SoftBank Group Corp
TSE:9984
Earnings Call Analysis
Q3-2024 Analysis
SoftBank Group Corp
After its IPO, SoftBank caused concerns among investors but has since focused on a stable dividend yield of 4.9%. SoftBank Group (SBG) has received substantial dividends from SoftBank Corporation, totaling almost JPY 1 trillion, providing value beyond share price appreciation.
Vision Funds have turned around from earlier struggles, posting profits for three consecutive quarters and working towards a cumulative recovery to a negative JPY 2.9 trillion. The company maintains a healthy cash position to avail investment opportunities and has a conservative Loan To Value (LTV) policy of 25%, currently at a safe level of around 10%, which offers room for further investments.
The yen's fluctuation impacted SoftBank's net asset value (NAV) by JPY 1.1 trillion, with a stronger yen negatively affecting equity but positively influencing consolidated net income. Additionally, SoftBank has strategically shifted from a China-centric portfolio primarily composed of Alibaba shares to a diversified AI-centric portfolio, considerably reducing regional concentration risk.
Arm, one of SoftBank's significant assets, has shown excellent performance with record quarterly revenues of $824 million and solid growth in its AI and cloud server products. SoftBank's AI-focused investment strategy further supports Arm's growth potential, with an updated guidance projecting annual revenues between $3.1 billion to $3.2 billion.
Vision Fund I and II, along with the LATAM fund, display consistent performance with major gains from companies like ByteDance. Private portfolio companies marked up in value, outpacing markdowns, indicating an improvement in the quality of investments. With a shift from defense to offense mode, SoftBank is primed for new investments targeting AI advancements in various sectors.
SoftBank remains committed to a balanced financial strategy that supports both growth and shareholder returns. Despite a substantial JPY 4.5 trillion spent on share buybacks over the last five years, the focus is on increasing NAV through new investments before further shareholder returns. With a net income of JPY 950 billion, SoftBank aims to continue a cycle of investment that promotes corporate value growth and sustainable returns.
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Thank you very much for waiting. I would like to start SoftBank Group Corp. Investors Briefing for the 9-month period ended December 31, 2023.
First of all, I'd like to introduce the representatives from SoftBank. Mr. Goto, Board Director and CFO; Ms. Kimiwada, Corporate Officer, Senior Vice President and Head of the Accounting Unit; Mr. Navneet Govil, CFO, SoftBank Investment Advisers and SB Global Advisers; Ian Thornton, Head of Investor Relations Arm.
The session will start with the overview of our consolidated results by Ms. Kimiwada; financial update by Mr. Goto; SoftBank Vision Fund update by Mr. Navneet Govil, followed by Arm update by Mr. Ian Thornton.
You can choose either English or Japanese for this meeting. If you do not choose the language, you will hear the original voice of the speaker. You can take both English and Japanese questions within Zoom after the presentation. Material for today is available at our corporate website. Now I'd like to invite Ms. Kimiwada to talk about the consolidated results. Kimiwada San, please?
Thank you very much. Good evening. Let me share with you, accounting section. The consolidated results were already announced. You can refer to the numbers already announced earlier. Please take a look at Page 2 of the accounting part. This shows results for the 9 months in terms of consolidated results. Net loss for the 9 months was JPY 458 billion. But in the third quarter, 3 months alone, net income was JPY 950 billion.
Gain or loss on investment is very important in terms of consolidated results. And loss on investment or gain on investment are broken into holding companies, SoftBank Vision Fund and Investment. Next page shows net income and SVF segment income.
Segment income of SVF is most important as business segment. Vision Fund segment income is indicated here in line -- blue line. Segment income, since we had Arm up until second quarter, Arm's loss or investment -- from investment was included. But from a consolidated perspective, Arm is consolidated. And between SBG and SoftBank Corp, intercompany transaction between Vision Fund and SoftBank Corp is eliminated.
And the bottom line of third quarter is shown on the far right. Looking at the third quarter alone, yen was stronger and our main driver of the bottom line of third quarter was our Vision Fund performance and T-Mobile shares.
Next slide shows the investment business of holding company segment. Two biggest pillars here is T-Mobile and Alibaba. Let me pick up T-Mobile and Alibaba more in detail.
Moving on to the next slide. Acquisition of T-Mobile shares for no additional consideration. We met the condition. And at the end of December 2023, we gained T-Mobile shares with no additional consideration. We get T-Mobile shares in kind, but before that our derivatives were recorded as a derivative financial assets. As the share price went up contingent consideration of value have been going up. So from P/L perspective, we have captured a lot of gains from the T-Mobile derivatives.
And if you take a look at the second bar from the right, you see a light yellow and dark yellow. We gained shares equivalent to JPY 1.1 trillion at the end of December. But the derivative gain for the quarter was JPY 227 billion. Again, yellow -- light yellow was a derivative finance assets on P/L. And now that T-Mobile shares are in kind, it's indicated in the darker yellow on the far right.
Since acquisition of T-Mobile shares, our share price went up slightly, so unrealized gain for this portion of T-Mobile share was recorded at JPY 10.6 billion as of December 31.
Next slide, again, we got T-Mobile shares after meeting the condition of contingent consideration agreement and also the ownership that we have been having for some time. Orange indicate the shares that we got in kind. You can see the legend on the far left. The light blue indicates T-Mobile shares as subject to call options, which is JPY 5.1 billion in this graph, and eliminating the options liability side, JPY 14 billion is the real value of our holding of T-Mobile shares. This is T-Mobile. And next is Deutsche Telekom share.
If you take a look at far right, JPY 5.1 billion is the value of Deutsche Telekom shareholdings that we have. And derivative financial liabilities was JPY 277 million and taking into account, again, our holding of Deutsche Telekom share value was JPY 5.1 billion as of December 31.
Next slide shows Alibaba shares and derivative financial assets or liabilities. Alibaba shares are used for -- prepared for contracts, but from BS perspective, it's recorded as investment securities. And depending on the market price changes, the investment security is valued accordingly.
At the end of third quarter 2023 compared to the previous quarter, share price went down, therefore, valuation of those was recorded. However, since we have derivative contracts in place, opposite move to market and move is taken into account. So valuation gain was recorded from derivative asset liability prospective. All in all, total JPY 31 billion is the holding of Alibaba shares that we have.
Now talking about SoftBank Vision Fund segment on Page 9 of accounting part. The details of SoftBank Vision Fund will be explained later by Mr. Navneet. So let me move on to the next slide, please.
In the second quarter, when a transaction took place, we explained this already. At the consolidated level -- was consolidated as a subsidiary up until second quarter when Vision Fund was held. So Arm's investment gain will be eliminated. But in the segment information, it's represented like I explained in the second quarter, third-party interest remains to seem. So gain, loss on investment in subsidiaries and gain, loss on investment in Arm are eliminated, and not represented in consolidated P/L. That was the explanation about the reconciliation.
Next, talking about WeWork, which is shown on Page 12. On the consolidated level, WeWork asset is zero. And credit support was fulfilled already at the end of the previous quarter. So in the third quarter, nothing big happened or changed. But before, when WeWork was listed, the market value was evaluated. But after Chapter 11 process kicked in, then from BS perspective that value has down to zero.
Next slide, Page 13. Arm segment in SBG's consolidated finance report bridge to Arm's disclosure, which was announced yesterday by Arm. Under U.S. GAAP, where SBG is under IFRS standard. That's the big difference first. And if you take a look at adjustment 1, amortization expense related to intangible assets recognized in the purchase price allocation at the time of acquisition of Arm by SBG. It's represented only on SBG's consolidated financial reports.
And segment income was -- well, loss was 116, and adjustments 340 and difference in accounting standard, which is equivalent to 180 negative. Especially difference in accounting treatment of share-based compensation is reflected here.
Moving on to the next slide, consolidated P/L summary. Please refer to topics on the far right. So in the interest over time, I will move on to the next slide.
Page 16. Investment securities and consolidated balance sheet. This slide is talking about the main investments. It does not include Vision Fund investment. It's in different lines, so it's not included here. So this is investment securities other than Vision Fund investment securities. And Alibaba, T-Mobile, Deutsche Telekom are main investments in terms of the amount of the investment and also holdings by SBKK Group and others, including public investment and private investments. So those our main investments reflected in consolidated balance sheet, which excludes investment by Vision Fund.
Next slide, breakdown of goodwill intangible assets. For goodwill, due to change in forex rate, Arm's goodwill increased, but that does not mean a new acquisition took place only because of the changes in FX rate in yen term, almost goodwill went up. For intangible assets, they are amortized at a straight line method for a short term period of time accordingly.
Next slide shows consolidated balance sheet summary. On liability side, again, later, please take a look at explanations on the right-hand side. And next, consolidated balance sheet summary on equity side, accumulated other comprehensive income in the third quarter, yen was stronger. But for the 9 months, yen was weaker. That's why JPY 852 billion increase in exchange difference from the translation of foreign exchanges was reflected here. And number five, noncontrolling interest included -- noncontrolling interest in Arm and SBKK issuance of bond type class shares.
Next slide shows impact of the weaker yen on P/L and BS. And next slide shows impact of a weaker yen in 9 months from first quarter through third quarter. Foreign exchange loss in consolidated P/L for the 9 months was JPY 308 billion, whereas exchange differences from translation and consolidated BS on December 31 was up JPY 852 billion. But for the 3 months in the third quarter, foreign exchange gain in consolidated P/L was JPY 339 billion, and exchange difference from a translation and consolidate BS on December 31 was down by JPY 932 billion.
And Page 24 shows income tax paid on a consolidated basis. Up to a third quarter, JPY 787 billion tax was paid at a consolidated basis. Next slide shows co-investment program to SVF2 related third-party transaction and the core investment program to LATAM funds and the management investment and asset management subsidiary. Some numbers were updated, but nothing big happened. That's all for the accounting part. Thank you very much.
So next, Mr. Goto will give you the financial update. Mr. Goto, please .
Thank you very much for your kind introduction. This is Goto speaking. First, we'd like to remind the current market environment, as you all know, interest rate in United States is now coming down, but -- and also softer landing has been discussed mainly. So based on the interest rate environment, equity market has been coming down and also especially equity semiconductor or the private equities venture capital index showing also the sign of recovery.
Our holdings -- the performance of our holdings compared to the NASDAQ 19%, Arm is 44% and SoftBank Corp, domestic telecom company TOPIX 10% and thus SBKK 15%. T-Mobile is about the same as S&P500, but this is very stable, telecom infrastructure. So I believe this number is good enough.
With those steady performance of the large holding, our net asset value is increasing for 4 consecutive quarters, especially from September end to December end, we had a big jump here.
So fourth quarter totaled JPY 5.3 trillion increase. And for the 3 months period summary, as you can tell from the strong performance of the equity market, net asset value and the loan-to-value, both are showing a good and steady result. The asset value quarter-on-quarter increased by JPY 2.8 trillion resulted to JPY 19.2 trillion. There are about JPY 1 trillion of the negative due to the forex. But still, we are showing this number for net asset value and loan to value, 11.5%, extremely safe. So maybe we are not working enough, I could say that the loan to value is too safe.
And the net debt, JPY 2.5 trillion. If you see the consolidated, net debt is JPY 20 trillion something. So you may be surprised to see the figure, but how -- if you see the nonrecourse to SoftBank Group portion, it's very much limited. Cash position, JPY 4.4 trillion. And there is no major financing activities. And for the investment activities, we have acquired JPY 1.1 trillion worth of T-Mobile shares for no additional consideration.
So this was one of the earnout close from the acquisition agreements. And we are able to achieve the threshold for this earnout close. Vision Fund, 3 consecutive quarters able to record the investment gain, which is good news, happy news for us. JPY 19.2 trillion of the net asset value, and I want to show you the waterfall. 3 months before, JPY 16.4 trillion. And we have increase of the equity value of holdings, which was about JPY 4.4 trillion, of which 3 are from Arm, 0.6 from Vision Fund 1 and 2, 0.4 from T-Mobile. Those are the main driver for the contribution to the equity value.
And also Forex because of the appreciation of the yen, Forex is in negative impact by JPY 1 trillion. And taking out some others, and that gives you to the JPY 2.8 trillion increase quarter-on-quarter. And we would like to highlight Sprint here. Originally, we have loan and equity JPY 3.3 trillion in total. And as of the end of December, actually, this has grown to JPY 5 trillion. Immediately after the acquisition, Sprint business was not well and it was the #3 player and actually T-Mobile has surpassed them, and became a #4 player in the market. It was a very tough market, it was a tough situation. Many people criticized, but the management and also the supporting employees for the business recovery. And as a result, the return IRR for equity 26% and the MOIC 8.2x.
So the return of the infrastructure investment, I believe this was a very good result, JPY 5 trillion here of which JPY 1.9 trillion is equity value of holdings, 3.1 has already been monetized including sales or asset-backed financing is expecting the future sales. So 3.1 has already been monetized and contributed to the monetized portion. And this is the trend of the equity value of holding, including Sprint T-Mobile. Right now, it's still JPY 21.7 trillion. December last year was JPY 16.9 trillion. So it is quite a good jump by JPY 4.3 trillion.
Alibaba, this March we have completed the monetization. And since then, we see the biggest driver was from Arm. In addition -- on top of that, the Vision Fund and SoftBank KK is also growing.
Alibaba [indiscernible] is a kind of a big shift and also the trend of the allocation of our assets, not only because of the share price down on Alibaba, but Alibaba has been monetized in a very steady manner. It was about JPY 9 trillion. Of course, some of them has been utilized for the recycling to investments by Vision Fund, but also recently used for the share buyback for SBG and so on. So now that we have more diversification, well addressed -- and also that help us to reduce -- mitigate the geopolitical risk, namely China risk. So right now, we believe that we've been minimizing the investment in China as much as possible, which has been clearly done with our activities so far.
In our highlights of the assets, we have a larger portion of the public assets. As I went public a year ago, because we were monetizing Alibaba so that the public listed asset ratio has decreasing, so only from the equity comparison because of the decrease in Alibaba share due to the monetization, this asset ratio went down below 50%, which was why that the rating agency has been criticizing us because we should keep a certain ratio of the listed asset. But what happened after we monetized Alibaba, which went to -- that went to cash and cash positions. So rather than the listed asset actually cash position is even more safe. However, that has not been appreciated by the rating agency, which is so strange, and that's been continuously seen, which make us a bit confused.
I believe that is a misleading to the market and investors. So that's something that I'm concerned about. End of December, our listed asset ratio has -- go above 50%, once again now to the 73%. So having more than JPY 20 trillion of the assets on balance sheet, of which 70% of the listed assets, which is quite rare compared to the other peers and also easy to monetize and also a safe balance sheet that we can call it. So that's something that we should be emphasizing to the rating agencies.
Today, our share price actually surged a lot. And including that result that we created this 1 page. Year ago, May, was set as 100 and what happened later on. So MSCI China and Nikkei, which is grey color and light blue is the SOX index, semiconductor names and navy blue, SoftBank Group, which is actually have a correlation with. One thing I can say is, clearly, we have no kind of correlation with Chinese stocks, which is very clear to see from here. Of course, we are quite a large name in Japan so that we have some influence from Nikkei. But if you see the latest trend wise, it looks like coming closer to the SOX index to some extent.
Of course, you have your own view, and there are many opinions about it, but we are setting Arm as a kind of a core for our focus so that correlation with SOX Index is something preferable from a perspective right now.
And as an investment company, this quarter investment -- actual amount-wise, amount was very small, JPY 0.3 billion. So I recognize this is a small amount. But there was a question at the earnings results announcement. It doesn't necessarily mean that we don't make any activities at all because the actual amount is small this quarter. Only because this 3-month period, we didn't execute much in terms of investments. That doesn't mean that Vision Fund members not working or anything they are working around the clock to make sure that we have a good pipelines.
And at the same time, SBG -- balance sheet investment, Masa day and night he is discussing with the many leaders of the industries and CEOs, and he is actually in the seeding period. That can be a good pipeline later on. And also that can be good fruit for the next quarter on. Cash position, JPY 4.4 trillion.
Well, we promised as a financial policy is to cover 2-year equivalent of the bond redemption, which is JPY 1.9 trillion. So our current cash position is almost twice as much. And even you include the third year for the cash redemption or fourth year of the redemption, but still, we can easily cover with our cash position. So that's why I believe that we are providing a very safety feelings to the investors and the market.
And cash position here, how do we manage those assets? So this is also something we share with you every quarter basis. Excluding commitment line, we have JPY 3.7 trillion of the deposit of which JPY 2.8 billion are in the cash and cash equivalents in U.S. dollars, JPY 0.7 trillion is in Japanese yen deposit. On your right-hand side, you can see our -- [ mainly ] our management of those cash -- that the U.S. dollars -- but also there are some other options like U.S. treasury. But right now, we believe that deposit yield is relatively higher than the bond yield or treasury yield or maybe we are receiving a good rate from the banks. So that's how we see. Of course, we kind of managing those assets in detail so that -- and there are many changes so that we kind of distribute, but mainly for the bank deposit at this moment.
In the currency exchange impact in the past 1 year, actually, up until second quarter, up until the September, it was weak yen, but starting from this October, November, it has changed and the yen became strong. As a result, net asset value impact or impact on consolidated net income showed in other way compared to the second quarter.
One another comment I should make is that -- since this new year in January that we've been seeing the weaker yen, -- right now, we're seeing about JPY 148 or so, so JPY 8 stronger, and now that JPY 8 weaker, so it's kind of offsetting.
Bond redemption schedule. This is also something that we will share with you every quarter basis. Fiscal 2024, JPY 699 billion and also JPY 999 million for fiscal '25. And about JPY 460 billion for 2027 and 2028 is a bit large for JPY 1.5 trillion. But roughly speaking, you can say that about JPY 1 trillion every year.
In our financing policy. For bonds, we would like to make sure to be fully prepared for the redemption and also scheduling for the refinancing. So for those investors of the bonds, this maturity is coming close, we are planning to show the similar type of the [indiscernible] so that the investor can decide. At the same time that we make sure to keep the good cash position so that if there is any needs, we will be able to redeem any time.
And also, for your reference, JPY 450 billion for domestic redemption. And there are about $2 billion for the global bond redemption. If possible that we would like to use a similar [ instrument ]. However, the base rate for the global bond is relatively higher than the domestic one. Of course, we need to see the cost as an important factor. So we would like to think hard to decide what currency that we would like to choose for the refinancing. And net asset value is increasing. Therefore, we would like to take an advantage of such position. We have about JPY 13 trillion of the listed assets, excluding asset-backed finance, so that we -- that is also give us a good capacity for the funding. So we would like to maintain the financial policy and at the same time to consider the diversification of the fundraising.
Excess cash management, mainly U.S. dollar deposit and also do some other options as well. Of course, we mainly focus on the yield, but also we would like to have a good balanced allocations for the management.
Here on is the similar pages we've been using for the announcements here. JPY 13.7 trillion is the end of December debt of which JPY 7 trillion are nonrecourse to SBG .
Cash position. JPY 3.7 trillion. In addition to that, we have a credit facility. So that gives us JPY 4.4 trillion is the actual cash position. So as a result, gross debt less cash position gives you net debt. Here, December end was about JPY 10 trillion, almost the same as last quarter, of which JPY 7.5 trillion are asset-backed finance, which means we can utilize shares for the repayments or we have our equity ratios counted such as hybrids. So that's the kind of adjustments. So after those adjustments, SBG stand-alone net debt is JPY 2.4 trillion.
A year ago, we also share with you the 3 scenarios for the future. Scenario 1 linear recovery or the scenario 3 is a further decline in the recovery after 2024, in the middle, there was a scenario 2, which was our best guess, which is instability followed by recovery from 2023, second half. And actually, market followed this scenario 2 forecast. That was the S&P 500 indication. Of course, we are preparing many types of scenario to be prepared and for the control and management of loan-to-value. Originally, we had about close to 20% of loan to value, but now that [indiscernible]. And as I mentioned earlier, we would like to safely take an advantage of leverage so that we will be able to utilize the cash. But right now that I would say that we are too safe in terms of loan-to-value and also equity value holding is making a steady growth.
So how you look at the loan-to-value. And this is the new dotted line, you see 14.4% that's the -- actually the average loan-to-value over the past 4 years. That gives us 14.4%. So those 4 quarters, which is a full year actually kept below the 14.4%, which is average loan-to-value. So it's not levering. So I believe that the appropriate level of leverage these 2, the most appropriate activities. Therefore, 10% [indiscernible] loan-to-value is lasting for a little bit while means that we are -- this tells us that we do need to think hard about shifting towards financial management excelling in both offense and defense. And I've been saying that we are shifting to offense from defense.
And the Vision Fund team also recognize, and I am encouraging the members for shifting -- such a shift. But if you look back 2 years ago, 3 years ago, we do recall that difficult time as well. So that is why that we need to be safe so that we may be a little bit too cautious or conservative, which is also important. But at the same time, as a finance point of view, we would like to be prepared for both offense and defense.
Financial policy, once again, no change at all. And I believe this is important not to change, and that's my belief, that no change for the financial policy, maintaining loan-to-value below 25% in normal times, maintain at least 2-year worth of bond redemption in cash and secure recurring distributions dividend income from SVF and other subsidiaries.
For the support to portfolio companies, -- and recently, we've been seeing the tough situations in WeWork, you've been seeing the numbers on our earnings and also hearing the news. And -- but that was the last support that we provided to the portfolio. And since then, that we are clear in terms of positions of no rescue packaging to the portfolio companies.
This year, financial strategy, fourth quarter now, no change, adhering to the financial policy. And at the same time, we would like to finance -- have financial management adaptable to both defense and offense. In other words, we have a policy on base. And while keeping this financial policy steady, on top of that, we need to expect the further risk and keeping the buffer. But at the same time remaining, we should be doing the new investments, which includes buybacks too. So that also leads to capital allocation. So we have -- we'd like to strike 3 parties balance and like to pay attention to those 3 and which to make more allocations? Is it new investments? Is it shareholders return? Or is it financial policy?
Financial stability means also return to bondholders. So that's something that we always like to take on the balance of.
In share price, I believe there are 2 things. One, because we are investment company. And our investment itself is the business. If it's going well, of course, net asset value increase. That is exactly the performance. Although we'll be seeing a net asset value increase, however, share price increase is limited, and the gap will expand. That's going to be net asset value discount. So our market cap and also our asset value gap. Why does that happen? Because we believe we will be increasing -- we increasing more and more of the net asset value or not. So if a market or investor trust on our growth of net asset value or not is a question. And because we don't have such trust from the investors of the market, so that is why that we've been seeing the widening of our discounts. Once we gain the trust, I believe that we'll be able to narrow this gap.
Of course, I understand our strategy is not fully understood by the market and investors. And we all have to kind of make sure that we have good communications. But also, our strategy is not fully penetrated or understood by the market, then that I believe we need technical measures time to time, and that includes buyback.
In the past 5 years, we have done JPY 4.5 trillion worth of the buyback in total. How has that reflected to share price? And if you look back, when we do the buyback, of course, share price surge. However, once it's done, that goes back to the original level, that is repeatedly happening which is a bit unfortunate. Of course, net asset by itself is increasing gradually. And as you can tell, share price itself is gradually increasing. However, this increased ratio is not satisfactory for investors' point of view. Then, we believe, it is not best way to bring the share price to the appropriate level only by the buybacks. So I would say, the growth of the net asset value is the most important driver. So to receive the understanding of our strategy by showing the performance, then that leads to the NAV growth, and that leads to the share price recovery. And for that, I believe we need new investments.
If we become more defensive only by keeping or maintaining or managing our existing portfolio, that doesn't give you an increase of the net asset value. We do need our efforts on the new investments. And what now? Our financial policy as an investment company is to recycle from the monetization to the investments. So once we monetize the portfolio, then there will be 3 ways to use. One is the recycle to the another investments. Second is return to shareholders or return back to balance sheet improvements.
And improving our balance sheet, meaning that it is making a return to the bondholders. But at the same time, that gives us a bigger or more flexible debt capacity. Once we have a safer balance sheet, that gives us a bigger capacity, debt capacity that may be able to accelerate our growth investments. So again, I believe that the growth investment is the key for our growth in net asset value.
And once we have such monetization, that needs to also return to our stakeholders as well. We do receive a lot of questions. You have JPY 4.4 trillion of cash position, more than enough. But also, we have about JPY 2 trillion of the payback to the Arm shares. So JPY 4 trillion is not something that we can relax as an investment company. We do need to keep thinking about monetization. It doesn't have to be selling of shares or positions, but also we can utilize, leverage our asset-backed financing.
So with those options, we would like to make sure we have good cash or the capacity so that we'll be able to make all those concerned party happy. That's all for me. Thank you very much.
Next, Mr. Navneet Govil will give you the Softbank Group Vision Fund Update. Navneet, please.
Hello, everyone. Thank you for joining us. Before we get started, please read the legal disclaimers on Slides 2 and 3 or refer to the online presentation for more details.
As Slide 4 indicates, today, I'll summarize our key performance highlights and the financial impact for the quarter that ended in December. For the in-focus section, I'll summarize our key accomplishments over 2023. It was a volatile period for markets, but our portfolio has emerged stronger and well positioned to take advantage of opportunities as we look forward to 2024.
Moving to Slide 5. I I'll begin with a summary of our progress along with some highlights from the last quarter. First, let's look back at the market expectations for 2023 and what actually transpired.
On Slide 6, you can see the market outlook for 2023 was broadly pessimistic at the beginning of the year, challenging macro trends, including elevated interest rates and inflation, along with enhanced geopolitical risk contributed to low expectations for the fundraising environment and financial performance globally.
Looking back, we can see that the economic realities were more nuanced. Economic performance has been resilient, while technology companies, in particular, bolstered by increased AI adoption have driven strong earnings growth. Dark spots remain with lingering inflation and geopolitical tensions. But overall, the picture is more positive than we might have expected.
Against this nuanced backdrop, Slide 7 shows how our performance stabilized in 2023 despite market volatility. Here, you can see sustained upward momentum in fund performance in recent quarters, and I am pleased to share that we recorded a further $4 billion gain for the December quarter. This translates to a total of $5.1 billion in gains over the fiscal year-to-date, a notable turnaround from the previous year.
Moving on, Slide 8 further breaks down our December quarter performance. We reported a fair value uplift of $4 billion across all our funds with $1.5 billion of gains in our publicly listed assets and $2.5 billion of gains in our private portfolio.
Let's turn to the drivers behind this performance. First, Vision Fund 1 registered gains of $2.1 billion. The momentum was partly driven by the continued strong performance of ByteDance, which generated $110 billion in 2023 revenue. Second, Vision Fund 2 registered gains of $1.6 billion as the market improved for public companies such as AutoStore, while private companies such as Ola Electric successfully raised private up rounds during the quarter.
Slide 9 indicates what this means for the overall performance at each of the funds. Total fair value now stands at $146.6 billion, with Vision Fund 1 accounting for $18.9 billion in cumulative gains since inception. Combined distributions for our limited partners stands at $58 billion.
Let's go to Slide 10. Looking at distributions to our Vision Fund 1 limited partners. These increased by $4.2 billion during 2023, marking $48.5 billion of capital returns since inception. Outstanding preferred equity has continued to reduce, now standing at $15 billion.
Moving to Slide 11. We see a breakdown of our portfolio's fair value and percentage allocations across the multiple sectors in which we invest. We remain well diversified with the largest allocations across the platform represented by consumer at 28%, followed by Frontier Tech and Transportation at 17% and 15%, respectively.
Slide 12 shows we have maintained a diversified portfolio across global markets. We continue to have a majority waiting in the U.S., while maintaining balanced exposures to other geographies. Across our 15 largest portfolio companies by fair value, you will also see this diversification play out. For example, companies like DoorDash and Fanatics in the U.S., Arm in Europe, Coupang in South Korea and ByteDance in China.
To conclude this section on Slide 13, I want to provide an update on the China market. As you can see, the region has faced multiple headwinds, including slowing domestic growth and increased regulatory scrutiny. This has contributed to a softening of the local market, which has underperformed global peers.
We have made 55 investments in China since inception. And while our portfolio is not immune from external factors, some of our companies have bucked the trend. For example, ByteDance continued its stellar momentum, growing revenues 30% year-over-year, which totaled $110 billion in 2023. DiDi increased quarterly revenue by 25% to $7 billion. And our largest exit in the China market by fair value is Beike, which resulted in a $1.1 billion gross realized gain.
Let's move on to Section 2. Before we begin the in-focus section, I'd like to summarize the financial impact of performance across Vision Funds 1 and 2 and the LatAm funds on SoftBank. Let's turn to Slide 15. Beginning with Vision Fund 1. From inception to December 31, 2023, fund net profit was $6.8 billion, of which SoftBank's share was $3.3 billion. The total contribution to SoftBank net of third-party interest was $4.4 billion.
Here on Slide 16, continuing our focus on Vision Fund 1, I show the impact of fund performance on SoftBank. Total paid in capital is $27.7 billion and total value to SoftBank is $31 billion, with the breakdown of $21.3 billion as net asset value and $9.7 billion as distributions.
Moving on to Vision Fund 2. Slide 17 shows total paid-in capital is $55.1 billion, and total value to SoftBank is $35.5 billion with a breakdown of $26.5 billion as net asset value and $9 billion as distributions.
Finally, here, Slide 18 presents equivalent data points for the LatAm funds.
Let's move on to the in-focus section. Last quarter, I shared the investment themes that are driving portfolio performance. In this quarter's in-focus section, I want to provide a review of 2023 and call out our key accomplishments. These wins have helped to stabilize the portfolio and have set us up for success in 2024.
On to Slide 20, in 2023, we saw a rapid acceleration in the development and adoption of AI. As the time line on the left demonstrates, we have seen a series of groundbreaking moments in the technologies development, including the release of new tools like ChatGPT 4 and Gemini and significant investments in companies like Anthropic and Cohere. It also marked the sixth year since SoftBank launched Vision Fund 1, underpinned by our core belief that AI will be an extraordinary driver of value creation.
The IPO of Arm in 2023 and our subsequent monetization of this position was an important milestone in this journey and we're looking ahead with excitement. As an investor, SoftBank deploys capital across the full stack of AI technologies from the foundational compute architecture to the applications, shaping new consumer behaviors.
In a market that has attracted such significant interest, it is important to ensure capital discipline with a focus on opportunities with the highest potential for growth. You will see from our investing focus areas that we have built out a set of criteria to guide those decisions, including prudent entry valuations and high potential for commercial traction.
Moving on Slide 21 outlines our key 2023 accomplishments. In response to market conditions, we adopted a flexible investing approach, balancing defense and offense. Staying disciplined and moving decisively where we see value in the market. Against a volatile backdrop, we maintained a solid pace of public listings and monetization, including the successful exit of our position in Arm. Our portfolio companies continued to attract outside capital as a signal of confidence in their continued growth. Many portfolio companies, meanwhile, have been successful in pursuing sustainable capital-efficient growth.
Let's go to Slide 22. 2023 was a year of 2 halves. In the first half, there was a notable pullback in investing activity as the cost of capital for private companies increased, necessitating a more defensive investing approach. As the summer [ thawed ] funding activity, we shifted to a more offensive mindset while remaining judicious in our assessment of potential opportunities. As you can see, our investing teams were focused on meaningful engagement with prospective portfolio companies across AI verticals. We demonstrated discipline in identifying high-quality companies and continue to be focused on portfolio management and monetization.
Here, on Slide 23, you can see that we were able to increase cumulative public listings to 50 despite the IPO market recording the lowest level of activity since 2019. We're very proud of the successful Arm listing. Looking ahead to 2024 and beyond, we have several exciting candidates for the public markets, representing $31 billion in fair value, including ByteDance, Fanatics, and FirstCry.
Let's go to Slide 24. Despite market volatility in 2023, we were able to maintain a steady pace of monetization, enabling us to continue distributions to our limited partners. In 2023, we achieved 49 full or partial exits, including Arm, Zomato and Policy Bazaar, which together generated $21.4 billion in gross proceeds over the 12-month period at 1.6x gross MOIC. India's stock market continues to perform strongly, and we are optimistic for further portfolio company IPOs in the coming months.
Turning to Slide 25. Venture capital funding to start-ups dropped 60% in 2023 compared to the year before. Yet, against this challenging backdrop, our portfolio companies raised a total of $8.2 billion in additional capital. This is a strong signal of their continued growth momentum and attractiveness to external investors, even in the midst of a funding slowdown. As you can see, Lenskart, GetYourGuide and Ola Electric represent a small sample of portfolio companies across various stages that successfully raised last year.
Moving on to Slide 26. 2023 was marked as a year of efficiency by many tech CEOs. This rallying call did not fall on deaf ears across our portfolio. And the metrics on this slide tell a story of maintaining growth while reducing costs. Over half of our portfolio companies grew revenues by more than 25% year-over-year in 2023. And we saw a 41% median reduction in cash burn, which enabled our portfolio companies to maintain strong cash runways.
On to Slide 27. Looking ahead to 2024, we expect to see a shift in the AI revolution from excitement to execution. In other words, AI will increasingly address core business challenges like driving customer impact, improving efficiency and creating exciting new products, companies and verticals. Amidst this secular technology shift, we are looking forward to the opportunities ahead with 3 core priorities: investing in companies at the forefront of AI, supporting portfolio companies to unlock value and maintaining a disciplined and consistent approach to monetization.
As always, thank you for joining us today.
Thank you, last but not the least, Mr. Ian Thornton will give you an update. Ian please unmute and start your presentation.
Thank you very much, indeed, everybody, and good morning from San Jose, where it's about 2:30 a.m.
As a reminder, from last quarter, I wanted to remind everyone that there is a difference in how SoftBank and Arm presents its numbers. Firstly, to make ourselves appear similar to our U.S. peers, Arm is presenting our accounts under U.S. GAAP, not IFRS. This can lead to differences between how Arm and SoftBank present our numbers. And secondly, we are adopting the U.S. standard approach for naming our years. So for the fiscal year ending March 31, 2024, we will be calling that fiscal year ending 2024, or FYE '24. SoftBank calls this FY 2023. So please be careful when comparing financial years. Now let me walk you through the financial highlights of the quarter. You may remember that last quarter, Arm reported record revenues. I'm very happy to say that today, Arm has reported even higher revenues, a record once again. For the quarter, Arm's revenues are $824 million, up 14% year-over-year. This was driven by record royalty revenues, up 11% year-on-year and strong license revenues, up 18% year-on-year. Royalty revenue was helped by the recovery in the semiconductor industry. In addition, Arm is outperforming the industry due to market share gains in areas such as servers and automotive and higher royalty rates from our latest technology such as Armv9.
License revenue was driven by Arm signing multiple high-value, long-term agreements, including 5 more Arm Total Access agreements, and I would discuss Arm Total Access deals in a little bit more detail later.
Arm's gross margins remain very high at 97%, as you would expect. Arm's non-GAAP operating expenses were up 13% year-over-year, and non-GAAP operating profit, up 17% year-on-year, resulting in a 41% operating margin. However, this includes an employer tax related to share-based compensation, which will be excluding from non-GAAP presentations going forward.
Excluding this tax, Arm's non-GAAP operating expenses would have been up 7% year-on-year. Operating profit would have been up 25% year-on-year, resulting in an operating margin of 44%. And finally, Arm generated around $87 million of free cash, resulting in cash, cash equivalents and short-term investments of $2.4 billion.
Arm processes are about 50% penetrated into the semiconductor industry. Although we expect to outperform over the long term, we still continue to gain share. And we are impacted by the near-term ups and downs of the industry.
As you can see from this slide, calendar 2022 was a period of decline for the semiconductor industry, whereas calendar '23 has been a year of recovery. In Q3, smartphones have grown about 8% year-on-year. And so companies with exposure to smartphones have all benefited including TSMC, Qualcomm, MediaTek and of course, Arm. However, all of these companies, ,TSMC, Qualcomm, and MediaTek, are forecasting a normal seasonal decline in the next quarter.
Next slide. Earlier, I mentioned how Arm Total Access is driving license revenue. Arm Total Access is a new business model that Arm introduced only in 2021. It is a subscription-based model, where the customer pays an annual fee and gets access to a wide range of Arm's latest technologies. [indiscernible] metrics but the CPU designs [indiscernible] for 2 reasons. Firstly, Arm now has a very wide range of products aimed at many different markets. And secondly, many of Arm's largest customers are now deploying the products across many different business units.
It is more efficient to have one contract that covers all the Arm's products, which we renew every 3 to 5 years. This allows us to focus on getting more Arm CPUs designed into more of our customers' chips. Arm Total Access is both financially and strategically important. For a major semiconductor company to commit to using Arm technology in their chip designs for the next 5 years suggests that we will benefit from much greater royalty revenue in the future.
Arm Total Access is targeted at our largest customers. So far, we have 27 Arm total access licensees, of whom 15 are already our top 20 customers. We expect that most of our largest 50 customers will become Arm Total Access licensees over time. Arm has 4 main long-term growth drivers. We expect royalty revenue to grow over the medium term as the semiconductor industry grows. Arm expects to gain market share across all target markets with automotive and servers being the current focus. Also, Arm charges a higher royalty rate for our more advanced technology such as Armv9. Generative AI and large language models will drive growth in our business, too.
Most AI algorithms are very compute-intensive. They need fast CPUs to rapidly provide answers to your questions, but they also need to be very energy efficient to fit inside a smartphone or electric vehicle. Arm is therefore very well placed to provide the CPUs needed for AI applications. And during the quarter, MediaTek, Qualcomm, and Samsung all announced new Arm-based chips to run AI applications.
Some of our customers are asking Arm to provide more than just the CPU. Our response to this request has been to create what we are calling compute subsystems. A subsystem is a combination of Arm CPUs and other on-chip technology that are integrated and verified to work together. This makes chip design quicker and easier. One customer has told us that they went from design start to a working chip for the data center in just 13 months. To build a complex chip so quickly, validates the benefit of using our compute subsystems. And compute subsystems are a growth driver because we can charge a much higher royalty per chip. Microsoft have recently announced that their first server chip is based on Arm Neoverse Compute Subsystem.
And finally, Arm's growth will be helped by our ecosystem of software engineers and chip designers. We estimate that there are thousands of companies that are developing their products and services using Arm technology. And today, there are over 15 million software engineers developing software for Arm-based products. Technology ecosystems do not happen by the chance. They need to be created and nurtured. They need to be invested in.
For much of the past 10 years, Arm has been investing in creating an ecosystem needed for AI to go everywhere. One product called ArmNN, which is our AI engine, has now been deployed over 700 million times into consumer electronic products such as smartphones and laptops.
My final slide is on our guidance. After 2 quarters, we are forecasting that Q4 will be higher still, another record. The midpoint of our Q4 guidance is revenue to be up 38% year-on-year. We expect the cost to be down by about 20% year-over-year, although this is flattered by one-off IPO-related costs a year ago. And we are guiding that the midpoint of our fully diluted EPS is up about 60-fold year-on-year.
To conclude, Arm has had another outstanding quarter with record revenues driving increasing profitability, and we are forecasting even higher revenues and profits for next quarter. Thank you very much.
Now we would like to have a question-and-answer session. [Operator Instructions] So now I am taking questions from Japanese webinar.
Masuno-san of Nomura Securities, please go ahead and have your question.
I have two simple questions. One to Navneet. Third quarter Vision Fund unlisted assets has quite a markup. Is it because of the peers' share price increase? Is that the main driver? Or like you explained in your presentation because of the [ brands ] of the financial rounds, which elements are the bigger for the markup of those unlisted assets? That's my first question.
So the biggest driver on the private assets was ByteDance. On ByteDance, a couple of things that I would like to highlight. The 2023 revenue was $110 billion, and it grew by 30%. So this is a big accomplishment for ByteDance because if you look at the peers, the 2 closest peers would be Meta and Meta had revenues of $133 billion in calendar year '23, and the other one is Tencent, which had $86 billion of revenue in 2023. However, ByteDance revenues grew 30% year-over-year, Meta's revenues grew 14% and Tencent revenues grew by 10% year-over-year. . The other interesting thing is if you look at the revenue multiple for Meta, it's 6.5x, Tencent is 4.2x, and ByteDance, we have marked at 2.8x. So even though we took a substantial uplift on ByteDance, the multiples are still less compared to Meta and Tencent. And that was the biggest driver of performance on the private assets. Even though, as you know, we reported about $4 billion in total. And of the $4 billion, the public assets went up by $1.8 billion and the private assets were up by $2.2 billion.
This morning -- question to Ian. So China sales was very strong, and that was very surprising that the management comment was made. So sales in China, is there any reason of the background for the China growth? And also, do you think that this China revenue is sustainable?
Yes. Thank you for your question. So in our previous quarter, sales from China were just over 20% of total revenues. For the quarter that we've just reported, that has increased to 25% of total revenue. So up a bit, but generally speaking, we're seeing the same drivers in from China as we are seeing from the rest of the world, being that recovery in the semiconductor industry and also -- but most particularly a recovery in the Android smartphone space. And with China being such a large market for Android smartphones and also developing the amount of chips in China, it's probably not surprising that we've seen somewhat of an increase in revenues from China. If I go back to last year, China was about 25% of our revenues then as well. So generally speaking, I think we're seeing China reverting back to mean, back to average rather than being anything unsustainable. So we see no reason why certainly in the near term that the sort of level of revenues from China shouldn't be sustained.
When we look out in the multiyears in the future, we do expect that rest of world will probably grow faster than China. And so maybe in 5 years' time, China is under, under 20%, again, so into high-teens. But certainly, in the near term, we think that China being around about 25% of our revenues is probably appropriate.
Next, Ando-san from Daiwa Securities, please.
I have one question, actually. With regards to AI and investing in Gen AI. You were ready for making a big investment at the last financial results announcement. My question is, in Gen AI, I think there are different categories like developers or device manufacturers or service providers and Gen AI users. I think there are different categories when you say Gen AI. So when it comes to your investment, I don't know which category has what investment opportunity? Is there any challenge or hurdle when you invest in certain categories because in the last -- or this quarter, actually, the investment amount was relatively small. So again, in different categories in Gen AI, which category has the biggest opportunity or the risk or hurdle do you think?
So a couple of things. You mentioned that our investing activity was low. So let me explain why first and then what are the areas in AI or Gen AI that we look at. So when we make these investments, we look at 4 factors. The first is the quality of the AI tech stack, the second is the product market fit and scalability, the third is unit economics and the fourth is execution excellence. And we looked at 300 opportunities in 2023, but our bar for investing is very, very high. And we pay a lot of attention to customer validation and product market fit.
The kind -- we want to protect against certain types of risks. So we want to avoid emergent verticals. So for instance, if you remember, in the early 2000s, there were a lot of different search engines and Google came much later. And so what happens is it's harder to identify successful investments when the market is consolidating. Another example is, if you remember, in food delivery, there were many companies before DoorDash was a success. And also just because something is a good technology does not mean it will become a good product. For example, Google glasses is great to technology, but not a great product. And when we looked at these 300 opportunities in 2023, we passed on a lot of them because we are financial investors. We're not strategic investors.
So if you look at what happened with companies like Anthropic, Cohere, et cetera, there were a lot of strategic investors there, not financial investors. So that explains some of the reasons why we didn't do that many investments.
Just to give you a quick example, Anthropic's valuation increased by 10x in 2 years to $5.5 billion in May '23, and it rose by another 4x to $25 billion in October '23. So we're paying very careful attention to valuations. And I think the other part of your question was what areas of Gen AI are we looking at?
So the way we think about this is broadly in 3 categories. The first is the hardware layer. And here, you have foundational models and compute infrastructure. And the best example of our investment here is Arm. And you can already see from what Goto-san and Ian just said, where the prospects of Arm and everything is running on AI runs on Arm. So that's a good example of the hardware layer. The second area that we look at is the infrastructure layer. This is data infrastructure, model hosting and fine-tuning and developer tools. So Gen AI has proven its potential is next, it's solving efficient scalability and showing compelling product market fit to end users. It's empowering the developer community to train, fine-tune and develop models in a low friction manner. The third area that we are looking at is applications layer. Here, you have existing applications actively embedding Gen AI elements into the core value proposition. The example here is Microsoft Copilot, Adobe Firefly and many of our Vision Fund portfolio companies. And then there's also emerging Gen AI native applications that are fostering new digital behaviors and disrupting traditional industries. So at a high level, as I said, we're looking at AI in terms of hardware layer, infrastructure layer and applications layer.
Now that for the interest of time, I would like to take last 2 people, 2 questions, and we would like to conclude this meeting. Now next question is from Mr. Yasui of UBS Securities.
This is Yasui from UBS. I have 2 questions. First, as a CFO message, NAV increase is also to increase the market cap and I believe that you would like to prioritize the growth instead of a buyback. That's the impression I receive. So in the meantime, you'll prioritized growth investments to buy back. I believe that the buyback option is going to be remained, but is my understanding correct? And my second question is about -- to you Navneet, about the 3 layers, hardware, software. In the hardware, I believe that there will be no many candidates for the investments. So hardware, application, software. A number of the option-wise, for those 3 layers, do you think that the 1/3, 1/3, 1/3 or do you think that the more biased towards applications in terms of the number of investees or the number of opportunities point of view? That's my question -- my second question.
Yes, let me answer you my first question. Capital allocation, I understand this is always the high interest from you? And how can we put our shareholders' return to -- and what is the idea we are having and I wanted to share our kind of thoughts about when it comes to shareholders' return. It's like a kind of a choice of the stream, but extremely speaking, I believe we need to do growth investment first. And then otherwise shareholders' return comes. I believe that's not only for the SoftBank Group, but many companies does that operation. I believe we have a common kind of understanding because -- and that also applies to the investment company like us as well. For example, automotive company that when you produce car, is it you prioritize those production of the car to the shareholders' return. Of course, you have to invest in such otherwise, you cannot create a car. So business and the shareholders' return cannot be clearly separated. However, we kind of reminding ourselves to kind of focus on the growth investment. Otherwise, we cannot grow as a company. And that's something that we believe. And also, while that we're having communication engagement with the shareholders or stakeholders, actually, they understand that we should also focusing on growth investments. So based on such understanding that we -- I made such a slide to share with you for today's earnings results, and that's kind of our position when it comes to our capital allocation. It's not that we ignore shareholder return or anything like that at all. We always keep 3 elements for our important capital allocation. We just wanted to share with you what kind of approach we are thinking.
So on the second question about where are the most opportunities. First, let me give you examples of companies in each of those areas. So in the hardware layer, you're correct. It's companies like Arm, NVIDIA, CoreWeave, Lambda Labs, OpenAI, Anthropic, Cohere. In infrastructure layer, there are companies like Mango DB, Chroma, Redis Labs, [indiscernible], Hugging Face, Weights & Biases, LangChain, LangSmith. Then in the applications layer, you have companies -- a lot of those are already in our portfolio. Picscart, Automation Anywhere, ByteDance, ContractPod. So these are just examples of companies in each of the categories. So you are correct. There aren't that many opportunities in the hardware layer, and we already have Arm, 90% ownership by SoftBank Group, and we're extremely bullish on Arm. So we see most of the future investing opportunities for us in the infrastructure layer and the applications layer.
Thank you very much. This concludes the SoftBank Group Corp. Investor Briefing. We are going to have a global conference call in 2 hours. If you still wishing to ask us questions, please take that opportunity. Once again, this concludes the investor briefing. Thank you very much for your participation. Thank you. And this meeting will be distributed on demand on our corporate website. And also appreciate your cooperation in answering a survey. Again, we are welcoming your participation in the global conference call, which will start in 2 hours. Thank you very much.