Sony Group Corp
TSE:6758
Earnings Call Analysis
Q3-2024 Analysis
Sony Group Corp
The company has weathered the impact of the Hollywood strikes, which are now concluded after causing significant disruptions in releases and schedules for movies and television shows, costing them less than JPY 20 billion in the current fiscal year. Despite these challenges, they anticipate a greater impact in the next fiscal year, with an estimated hit to profits due to streaming licensing revenue declines, expected to be nearly twice that of the current year in U.S. dollar terms. However, Crunchyroll, a strategic growth driver, has seen its paid subscriber base surpass 13 million, growing at an impressive 23% annually since its acquisition. Future growth strategies involve enhancing anime content, service expansion in emerging markets, and diversifying into related business areas such as theatrical distribution and e-commerce. With reduced amortization costs from next year, the segment's profitability is expected to improve despite the ongoing challenges.
The Entertainment, Technology & Services segment witnessed a slight dip in year-on-year sales and a minor decrease in operating income. While North American growth faltered, steady sales with no major demand drop were noted, and the Chinese market's digital camera sales outperformed expectations. Noteworthy is the significant inventory reduction achieved, down 18% year-on-year, contributing to better efficiency and cost control. The outlook remains cautious, with plans to manage inventories further and leverage new product releases for digital cameras and lenses.
Experiencing a 21% surge in sales year-on-year, primarily due to increased image sensor sales for mobile devices, the Imaging & Sensing Solutions segment reached new profitability highs. While the smartphone market's recovery is contributing to growth, there is still significant uncertainty, especially in the North American market. The company is proceeding with caution, focusing on monitoring market trends and inventory levels to securely position themselves. They have managed to maintain profitability impacts in line with forecasts, despite manufacturing cost challenges, and are looking to maximize existing capacities and strategic inventories for future investment optimization.
The Financial Services segment delivered robust performance, with a revenue jump of JPY 287.3 billion year-on-year to JPY 311.7 billion and an increase in operating income to JPY 77.3 billion. Sony Life's steady rise in cumulative policy amounts by 22% year-on-year reflects strong growth within the financial arm. The forecast for the segment is encouraging, suggesting a JPY 90 billion increase in revenue and a JPY 20 billion increase in operating income for the fiscal year, mainly due to Sony Bank's profit on transferring shares of Sony Payment Services Inc. With capital restructuring on the horizon, particularly the listing of Sony Financial Group Inc. planned for October 2025, the segment is set for strategic transformation.
The company's roadmap for growth encompasses the gradual increase in operating income for the G&NS segment thanks to the expansion of the PS5 installed base and third-party software. In the Pictures segment, even with strike-related impacts peaking next fiscal year, they look to outdo the current fiscal year's operating income through global production enhancements and strategic cost management. The I&SS segment is poised for moderate sales growth, banking on both market recovery and innovation in sensor technology. Strategically, investment in this segment over the next mid-range plan period is expected to be 70-80% of the current period. All segments appear to align with the company's strategic focus on cost control, optimized investments, and innovative growth trajectories.
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[Interpreted] We will now begin FY 2023, Q3 consolidated financial results Corporation. I am Okada, the Corporate Communications, I am master of ceremonies. People on the stage are Mr. Hiroki Totoki, President, COO and CFO; Ms. Naomi Matsuoka, Senior Vice President in charge of Corporate Planning and Control, Lead of Group Diversity Equipment and inclusion, support for financial services and entertainment area; Mr. Sadahiko Hayakawa, Senior Vice President in charge of Finance and IR. These 3 people will be explaining the FY '23 Q3 results and full year forecast, followed by Q&A. A total of 70 minutes is allocated. Mr. Totoki, the floor is yours.
Today, after Mr. Matsuoka and Mr. Hayakawa explained the content shown here, I will summarize the entire earnings briefly. Mr. Hayakawa, please go ahead. Matsuoka and Hayakawa will explain.
Consolidated sales for the quarter were JPY 3,747.5 billion, a significant increase of 22% compared to the same quarter of the previous fiscal year, a record high on a quarterly basis. And the consolidated operating income increased JPY 41.8 billion year-on-year to JPY 463.3 billion, the second highest level on a quarterly basis. Net income increased JPY 42.4 billion year-on-year to JPY 363.9 billion, and adjusted EBITDA increased JPY 75.5 billion to JPY 605 billion. Nine-month cumulative consolidated operating cash flow, excluding the Financial Services segment was JPY 618.5 billion. The full year forecast is for sales to be JPY 2.3 billion, a decrease of JPY 100 billion from the previous forecast for operating income to be JPY 1.180 trillion, an increase of JPY 10 billion from the previous forecast. And for net income to be JPY 920 billion, an increase of JPY 40 billion from the previous forecast. Adjusted EBITDA is expected to be JPY 1.770 trillion, a decrease of JPY 15 billion from the previous forecast, primarily reflecting the impact of the foreign exchange rate on nonoperating profit and loss. The consolidated operating cash flow forecast, excluding the Financial Services segment, is expected to be JPY 1.80 trillion, a decrease of JPY 80 billion from the previous forecast, mainly reflecting an increase in working capital in the G&NS segment. Now I will move on to overview of each business segment. First is G&NS segment. FY '23 Q3 sales increased a significant 16% year-on-year to JPY 1,444.4 billion, primarily due to increased third-party software sales and the impact of foreign exchange rates. Operating income decreased significant JPY 30.1 billion year-on-year to JPY 86.1 billion, primarily due to a deterioration in the profitability of PlayStation 5 hardware mainly due to promotions and adjusted OIBDA decreased JPY 26.8 billion to JPY 113.1 billion. The full year forecast is for sales to be JPY 4.15 trillion, a decrease of JPY 210 billion from the previous forecast, and operating income and adjusted OIBDA remain unchanged. Inventory-related reserves that were additionally recorded in the current quarter, mainly due to an increase in inventory resulting from the decline in PS5 unit sales in the current quarter are expected to be recorded as a recovery gain in the fourth quarter due to a decrease in inventory. As a result, there is no impact on our full year operating income forecast, but there is an expected shift in profit of approximately JPY 30 billion from the current quarter to the fourth quarter. PS5 hardware unit sales in the quarter were 8.2 million units, which fell short of the target to hit our annual shipments of 25 million units, but was a record high number of quarterly unit sales for PS5 and the cumulative sales have exceeded 50 million units. Due to the impact of the increasing popularity of PS5 and third-party free-to-play hit titles, key user engagement metrics have increased significantly with monthly active users for all our peers in December, reaching a record high of 120 million accounts and total game play time for the quarter increasing 13% year-on-year. Based on the results for this quarter, PS5 unit sales for this fiscal year are expected to be around 21 million units. Regarding first-party software, the cumulative sales of Marvel's Spider-Man 2, which was released in last October exceeded 10 million copies as of February 4. And the Marvel's Spider-Man game series has now sold through over 50 million units, including on PC. The game is our second blockbuster hit in 2 years following God of War Ragnarok, which was released in the same period last year and is making a major contribution to profits. Regarding network services, despite the impact of a slight year-on-year decrease in the number of PS subscribers, sales increased 11% year-on-year, mainly due to the impact of a further shift to higher-end services and price revisions. Now I would like to explain our current view on the outlook for this segment next fiscal year. Regarding the PS5 hardware, which will enter its fifth year since launch, partially due to its entering the latter half of the console cycle, we aim to optimize sales with a greater emphasis on balance with profits. So we anticipate a gradual decline in unit sales from next fiscal year onwards. We expect third-party software sales to continue to expand gradually due to the expansion of the PS5 installed base and the high level of user engagement. In Network Services, we expect subscribers to be on par with this fiscal year or slightly less due to the impact of price revision we implemented in this fiscal year, but we expect sales to gradually expand due to a shift to attractive premium services. Regarding first-party software, we aim to continue to focus on producing high-quality works and developing live service games. But while major projects are currently under development, we do not plan to release any new major existing franchise titles next fiscal year, like God of War Ragnarok and Marvel's Spider-Man 2. Although the burden of acquisition-related costs will ease next fiscal year, we expect profit from first-party software to decrease slightly from this fiscal year due to the impact of the decrease in sales. Based upon this, operating income for the next fiscal year is currently expected to increase slightly from this fiscal year. However, while, this is our baseline. We are reviewing measures for further improvement in profitability in advanced of finance annual forecast results announcement this May. Next is the Music segment. FY '23, Q3 sales increased 16% year-on-year to JPY 422.1 billion, and operating income increased JPY 13.1 billion to JPY 76.1 billion, both significant increases. Adjusted OIBDA increased JPY 19.9 billion year-on-year to JPY 98.5 billion. Streaming revenue for the quarter on a U.S. dollar basis continued to grow, increasing 12% for Recorded Music and 17% for Music Publishing. Profit contribution from Visual Media and Platform was a mid-single-digit percentage of the operating income of the segment. The FY '23 forecast is for sales to increase JPY 10 billion from the previous forecast, JPY 1.57 trillion operating income to be unchanged and adjusted OIBDA to increase JPY 10 billion to JPY 360 billion. In recent years, the expansion of the streaming market has greatly expanded the revenue opportunities and asset value of music catalogs that have been released for a certain period of time. During the quarter, the total streams of 5 of our holiday song catalogs by our artists succeeded JPY 1 billion in the United States. Mariah Carey's album, Merry Christmas, ranked in the top 10 of SMEs album sales for the quarter 29 years after it was released. In Music Publishing, the use of catalogs synchronized with images, such as background music from movies and advertisements is also an important source of revenue. Today, we have established a strong foundation that we expect will contribute to achieving stable revenue and expanding our market share in the Music business by acquiring the publishing rights to the large catalog works led by EMI Music Publishing and the catalogs of industry-leading artists such as Bruce Springsteen and Paul Simon. Moreover, depending on the rights for each catalog, we plan to expand opportunities to use the music and are working to create new revenue, such as in the artist merchandise and event promotion areas. Of the 4 major awards presented at the 66 Grammy awards on February 5, Miley Cyrus won Record of the Year, and Victoria Monet won Best New Artist. Sony Music Group artists and songwriters won awards in multiple other categories, including SZA, who was nominated in 9 categories, the most of any artist this year and 1 in 3 of them. Next is the Pictures segment. In the current quarter, sales increased by 10% year-on-year to JPY 366.3 billion and operating income increased significantly JPY 16.2 billion year-on-year to JPY 41.6 billion, mainly due to increases in television and digital streaming licensing revenues and home entertainment sales and motion pictures. Adjusted OIBDA increased JPY 16.3 billion year-on-year to JPY 54.6 billion. The FY '23 forecast is for sales to increase JPY 10 billion from the previous forecast to JPY 1.47 trillion and for operating income and adjusted OIBDA, they will remain unchanged. Although the Hollywood strikes have finally ended, delays in script development have caused continued changes in movie release schedules and delays in the delivery of television shows. As a result, we estimate the impact of the strikes on profits in the current fiscal year to be a little less than JPY 20 billion. Next fiscal year, in addition to continued delays and releases, it is expected that digital streaming licensing and other revenues will decline due to a decrease in the number of films released this fiscal year. So the negative impact on profits due to the strikes is expected to reach its peak and the amount of such impact on a U.S. dollar basis is expected to be slightly less than twice as much as in the current fiscal year. On the other hand, the paying subscribers of Crunchyroll, which is driving growth in this segment, exceeded JPY 13 million as of the end of December last year and have expanded at an average pace of 23% a year since we acquired the business in August 2021. In addition to continuing to provide appealing anime content to core fans, we are focusing on measures to broaden the anime fan base and deepen engagement by collaborating with external partners, such as Amazon expanding the service into growth markets such as Brazil, India and Southeast Asia. And further expanding in business areas such as theatrical distribution, anime movies and e-commerce. Amortization costs associated with the acquisition are expected to decrease significantly from next fiscal year onwards, and we expect this to further contribute to profit in this segment. For the next fiscal year, despite the challenging environment, where the impact from the strikes on profitability is expected to increase, we are aiming for a level of operating income that exceeds the current fiscal year as we intend to further grow our Crunchyroll business, develop and produce content all over the world, enhance theatrical distribution by distributing films from third-party studios and maintain a strong focus on cost control. Next is the Entertainment, Technology & Services segment. FY '23 Q3 sales decreased 2% year-on-year to JPY 735.7 billion, mainly due to lower sales of televisions, and operating income decreased JPY 3.9 billion to JPY 77.2 billion, and adjusted OIBDA was JPY 103.4 billion, down JPY 1.9 billion. The FY '23 forecast is for sales to decrease JPY 10 billion from a previous forecast to JPY 2.43 trillion for operating income and adjusted OIBDA, the OIBDA, they will remain unchanged. In North America, expected growth was not being made. There was no sign of major decline in demand and expected and sales were relatively steady. In the Chinese market, while demand for [Foreign Language] fell sharply Demand for digital cameras was higher than expected. And our overall performance was roughly in line with the expectation. Furthermore, as a result of care for production and sales control, the overall inventory level in the segment at the end of December, was significantly reduced to JPY 341.3 billion, an 18% decrease year-on-year. Regarding televisions in the fourth quarter, we plan to further reduce the inventory and reduce costs based on results of the year-end selling season. Regarding digital cameras and interchangeable lenses, we aim to continue to expand our businesses, including through the introduction of new products to the market. Next is the Imaging & Sensing Solutions segment. FY '23 sales for the quarter increased significantly, 21% year-on-year to JPY 505.2 billion primarily due to an increase in sales of image sensors for mobile. And operating income increased JPY 14.9 billion to JPY 99.7 billion, both new record high for the segment. Adjusted OIBDA increased JPY 29.0 billion year-to-year to JPY 163.7 billion. The FY '23 forecast is unchanged from the previous forecast. We believe that smartphone product market, which has continued to experience negative growth compared to the last calendar year has hit the bottom in the current quarter. But the North American market is still showing declines compared to the last calendar year, and there is still uncertainty in the outlook. During this quarter, sales increased significantly year-on-year, primarily due to a recovery of the smartphone product market and the introduction of large-size sensors for high-end products. Nevertheless, we plan to continue to operate our business cautiously for the time being while continuing to monitor product market trends and the inventory status. The yield rate of mobile sensor, which is the most important issue for current fiscal year is progressing following the improvement curve assumed in the previous forecast. And the impact on profitability has not changed from the previous forecast. Regarding the sensor business, other than the mobile sensor, the delay in recovery in the sensor market for industry and social in fractures has become particularly noticeable. So we plan to proceed with positional adjustments and the improved inventory in the fourth quarter. Sales in the segment during the current mid-range plan are expected to grow significantly by an average of 22% year-on-year basis and 8% on U.S. dollar basis. We have been able to steadily transition our mobile sensors to become larger and more value added. And we believe that we will be able to continue to grow our business in a period of the next mid-range plan. On the other hand, at a time when sales are not increasing as planned, primarily due to the market environment, we recognize that significant increase in manufacturing costs, mainly due to capital expenditure and production operational losses such as those brought on the -- by deterioration yield issues. That needs to be addressed in order to further improve profitability going forward. Regarding human sensor capital expenditure, in the period next mid-range plan, we plan to leverage production capacity and strategy inventory we have built up ahead of time to optimize the investment. Lastly, there is the Financial Service segment. For the current quarter, mainly due to the impact of market fluctuations on Sony Life. Financial Services revenue increased JPY 287.3 billion year-on-year to JPY 311.7 billion, and the operating income increased JPY 30.2 billion to JPY 77.3 billion, both significant increase. Adjusted OIBDA increased JPY 30.5 billion year-on-year to JPY 84.3 billion. Sony Life's cumulative new policy amount enforced during the 9 months ended December 31, 2023, continue to grow steadily, increasing 22% year-on-year to JPY 7.3 trillion. FY '23 Financial Service revenue is expected to increase JPY 90 billion from our previous forecast to JPY 1.3 trillion. Annual operating income is expected to increase JPY 20 billion from the previous forecast to JPY 175 billion reflecting the recording of a gain mainly from the transfer of portion of the share of Sony Payment Services Inc. by Sony Bank. Adjusted OIBDA is unchanged from the previous forecast. Please note that the forecasting corporate costs associated with profit quality improvement measure at Sony Life going forward excluding the record of the gain mainly from the transfer I just mentioned, we have made no change of our previous forecast. Finally, I would like to speak about the main points regarding the forecast for this fiscal year and outlook for each business in next fiscal year and beyond. Regarding the outlook for the current fiscal year, consolidated operating income for the quarter reached the level approaching the record high level achieved in the third quarter of the fiscal year ended March 31, 2022. And I think we have created good momentum towards completing the current maturing. Looking ahead to the next fiscal year, in the G&NS segment, we expect operating income to slightly increase from the current fiscal year as the gradual growth in third-party software and network services due to the expansion of PS5 installed base offsets a decrease in profit from first-party software. In the Pictures segment, although the impact of the strike is factor to peak next fiscal year, we are aiming for a level of operating income that exceeds the current fiscal year, mainly due to the expected growth of control development of a global production and to control costs. In the I&SS segment, we expect moderate sales growth due to a recovery of the smartphone market as well as increasing the size and value added of mobile sensors, which have been promoting to date. Regarding image sensor, capital expenditure during the period of the next mid-range plan, we currently assume that we will be able to keep it to approximately 70% to 80% of the current mid-range plan period by taking forward by existing production facility and strategic inventory. In the Financial Services segment, we were able to obtain approval for the corporate restructuring plan for partial spinoff under the active segmenting industrial competitiveness of Japan. Based on the approval, we are working in honest to prepare for the spinoff and listing of the shares of Sony Financial Group, Inc. in October '25. That's all for my explanation.
Thank you very much. We have given presentation by Totoki, Hayakawa and Matsuoka from 4:25, we have Q&A for media. And from 4:50 Q&A for investors and analysts. 20 minutes for each Q&A session. [Operator Instructions] Please wait until the Q&A session begins. Thank you for waiting. We will now entertain questions from the media. As it was the case of presentation, the people are shown on the slide are the people who will respond in to your questions. I'd like to now begin the Q&A session. [Operator Instructions] The first question it's Tsutsumi from Nikkei Shimbun Newspaper.
Tsusumi from Nikkei Shimbun. I have 2 questions. First question. The strategic investment and CapEx of the current midrange plan. You referred to this in the semiconductor group as a whole FY '21 to the end of this fiscal year, in 3 years. At the end of the day, how much would be the amount of investment? Also, based upon that, next mid-range plan, the strategic investment and the CapEx. What will be the direction and the size? How -- what would be the level of investment? Are there going to be increase? Or strategic investment will increase, but the CapEx will be flat? Can you please give us the direction and also the size. The second question, in the medium term, ROIC forecast for each business segment, entertainment and semiconductors. What applications and uses will drive growth. The products and services as well. Can you please elaborate? These are my 2 questions.
Thank you very much for your questions. Your first question, regarding the current mid-range plan and strategic investment and capital expenditure from FY '21 through FY '23. The cumulative amount, CapEx will be about JPY 1.9 trillion. M&A and other strategic investment is JPY 1.8 trillion. That is our forecast. The investment is progressing steadfastly. So in the medium term, this investment will bear fruit. And then next mid-range plan and the size of investment and the direction of investment. Officially, in spring next fiscal year, we would like to give you explanation. CapEx I&SS investment. As compared to the past, it will be 70% to 80% I explained in my presentation. The largest amount -- largest of the CapEx is investment into I&SS. So there will be a slight increase in investment in this area. With regards to strategic investment, there are opportunities that we have to look at. So it's very difficult to say precisely. But about the same level as this fiscal year or might be a slight decrease from this year. Strategic investment, as you know, include return to the shareholders. So including that, we have to think about strategic investment. And then from next year, the direction of ROIC. Entertainment area, the driver of the ROIC will be gained. And in terms of improvement, Music, we have expectations for improvement in Music. Music in the current midrange plan, acquisition of large catalogs and the foundation of the business and the competitives have been strengthened. Going forward, based upon the catalog base, we are going to further expand this. That's all from me. Thank you.
Next question, Mr. Meyaki from Toyo Kezai. Toyo Securities.
I have 2 questions. The first question is about the spin-off that was released today. When I read this, by implementing this spin-off, entertainment and other areas that you are focusing on will not bring in any cash. So the purpose of conducting this spin-off and also trying to improve the business. What is the relationship between the 2? My second question has to do with Indian strategy. So I understand that your negotiations with Z for a merger didn't -- wasn't successful. I understand that you spent some time explaining about India, but are you thinking about a change in your strategy? What will you do with that investment you were thinking about that merger? How will you use that money?
Thank you for the question. About the financial spinoff. Regarding that point, as you know, we will do an actual -- we will not use any cash. But on the balance sheet, I think there's about JPY 20 trillion asset and liability recorded. And if we streamline that, the business capital allocation will become easier to handle. On the other hand, in financials or by -- they can, of course, try to grow on their own because they are going to become a listed company. So for both companies, I think this will be a win-win situation. That is our aim. And regarding the Z merger, the negotiations as -- has been announced. The negotiations are not progressing at the moment but the strategy itself, India on a long-term basis has a great growth potential. It's a very appealing market. Therefore, we will try to seek various opportunities. And if we can find another opportunity that would replace this type of plan, we will look into that, and we will also continue to look into organic growth and our strategy. The amount of money that was expected to be used for that merger? Well, that investment wasn't -- isn't going to change capital allocation or it will not change our behavior in our investment. So at the moment, we don't have any concrete plans.
Now we can move to the next question. Jarka from Newspeaks.
Yes. My name is Jarka from Newspeaks. First question is about the Gaming business. Over the last few years, you had shortages of smart chips, semiconductor chip supply was the problem. But then to the smartphone chip is becoming more difficult to produce additional value by miniaturizing it. In the past, if you wait for 2 or 3 more years, more advanced CTGT, like can reduce the energy consumption with a much lower prices. You could do that, right? So the hardware itself you can sell at JPY 30,000 or so. You could take that strategy. But right now, for 5 or 3 nanometers, if you are trying to get those miniaturized semiconductor jobs, it will become more expensive. So taking that strategy to become more expensive or more complicated. But at the same time, you could expand on the network to have different ways to develop the GPS? Or do you think still we need to rely on hardware with the pricing so that you can widely sell them? Do you still not giving that option? So that's my question. Second question is about cash flow. For several years -- years ago, you had JPY 4 billion cash flow. But right now, operating cash flow because of many reasons is quite behind the plan compared with the plan. But operating cash flow will be the -- like a driver of where you would make investment. Therefore, would you become slightly hesitant to make less of investment? Or would you want to like reduce inventory? There are other ways to increase cash, right? So do you think allocations of capital as big as previously is going to be possible? There are also financing. There are many different options to manage their cash, right? So currently, can you talk a little more context about how do you see about the use of cash and how much cash that you could generate and invest?
Well, first question about G&NS. There is a structural issue, as you have pointed out. And you said it exactly right, PS5 today is using Nano die that is on single digit. In the past, PS4, the previous version, chip shrink benefit is very difficult to combine unlike older generation. Therefore, cost reduction is very difficult simply. But if -- I simplify the explanation. Now our sales strategy, we used to have a steep discount, but we do not want to rely on that. We want to make sure our business is profitable as well as we want to focus on user engagement together with the volume of sales of units. You need to strike a nice balance between all those components. So generation from PS4 to 5, one of the biggest differences we shifted more focus on network service. That's one. And from PS4 to PS5, we can continue to handle over the consumer customers. So user engagement is something that we want to sustain so that we can sustain the level of image. That will be the most critical things in our business right now. Now our plan for the hardware, that is like one is the commercial strategy that gets to do with the commercial strategy. And what will be the right pricing for customers. But whatever that might be, you have to -- you cannot enjoy a game without client device in your hand. So in that sense, a PS portal would be 1 device that we just came up with as a conduct an experiment, but we are getting some feedback. We are hoping to get more feedback. But we can get those feedback while customers using them. So that our services and our network mature if I evolve by receiving those feedback. Now the other question that you raised was on the cash flow. As you said it rightfully so, we had about JPY 4.2 billion in cash flow in financial years ago. This year, the operating cash flow is relatively lower. But working capital has actually have grown quite a bit. If you just cut it off in 3 years, it may look like our operating income is lower, but inventory level can be reduced. We can collect accounts payable and we can get the cash. So in a big sense there's no major change. And I would say you've -- you can actually understand it like that. And if you look at the rating agencies, we do actually have more opportunity for financial leverage should it need to. If it were required, we can also take that as an option.
Next question, Abeta from Nikkan Kogyo Shimbun, please.
Abe from Nikkan Kogyo Shimbun. DNS Camera. I have 2 questions regarding the camera. The first question by situation by market, for China, sales unit sales volume was larger than your forecast. What about other markets, North America, Europe and domestic in Japan? What is the trend of the sales? Second question is the level of inventory. ET&S segment as a total as of the end of December, reduction in the inventory as compared to the same period last year. What about the inventory level of camera? These are my 2 questions.
Thank you for your questions. First, ET&S segment, and you're talking about camera, and what is the market trend was your question. China has been doing well. For the third quarter, North America and the European market have been moving rather relatively well. The inventory itself, there is no particular problem in the inventory level at a level that we are satisfied with, and we are able to maintain that inventory level.
I think we don't have much time left. I think the next question will be the last question. From Yomiuri Shimbun, Masala from Yomiuri Shimbun.
Sorry, this is a different question. This is about the Nikkei average, and I believe that it is the highest -- record high. Were you expecting this? I'm sure the investors have a lot of expectations towards the Sony Group. How do you feel about this?
Thank you for the question. Since the beginning of this year, we're seeing this increase -- significant increase. Quite frankly, I, myself, did not expect this kind of trend. So in that sense, I kind of regret that my forecast didn't come true, but I'm very happy that the market's expectation of us is quite high. We hope to make sure that we don't underperform against that type of expectation and to demonstrate growth and development. Thank you.
Since it's time, we'd like to conclude the Q&A session with the media. Q&A with the investors and analysts will start at 4:47. We will soon be starting question-and-answer session with the investor and analysts. Please give us a few more moment while we get started. Thank you for waiting. We'd like to now start questions from the investors and analysts. I'll be facilitating this meeting -- this session. My name is Condo from IR Group. Very good to see you all. Respondents, just like all media sessions are being going to be responded by 3 of them on slide. And please note about the information that we have distributed to you ahead of time about how to use telephone, how to control it and other things to be careful about. [Operator Instructions] We'll start. [Operator Instructions] With that, I'd like to ask Katsura from SMBC Nikko.
My name is Katsura from SMBC Nikko. I like to, yes, ask 2 questions. First question is about on a fourth quarter industry inventories like your plan is going to be shrinking the inventory level. But it is looking at Slide 7 tandem that you are showing how much inventory that you expect. But how much are you planning to shrink? Do you -- can you give any idea about how small the inventory level is going to be? And then the 7 19 talks all about utilization. So maybe you can do that calculation about that. But can you also talk about how we should interpret it after Q1 next year? Second question for the next year, Game & Network Service, Pictures. And I think you mentioned back then in those sections, you made about aiming at certain levels. But can you also talk about other segments about perspective and other segments as well.
Okay. Thank you very much for your question. I&SS fourth quarter inventory to that question, well, in terms of that in a 3 quarters levels is actually quite a small level. So the impact overall is quite limited. In general, I would say it will end up to about being flat. Flat or plus incremental small addition on top of third quarter. Now you asked also about inventory level for next financial year. And we are expecting our top line growth to grow. And so inventory will also grow as fast as the top line but that should be covered during the business planning process for next financial year, and I hope that is good enough for my answer to your question. Now for FY '24 in general, what I've talked about, yes, I mentioned about Game, Pictures, I&SS. Yes, I mentioned about them for perspective for FY 2024. For Music, market on a streaming single high digit or mid-digit, single to mid-digit was the growth. And we hope to grow faster than that. So finance, well, the base profit level is going to gradually slowly grow. It's going to take some time, right? But the new policy amount is going up, too. So it's not changed since it's going to keep growing in a steady or gradual but because of adoption if IFRS, we have to do risk hedging because there can be volatility because of the change of the standard. That is the risk. We are going to be investing some costs. Therefore, we believe relatively gradual growth for finance. Pictures, I actually mentioned it already. Flat or plus incremental on top or flat for Picture, like I said. But in any case, we will be giving the next financial guidance during the springtime. So we hope to cover more details at that time. Thank you.
Next question, Okazaki from Nomura Securities.
Okazaki from Nomura Securities. Game, I have questions regarding Game. MAU became a record high level. PS5 cumulative sales is already exceeding. So PS5 alone will not be able to satisfy that. Why is it MAU has grown to this level? Can you please explain a bit more in detail? MAU use is a metric for user engagement and an important metric. While MAU is increasing, in the fourth quarter, the profit is not as much as expected. MAU increases, but the profit was not as high. What is the background for this?
Thank you for your question. First, with regards to MAU, for one thing, there is seasonality. Third quarter is the holiday season. So there's seasonality factor. And then free-to-play titles, we had the big hits. So we are enjoying benefits from that. These are the 2 major factors drivers for increasing the MAU. And then engagement metric. Third quarter, I already explained a bit, special factors were there. And about JPY 30 billion of profit will be shifted to the fourth quarter from the third quarter PS5 inventory valuation-related number. In the second half will be leveled. But if you only look at the third quarter, the profit level, as it appears is slightly less than what it actually is.
The next question from Mizuho Securities. Nakane-san.
From Mizuho Securities. I have 2 questions. The first question to Mr. Totoki, the first question is as follows. It's 4 months since you became the President. What have you noticed or realized since you have become the President? Next quarter, there's no first party, large first parties but the W3C titles going to be have. Now in 2020 -- FY 2025, what kind of measures are you considering? If you can share with us your impressions. The second question is about the return to shareholders. I understand that the strategic investment is going to become slightly lower. So basically, I understand that your measures of investment will not change significantly. But if you have any comments on that point.
Yes. Thank you very much for your question i.e., actually, I am the chairperson. It's been about 4 months. And I'm trying to demonstrate leadership and trying to have as many meetings as possible with the management team. I also visit studios and everyone is working really hard to fulfill their responsibility, to try to optimize the business. And I understand that. But overall, growth, overall growth and sustainable profitability or increasing margin, how will that translate to these goals? I don't think people understand that deeply. I think that is the problem of the organization. So as far as I'm concerned, I try to understand what is happening in the company, in the industry and also with the perspective of the analysts, and try to explain in a transparent manner so that people can recognize and notice these issues so that we can have a harmonized approach going forward. That is a very general comment since I became the chairperson. There are concrete points, which I will not go into today. Now about visiting the studios and about Bungie. And I've had meetings with the leaders there, the studios. People who work in the studios have very high motivation. They're very highly motivated. They're very good people, and they're very creative people. They have great creative minds and they also have knowledge about live streaming. However, having said that, when it comes to the business itself, I think there is room for improvement. And that's got to do about how to use the money or about the schedule of development or how to fulfill one's accountability towards development, et cetera. Those are my frank impressions. So I will continue to engage in dialogue with the people so that we can find the right way to proceed. Now shareholder returns and dividends. As you mentioned, no major change there. We will have to deal with shareholder returns in an honest way. And that is part of the strategic investment and we believe that if the solution is considered to be the optimum solution, then we will go ahead with that solution.
Now let me move to the next question. I'd like to ask Yasui from UBS Securities to ask the next question please.
This is Yasui from UBS Security. I have to want to ask 2 questions. And so basically, it's a single question. Operating profit, the game and semiconductor they were actually, top line is growing, but the profit level is not really growing up. Respective of 3 years or not, what are the things that you think -- so what do you think what you need to have, whether it's possible or not, is there any particular initiative or angle that you're going to get at to improve the bottom line, not only the top line?
Thank you. For gaming this year, profit margin, especially the operating margin was not really a wonderful situation. Well, partly because we are currently in a transition where the PS5 as a hardware units are expanding as a process. But what we need to manage is that PS4 and the previous general -- unlike PS4 or previous generations, consoles -- if you look at the console cycle, cost reduction within the cycle is very difficult to come by. And that is a big challenge. Because if you think about PS console device, unlike high specs computers. It's affordable price, while with a very safe countable environment with a very great experience. That's wonderful things about PlayStations. But compared to the past, in order the cost for building that experience, memories, chip sets, the prices of the cost of all those components are going up as a fact. And how can we give in the station can put our product plans together to make it affordable so that without relying on steep discounts to reasonably sell them to continue our commercial journey on a sustainable basis. I personally think that's important. And there is an opportunity in that, and that's how I see it. And the other potential driver is the first-party title generation because in the past, as you all know, we wanted to popularize console. And title was something -- and the first-party title may purpose was to make the hardware or the console popular, right? It is true, right? But there is a synergy to it. So if we have a strong first-party content, not only with our console, but also other platform like computers. And the first-party can be grown with multi-platforms and that can help operating profit to improve. So that's another one that we want to track with walk on. I personally think there are opportunities out there for improvement of margin. So I would like to go a great from improving our margin performance. Now to I&SS so far in the past, R&D and capital investment comes together but the sales is now recouping what we have invested. That's basically what we had at a problem. Because workforce, we need to focus to minimize the operating loss. We need to also manage investment plans. So the cost and investment opportunities needs to be meeting at the right balance. But I&SS in the past, as you all know, sensors is first of all, mobile sensor, let's say. Is it becoming a larger format. And also what's driving the other things about the prices, like having more cameras and better. So more cameras as well as a version format of the sensor, both requires having a bigger capacity, but a larger format as well as more cameras, small lenses and smartphone. Is that going to continue forever? Probably not maintained at the level of today, but having more functionalities to it, right? So having higher functionality is something that is now demanded. How can we build that high functionality? They think, without much redundancy in the process. That's the question, right? Because if we can address that, I think the more profit margin is going to go up. Thank you.
Time is running short. So I'd like to ask the questions to be please limit to 1 question per person. Next question, please. Morgan Stanley, MUFG Securities, Ono, please.
Ono from Morgan Stanley. About Game. I have 1 question. Next fiscal year, a slight increase in profit you are expecting. And JPY 270 billion this year and in the past, the peak was more than JPY 300 billion. So the peak in FY '21 with PS5, it's very difficult to exceed the peak level of 300 in '21. I may be asking a repeat the question. But MAU, JPY 123 million is to be increased. And further, is it possible to exceed the peak in profit level, especially in the cycle, the fifth year is a peak of the hardware and 6-year is the peak of hardware and seventh year is the peak of the margin. That was a cycle, as I understand this in the past. So 6th year, next year will be the sixth year of the release and the software mainly is if it is third-party, I think it is regrettable. But how should we interpret this? Can you please explain?
Well, PS4 can be one big reference for us. Under COVID-19 -- we had a COVID-19 period so we cannot accurate, say, fifth year, sixth year and seventh year for PS5, there may be some argument. Margin or the profit level. Absolute amount of profit is to be increased. And for that, it is challenging but I'd like to try and increase. At the time of -- compared to PS5, market itself, including the third-party titles, the market is increasing for PS5. But the profitability of hardware is higher for PS4. So with loan cost will not decrease with the new console. So how we can hit the balance with the margin and continue to spread the -- disseminate PS5 is important. And second point, this fiscal year and next fiscal year, the cost -- acquisition cost of the past is also incurred. So as the acquisition-related cost burden decreases, that will become a factor for increase in profit. So we have to think this in an integrated fashion. And in the era of PS5, we -- I do not think that -- I am not going to give up and renew the peak. So in the next mid-range plan, we would like to challenge and try to exceed the peak of the past.
The next person will be the last person to ask the question. Ayada from JP Morgan.
This is Ayada from JPMorgan Securities. On Games, you have been saying JPY 123 million of the MAU and you had a great hit with free title. And I understand that these are titles to which you invest. Well, regarding those games, I think new movies have been added or you have a collaboration with Disney, which are different expectations toward growth from the past. From your perspective, these third-party titles, what are your expectations toward those titles? And as an investor, what are your expectations? And the profitability for Games for next fiscal year, you didn't mention about the add-ons. So what's happening there?
Like you say, those titles are contributing significantly. That's true. Collaboration with other companies is something that we can't comment. Well, those companies are attractive companies to which we would like to invest, and that's very -- it's a positive development for us. And that collaboration, we hope that, that will generate an upside for us. And add-on sales for next fiscal year, whether that is being reflected or not, well, the business plan hasn't been fixed yet. So at this point in time, it's hard for me to comment on that point. But the third-party titles will -- if they grow, that will be very positive for us, and we hope to utilize that momentum -- take advantage of that momentum.
Since it's time, we'd like to conclude the consolidated financial results announcement from Sony Group. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]