales of segment. FY22 sales are expected to increase ¥50 billion compared to your previous forecast to ¥1,380 billion primarily due to foreign exchange rate. The forecast for operating income is unchanged from the previous forecast.
Theatrical revenue in the US appears to be recovering with Box Office revenue in some weeks exceeding 2019 levels, thanks not only to the large scale films aimed at young audiences but also hits in the family genre, where it was believed COVID-19 would make it difficult to attract audience. We are looking forward to the movie Bullet Train starring Brad Pitt to be released in August in the US.
Demand for premium content continue to be strong due to increased competition between — amongst the video distribution services. As an independent major studio that provides product to a variety of partners, we see this as an opportunity. In addition to media networks, the service integration between front row and animation distribution business Funimation is proceeding smoothly and the number of paying subscribers and business financial performance are growing at a pace that exceeds our expectation.
Next is the Entertainment, Technology & Services Segment. FY22 Q1 sales decreased 4% year-on-year to ¥552.3 billion mainly due to a decrease in Television unit sales resulting from the impact of lockdown in Shanghai and worsening market conditions partially offset by the favorable forex impact. Operating income decreased ¥18.2 billion year-on-year to ¥53.6 billion, mainly due to the impact of the decrease in television sales. FY22 sales are expected to increase ¥50 from our previous forecasts to ¥2,450 mainly due to the forex impact partially offset by our — incorporating the risk of market deceleration into our forecast for the second half of the fiscal year. The operating income forecast is unchanged from our previous forecast.
Due to a faster than expected improvement in the utilization of our manufacturing facility following the Shanghai lockdown and a faster than expected improvement in supply constraints for components centered on semiconductors, mainly for digital cameras, Q1 operating income significantly exceeded our previous forecasts. On the other hand, new risks such as global economic slowdown, especially in Europe, and the adverse effects of the strong dollar on our financial results have recently become apparent. We plan to apply the upside to profit we enjoyed in Q1 to these risks and implement additional measures such as improvements in product mix and cost controls in anticipation of even more risks.
The inventory level at the end of June is a little high even when we exclude the increase in valuation of the inventory due to the year-end depreciation, and the strategic stockpile of parts that we are concerned about procuring, and we plan to adjust that level in preparation for the expected softening of demand in the product market going forward. Moreover, we are steadily promoting the transfer of production across multiple facilities, decentralizing the production of key components, and digitalizing and further optimizing our operations. We will continue to strive to maintain and improve our profitability by responding swiftly to market changes.
Next is the Imaging & Sensing Solutions Segment. Sales for the quarter increased 9% year-on-year to ¥237.8 billion, mainly due to the forex impact. Operating Income decreased ¥8.8 billion year-on-year to ¥21.7 billion, mainly due to an increase in R&D and depreciation expenses despite the positive forex impact. FY22 sales are expected to decrease a ¥30 billion from the previous forecast to ¥1,440 billion. The operating income forecast is unchanged from our previous forecast. Our forecast this time assumes that we cannot expect a recovery in the Chinese smartphone market this fiscal year after considering the trends seen in the Chinese market during Q1 and we have incorporated deceleration of the middle and low end finished product market as well as lower sales of the mobile image sensors to reflect this deceleration.
On the other hand, in response to growing needs for video recording, the introduction of smartphone manufacturers of a larger die size, high resolution image sensors in their high end lineup is steadily progressing. We believe that this trend toward higher resolution quality improved functionality of cameras has become even more apparent. From the second quarter onward, we anticipate that the larger die size sensor adoption by customers will accelerate further and drive sales growth for mobile image sensors.
In addition, due to an easing supply and demand equilibrium for large semiconductors, it has become possible to gradually increase the production of high value add image sensors, the production of which was previously restricted due to supply constraints. Therefore we expect that the product mix will gradually improve from the latter half of the fiscal year. Moreover, when it comes to automotive image sensors in our AITRIOS and other solution businesses that are expected to grow significantly over the mid to long term, we will continue to proactively invest in the development of technology and the expansion of business themselves.
Last is the Financial Services Segment, FY22 Q1 Financial Services revenue decreased a significant 28% to ¥297.8 billion, mainly due to the decrease in net gains on investment and the separate accounts at Sony Life Insurance Limited. Operating Income increased a significant ¥57.3 billion year-on-year to ¥81.3 billion, mainly due to the recording of a gain on the sale of real estate completed in April and the absence of the loss record in the same quarter of the previous fiscal year from the unauthorized withdrawal of funds, both at Sony Life. As Sony Life previously announced, the judicial procedures to recover the funds from the unauthorized withdrawal were completed in July. The FY22 Financial Services revenue and operating income forecasts are unchanged from our previous forecast.
With the large scale and rapid changes in the business environment this was fiscal year, the risks and issues that need to be addressed are wide ranging and diverse. In each business, we aim to thoroughly grasp the situation accurately and respond promptly to changes in the business environment. And we plan to continue to operate the business with highest level of caution. At the same time, we will steadily continue our efforts to achieve long term growth.
This concludes my remarks.
Question-and-Answer Session
Operator
So that was a presentation from Mr. Totoki. It will be followed by this: we’ll have a media Q&A from 16:20 and Q&A for investors and analysts from 16:45. We are scheduled to be covering
about 20 minutes for questions. [Operator Instructions] Thank you. [Break]
Now we will be starting the Q&A session for media people so please wait a few more seconds, thank you.
Thank you for waiting. And we’ll now like to start the Q&A session with the media representatives. And to respond your questions, we have a Mr. Hiroki Totoki, Executive Deputy President and CFO and also Ms. Naomi Matsuoka, Senior Vice President in charge of Corporate Planning and Control, Support for Finance Business and Entertainment Area. And also Mr. Hayakawa, Senior VP in charge of Finance, and IR, and we will start the Q&A session. And please limit your questions up to two questions only. [Operator instruction] We have [Ms. Tsutsumi] of Nikkei BP.
Unidentified Analyst
This is Tsutsumi from Nikkei Newspaper. Can you hear me?
Hiroki Totoki
Yes, we hear you.
Unidentified Analyst
Thank you. I would like to understand the gaming business situation. If we look at the materials, the software sales was at about 25% decrease. And this is also the reason why you have reduced the forecast for the year. And maybe the reopening of the markets is the reason and the growth of the gaming world, maybe as the — for the industry as a whole, it’s slowing down. So in the mid-term, do you think it has already peaked out? So that is my first question. My second question, this is more about the future. When it comes to gaming and semiconductors, recently, mainly in the Western markets, there’s inflation and there’s also — there is concerns about recessions. So what is related to your company is the consumer’s lifestyle. When it comes to gaming PS5 and software, there might impact to the demand for the semiconductors, the image sensors including the high end consumers, maybe there’s an impact — impacts in the market. So I’d like to understand if there’s any impacts that you’re feeling? And how — what is the level of the risks that you’re feeling for the future? Can you explain those situations to me?
Hiroki Totoki
Thank you very much for the question. I think you asked me two questions, regarding game and networks services with the situation and now. And also in the Western markets mainly, there’s this concern of a recession. The gaming network associated and what is the impact on I&SS as well. So I would like to answer both questions. Regarding the gaming market, like you said, the software sales has gone down 25%. There were two factors to this. One is the reopening apparently. And secondly, I showed you earlier, the PlayStation users gaming time I talked about the trend. If you look at that, I think it’s apparent. And also compared to the previous fiscal year, the major titles sales has decreased. The number of titles have gone down. So I believe those are the two major reasons. The engagement itself for some time for the downward trend in June, that stopped and for July, we saw a slight recovery, that’s my understanding. So we need to carefully observe the situation around this. Therefore, the changes in the trend is something that we need to incorporate into our future expectations and for the mid to long term growth and trends, for now, we don’t have any serious concerns.
And for the game — network services in I&SS, impact from the economic situation point of view, for PS5 demand, the supply has not been sufficient. So for this, the demand has not gone down. And first of all, we need to really meet the demand. I think that is the important thing to do. And also regarding the image sensors, especially for the smartphones and for the high-end smartphones, we would have to see what the sales situation is going to be. In China, the demand is slowing down and I don’t think in this term, we will be able to see a recovery. And I said that in my presentation. So the mid to low end products, demand slowdown is actually significant. So for the high end products from a global perspective, the demand for our image sensors as of now has not gone down. And for now, the demand is quite robust. However, obviously, this depends on the economic trends, but especially in the second half, we would have to look at the global smartphone demand very closely. That’s all.
Operator
Now let us take you to the next question. Sasaki-san from Toyokasei, please? Hello, Sasaki-san?
Unidentified Analyst
Hello, can you hear me?
Hiroki Totoki
Yes, we hear you.
Unidentified Analyst
Okay, very good. Thank you very much. I’m Sasaki from Toyokasei. Thank you very much for your presentation. I have two questions. First question is again about gaming. Now, in first quarter software sales has decreased as I understood and but like you said, externality was main driver, but is there any other reasons whether from competitors or maybe internally, is there any reasons that drag down the sales performance of software gaming — software for gaming? The other thing is the progress that you made particularly for semiconductors in the mid-term perspective. You have — there are some concerns about that. And for Pictures, there are certain drivers that can influence on that. Semiconductors also, do you expect some like the turnover and the upsides coming in the midterm perspective in semiconductor?
Hiroki Totoki
Thank you for your question. First question was on gaming, is there any other factors that drove down slowdown of sales performance in gaming software except externality? That was your first. Second question was, your question was about first quarter progress we made in light with full year performance, particularly on the progression around semiconductor business, as I understood. First question, the factors outside of externality, it goes back to my earlier presentation. Last year, we had a big titles, big contents being launched. In this financial year, particularly in the first quarter, there’s nothing similar. In terms of the magnitude of the size of the one content, we are kind of has, we had not as many big titles before. Now progress for Q1 for I&SS, first quarter actual and the first quarter was performing better than our expectation, because our sales and profit plans, we’re focusing more growth coming from second quarter and afterward, because of customer’s trend, the product lifecycle for customers. These are the inputs that we took. In that sense, the progress that we’ve made for this first quarter in this financial year, I&SS business actually performed quite well in the first quarter. Thank you.
Operator
Let us move to the next question. Nakasuji-san from TV Tokyo.
Unidentified Analyst
Okay, thank you. And once again, my name is Nakasuji of TV Tokyo. And most recently the depreciation of yen was taking place, all of a sudden today yen went up and how — what’s your view on this rapid changes up and down? And also what’s your prospect for this exchange rate? Thank you.
Hiroki Totoki
And true, most recently exchange — forex market is changing rapidly. And our response to that is, since we also do have some management measures, Hayakawa-san will respond.
Sadahiko Hayakawa
The impact of exchange rate at the start of the fiscal year for the consolidated operating income other than the financial services, Gaming, and ET&S and I&SS in these three segments, our sensitivity, the one yen down is ¥1 billion and for euro that’s ¥7 billion difference. As Totoki-san has pointed out, it’s going — moving frantically up and down. But to mitigate the risks, we want to make sure we get enough margins and also the impact of the forex rate is very different depending on the segment, we want to make sure that we have a robust cost structure. So that’s how we try to respond in our operation.
Operator
Let us move on to the next question. Abe-san from the Nikkan Kogyo Newspaper.
Unidentified Analyst
My name is Abe from the Nikkan Kogyo Newspaper. Can you hear me?
Hiroki Totoki
Yes, we hear you.
Unidentified Analyst
Thank you very much. I have one question. Regarding the operating income you have revised it downwards for the year, why is that? So Game & Network Services is the main reason why you have done that. Out of that, in this area, what is the biggest factor for this revision? Is it the reduced sale in software titles?
Hiroki Totoki
Thank you very much for the question. As you have said, for the full year, the downward revision of — downward revision is because of the G&NS. At the beginning, we made a forecast for software sales, especially for the first quarter, we were quite confident but we believe that there was this gap in the results. We thought that the reopening would be much more stronger but that was — based on the results for the Q2 onwards sales, we have updated the information. And we have made the best estimation for now. That’s all.
Operator
We’ll take you to the next question. Furukawa-san from Bloomberg, you’re next?
Yuri Furukawa
Yes, I’m Furukawa from Bloomberg. I hope you can hear me.
Hiroki Totoki
Yes, I can hear you.
Yuri Furukawa
Okay, thank you. Now, question — two questions about Gaming business, software sales have been — was decreased, you explained about it a few times, but the hardware the PS5 hardware shipment was not catching up with the demand. Do you think that’s the reason for lower software demand? The other thing is about consumer products where the cameras and other products are getting hit from raw material cost and increased supply chain and the currencies. There are a lot of headwinds that are coming. Do you think PS5 also needs to increase the sales price point? Do you think it needs to be considered?
Hiroki Totoki
Well, thank you very much for the questions, both of which were about Game & Network Services with regard to your questions. So software sales, the — is the PS5, the hardware itself was not being supplied enough for distribution, is that the reason? Now, hardware supply were not meeting expectations of customer. We’re not shipping enough volume to cover the demand. We acknowledge that as the fact we want to address that and improve as soon as possible. As I hate to repeat myself, there are two big constraints that we are imposed with. One is that parts and components availability, the other one is supply chain. The logistics, parts and component’s availabilities saw a lot of improvements. Sure, we are very hopeful that this is quite optimistic about that.
For slow supply chain disruption, we actually got quite a hit from first quarter. In the first quarter hardware volume for sales were quite smaller than what we expected at the beginning of the year. So supply chain disruption is something that we hope to get or completely be addressed. In any case, we would like to take our product. [indiscernible] better. We want to deliver as much as soon as possible, 8 million shipment, that target has not been changed, but we are trying to produce them soon as possible in ready for holiday season this year.
Second question was about potential price increase for a PS — PlayStation 5. At this point in time, there is nothing I can tell you, share you anything specific about prices. So please take it as my answer to your question. Thank you.
Operator
Okay, we have only a limited time. So we’ll move to the next person, the last person to ask question. [Operator Instructions] I’m hearing none. I would like to conclude the Q&A session with the media representatives. And the Q&A session for investors and analysts, we will start at 4:41.
[Break]
We’ll be starting the Q&A session for investors and analysts. It will be a few more seconds.
Thank you very much for your patience. And now I would like to start the Q&A session for investors and analyst. My name is [Shinshi], I belong to the Financial Department IR Group. And the on behalf of the Sony Holdings Group, we have these people responding to your questions. [Operator Instructions].
Now I would like to start the Q&A session. And we ask you to limit your questions up to two questions only. [Operator Instructions] The first Mr. Ono-san of Morgan Stanley MEFT, please.
Masahiro Ono
Yes. Thank you. I am Ono from Morgan Stanley. I have two questions, one is about Game, the other question is about I&SS. So first question on gaming is, now PS5 shipment has been, well, the components parts situation has improved, as you said. But it’s the supply has been slow, more slow than launch. And the third party software has been postponed by third party content creators. But do you think and Totoki-san you earlier talked about how you said volume expectation was maybe too optimistic at the beginning. But do you think software has got the impact because of the supply shortage, or what about user engagement too? It appears, either there are a lot of excited to be, users who wants to play with PS5, they get for the lack of better word, get frustrated, and maybe have they shifted behavior? So can you talk about your perspective of how consumers are behaving based on that for us? The other thing is about I&SS, especially for the mobile customers, how would you see the risks and the inventory availability for that? You said mid-to-low end for Chinese market versus the inventory. Like you said there is a constraint for the inventory, but you are confident about high end. But I think you talked about a lot of inventories, which are commodity items. So can you talk about the risks associated with those — that situation?
Hiroki Totoki
Well, thank you for the question. Two question. First question is on Games, second question on
I&SS. Now, first question, the supply of a PS5 is the slower supply to demand is that the reason why users decided to stay away, therefore slowed down the sales of software and as a hypothesis, and well, how do I see it? Well this is a very difficult question. But for us, the supply of hardware will for sure increase user engagement for sure because actually, that’s been proven from that data that we are paying attention to. So somebody who are playing with PS5 tends to have very high engagement, which is a very positive sign by itself. But from that perspective, PlayStation 5 have to supply, more people use the hardware, then positive impact one may expect because the impact will come quickly. So in that sense in the second half, the volume of PS5 are going to significantly increase. So after the second half, we have our own title. Third party contents are also being planned for their launches. So after the second quarter, after — there’s a momentum which we can build on to escalate that engagement.
So your question about inventories, let’s say about this question initially for image sensor for mobile, so, we are looking at production capacity and the demand forecast and we are going to be acquiring like strategic inventories and inventory is going to be having a higher availability than last year. More recently in the first quarter, the shipment has slowed down a bit. Inventory right now is trending higher than our expectation but our — this is within a reasonable range, looking at the other growth projection on our forecast. How do I see it moving forward? Especially so we are expecting to see starting to expand more sales in second quarter. So inventory level is going to lower down. It’s going to be coming to the normal level, but for the strategic inventories, we are going to have deliberately have additional excessive inventory in 2020 — for 2023. So, for the time being, we expect the inventory level to for the — particularly for strategic inventory components to stay the same.
Now, I talked about many of the components or commodity parts. Generally speaking, I will stay with that statement. But when the demands change, I think — you know, you might be concerned that if the demand slow down, too much of the inventory may turn around as a risk. But we are going to be adjusting the capacity for FY23. We will be able to flexibly not be able to control that based on the reaction from the marketplace. Thank you.
Operator
Let us move on to the next question. Hidaka-san from BofA Securities, please?
Unidentified Analyst
Thank you. This is Hidaka from BofA Securities. I have two questions. First question regarding operating income plan, you have made a downwards revision. The cash flow, operating cash flow plan, the downward revision is a negative ¥230 billion. So that’s my first question. Secondly for I&SS, in your explanation, you talked about smartphones mainly. On the other hand, when it comes to the operating income plan, due to forex impact, ¥7 billion, so for three quarters, so it’s more the ¥30 billion is the impact of forex. For the industrial equipment and security cameras’ image sensors are things that were not included in your explanation. So those are having a significant position. So I would like to understand that situation. And from a housekeeping perspective, if you can give me any operating capacity factor information that would be helpful.
Hiroki Totoki
Thank you for the question. Regarding the first question, the downward revision of the operating income and also the cash flow situation, the working capital and the tax, those are the factors but Hayakawa will be explaining the details.
Sadahiko Hayakawa
Thank you very much for the question. As it was explained, and in the speech and the performance results was also explained that the operating cash flow is a negative. This is also impacting the expectations. The working capital has gone down and due to the depreciation of the yen, from an accounting perspective, from a cash flow statement perspective, there was an adjustment may due to forex. So that is significant and also regarding the operating income, it has gone down by ¥50 billion and the operating cash flow is ¥230 billion. The gap between the two, regarding the ¥230 billion negative, regarding the ¥50 billion, this is the G&NS downward revision of profits. And also for the working capital increase for this, I&SS and also the increase in inventory for ET&S is significant. Regarding I&SS as Totoki explained, after 2Q, second quarter on average, the sales is going to be significant especially in the fourth quarter. So, the account receivables will increase and inventory will also increase as well. But for this, the operating cash flow will come back from the next fiscal year. So, that is why the operating capital is involved.
For the forex calculation, this is quite significant for this fiscal year, the EN is depreciated. So, that is quite significant and also, as of May, compared to May, that cash tax payment has gone up and for Pictures and Television, production has also gone up. And also lastly, regarding the adjustments for the forex, the operating cash flow portion has gone to the negative side. If you look at the cash flow statement, I think it’s clear. But for the so called balance sheet for the foreign currencies, is also a being included in the calculation and we see an offset. For the first quarter result, you’ll see that there’s an offset. So, from a capital allocation perspective, the operating cash flow looks like a negative but from a balance sheet perspective, it has come back. So, I think for the forex adjustment, I think that could be said. Thank you.
Hiroki Totoki
Thank you very much. And as for I&SS, the impact of — positive impact of forex is offset by the profit in the industrial applications and the security cameras. And as I said that the macro economic slowdown risk, which I mentioned earlier is concerning that the large customers of ours in this area is in China. And so, we are — we anticipate the risk of a possible slowdown for industrial usage. But this might be and a somewhat of an conservative response we may have. And in terms of sensors capacity and the actual input and in the supplement material, there is a some information. We hope you will refer to it at the end of this quarter. 140k slices per month and also in terms of input 124k slices per month.
Operator
Okay. Let us move to Ayada-san of JP Morgan Securities.
Junya Ayada
Yes, my name is Ayada from JP Morgan, thank you very much. I have two questions, general questions both of which and the first question is about operation and the cost approach about the other operation. So, because the demands has quite shifted, right? That was like in your announcement, there are a lot of evidences of demand have shifted and Totoki-san you mentioned about very quick agile response, but after first quarter being closed, is there anything that you want to change versus not changed? In terms of the operation, can you — do mind highlighting changes and not changing operations? You speak about changing operation in the first quarter, you saw quite worse, the cash flows got worse than before. So TV, the consumer products like would you want to manage the inventory level? And the sensors, there is a downward adjustment and the production — the plans if not being made, the inventory level is going to quite go up at the end of the period. So again, based on those things, what are the things that you would change versus not change in terms of your operation? Second question is about your approach about the full year plans. You have, yes, I understand made some adjustments but having said that, there are some uncertainties right now. What are the uncertainties like the potential risks? For example, how this is in Game or the high end product’s revenue or sales projections are not changing? Do you see any risks so for those businesses at all? If and the unknown risk become materialized, do you have any buffers to be able to cushion that on surprises? Is that also part of the numbers that included in the full-year?
Hiroki Totoki
Yeah, thank you for your question. First question was the changes, shift on demands and a quite substantial one. And your question was, what are we going to change and what are we not going to change? Second question was about potential risk for the rest of the year. So, I will now take these two questions. So, first, what are we changing and not changing? In that respect, what we are not changing is building block for mid to long term strategy growth, the investment therefore. The amount of investment may adjust, but what we are committed to do will not change. We will not change our stance and commit for our investment for the future. What we are changing for this financial year is mostly on how we are using expenses and the control of inventories, I would say.
Speaking first on expenses, for example, entertainment in overseas. Company — overseas businesses in entertainment industries are now becoming very conservative for recruitment. And when there were headcounts who are open positions, we will not the traditional approach, but they will have taking more traditional — conservative approach than traditions. And marketing and sales expenses are also looked at, at not spending them, so operational teams are making sure that they are trying to make improvements with risks in their mind.
Now for inventory control, so, on all segments, a huge attention is being given to inventories or gaming network is, first of all, like, inventory is not a problem because supply is not being able to catch up with demand. But for ET&S and for I&SS, all the segment where the inventory went up, there are three reasons why the inventory went up. One is currency change, weaker Japanese yen, therefore, it on the surface level look like a bigger inventories because of the value change in currency. And we had a quite a long month of supply shortages. We have to make sure that we have accessed the challenged material and also the — in terms of inventory control, the bigger influence is actually comes from parts and components. So normalizing parts and component is something that we are focusing on right now.
Inventory for I&SS, goes back to my earlier comment actually, in FY23, we have plans to capacity expansion. But the question is, what timing in which we are going to turning that switch on? That will be the one control mechanism that we will use, right? And this next one is related to the second question, is there any risk of a high end smartphones? So high end smartphone, if there is going to be risk then become reality for the high end smartphone and so we have these scenarios. If our scenario that reality becomes slower than our scenario, if that’s the — if that happens, the timing of the capacity expansions will be adjusted or postponed slightly later, that will be the way to control it.
The other one is risk about holiday season’s gaming business. Well, the economy being slowed down therefore it is having an impact on the gaming business’ sales performance. I don’t think that will be our risk, not from the economic slowdown. And the reopen is probably the bigger reason. So after second quarter, when the big content’s title can miss out, we’ll be able to test and see how the — it’s going to perform and that will be a good indicator for us to assess the holiday season. Thank you.
Operator
Let us move on to the next question from Mizuho Securities, Nakane-san, please.
Yasuo Nakane
Yes, thank you. I have two questions. First of all, for Music and Pictures, aside from these two areas, the first quarter progress, performance was better than expected from Pictures and Music. I would like to understand the situation and up to the second quarter compared to the budget, is it higher or lower? What is the range? And for now, it looks healthy. And there are some continuing factors. So I’d like to understand situation. And regarding Bungie, you said that the acquisition has been completed and the cost will change from ¥44 billion to ¥57 billion. I would like to understand the situation regarding that from next year onwards? And I’d like to understand the business situation and the timing of the consolidation. Can you give us an update, please?
Hiroki Totoki
Thank you very much for the question. Regarding the situation regarding Music and Pictures, regarding Music, in the first quarter it was — it did very well and Spider-Man and other titles made a major contribution. For the Entertainment area, the profit contribution was very high from that perspective. And dramas have been produced, for TV there were many deliveries made. So this quarter, it performed very well.
And for, are we seeing a decrease? And from this point onwards, we got Spider-Man Verse, major titles, the Spider-Verse has been postponed to the next term, we have already made that decision. So that would have a negative impact. So that’s why it’s flat. Regarding Music, it’s in line. The streaming market is doing very well, it’s growing and our share and margin are both also performing very well.
And regarding Games, so we’ll have to look at the situation next year onwards, but regarding the cost for the acquisition, the expense for the FY23 compared to this year, it will be an increase about 20% — by 20%. And also the Bungie business having an impact on the whole both in terms of revenue and profit, and I think it will be minimal. Thank you.
Operator
We are running out of time. So we will limit only one question from per person. And so now Katsura-san from SMBC Nikko Shoken.
Ryosuke Katsura
Well, thank you very much. So since I can only ask one question, this is related with the previous question. But there is some — this is a general question. Now compared with a year-on-year and the last — the budget 1Q — Q1 and a full year, there are certain things that you have incorporated versus not incorporated. There were a lot of in and out, so I’d like to kind of clearly understand them. First of all Q1, so Shanghai lockdown about ¥30 billion, right? ETS is actually doing quite well, Pictures are ahead of the plan. And games, no, I&SS is also, have slight changes. So there are lot of changes or upsides. And the Financial Services also looks like that. So but I love that, the actual like I currency, so positive, negative, also there were a lot of ins and outs, positive and negatives for currency. Can you just summarize like, so how much currency actual impact compared with last year? For the full year, so this is again, gaming. Gaming is the only one you have made the adjustment but I&SS also have performed slower a bit. But there are — if there are any other positives in other businesses? Could you do mind making some comments about now?
Hiroki Totoki
Okay, so year-on-year and versus last year there were a lot of things that we have incorporated, not incorporated. And so currency versus last year, let me pick that up as a first discussion point. At the beginning of the year, this financial year, in terms of currency when we started this planning process, the currency forex impacts were — we actually incorporate certain changes that could happen. So and Q1 about ¥30 billion in positive and positives, so I’m talking about impact for the bottom line and that’s in overall, at high level, that’s about the impact that we gain from currency change.
The other thing, so there are changes from the upside and downside. It’s kind of complicated to describe. The reason why I say that is, well, we announced at the beginning of financial year, right? Back then lockdown in Shanghai was very clearly there, we could see that coming. And geopolitical impact, we have actually incorporate those — the geopolitical developments. But global economic slowdown, including China, is something that we didn’t really anticipate, incorporate, and that’s a environment change that we only saw afterward. And we have updated them based on those new developments.
And what’s been incorporated, what’s not being incorporated? You know, it’s quite messy, you feel like, well partly because there was a parts there from currency, but how much risks are we going to be incorporating? I guess that’s what you’re asking. But nature of risks are very different from business-to-business, and the demand, how demand is going to go up or down. And economic slowdown, the depth of and the length of economic slowdown, right? That is the very important factor in determining that which is very difficult to predict. What we can do is get as clear as possible in terms of intelligence that we can gather right now, so positive impact from currency are not completely being reflected to risks. But as a matter of fact, in first quarter, this is just first quarter, we have three more quarters to go. So in a sense, that’s — yeah, that’s the only thing that I can say, at least at high level. Thank you.
Operator
Next person and the last question is from [a san] with Credit Suisse.
Unidentified Analyst
And regarding the gaming, and there has been the forex and also the external factors but is there a specific positive factor, for example, R&D and platform expansion. And also there is, I understand there’s a launch for the touch game and if you could update us with those positive impact evolvements?
Hiroki Totoki
And from second quarter onward, positive factors, you ask PS5 hardware, PlayStation 5 hardware production is now experiencing much less restrictions from components supplies that’s I believe is one big factor. And we want to produce as many units as possible. In terms of production capacity, we have enough and because Shanghai lockdown is already been resolved. And as I mentioned earlier, that the logistics lead time is — has not recovered to the level pre-COVID-19. So it will take a little bit longer. So even considering that, we want to produce more units as soon as possible.
And in terms of third party and first party from second quarter onward, as I mentioned earlier, major hit titles are expected and that’s — it’s going to be a positive factor, obviously. In terms of a platform mix, plant expansion and extension, new PS5 has on the positive side, that the — as of the end of June, we were able to roll out as was planned. And so customers are moving to the new platform. But how much of this is going to impact and it is too early to see because we just rolled it out in end of June. We need to collect more data to say anything conclusive, but I don’t think — I think we had a very good start. That’s it.
Operator
Okay, now we have reached the scheduled ending time for Sony Group earnings announcement for Q1 FY22. And thank you very much for your participation. Thank you.
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