SoftBank Group Corp. (SFTBY) CEO Masayoshi Son on Q4 2020 Results – Earnings Call Transcript

SoftBank Group Corp. (SFTBY) CEO Masayoshi Son on Q4 2020 Results – Earnings Call Transcript

SoftBank Group Corp. (OTCPK:SFTBY) Q4 2020 Results Earnings Conference Call May 18, 2020 3:30 AM ET

Company Participants

Masayoshi Son – Chairman and CEO



Yoshimitsu Goto – Senior Vice President and CFO

Kazuko Kimiwada – Senior Vice President and Head of Accounting Unit

Conference Call Participants

Ryo Inoue – Asahi Newspaper

Takahiko Hyuga – Bloomberg

Debra Katz – Wall Street Journal

Operator

Thank you very much for waiting, ladies and gentlemen. Now we would like to start the SoftBank Group Corp. Earnings Results announcement for the Fiscal Year ended March 31, 2020. In consideration of measures to prevent the spread of the new coronavirus, we will conduct our earnings call via Internet.

First of all, I would like to introduce today’s participants. On the front left, we have Masayoshi Son, Chairman and CEO; Yoshimitsu Goto, Senior Vice President and CFO; Kazuko Kimiwada, Senior Vice President and Head of Accounting Unit.

Now I would like to invite Mr. Son, Chairman and CEO, to present you the earnings results and business overview.

Masayoshi Son

My name is Son. So recently it’s been tough worldwide and every day, there are many sad news here and there. And looking all those, I’ve been thinking about my own life and looking back my own life and I believe many of you are sharing the same feelings.

So now let me go into my presentation. Back in 1929, Great Depression was there. Back then Dow Jones Industrial average went one tenth [ph]. It was big Great Depression. This Dow Jones Industrial average took 25 years to recover. It was a big damage to around the world. And this time novel coronavirus, I would say it may damage similar impact to worldwide. Cumulative confirmed cases in global 4.5 million people.

Impact to travel was about 90% decrease. Automotive industry shipments went down by 50%. Impact to restaurant was about 80%, workforce about 80% of worldwide workforce has been impacted due to this coronavirus. So I will say this is unprecedented crisis that we are experiencing.

Under such circumstance, we SoftBank Group has been receiving several impact in many ways. Consolidated results has already been announced as forecast for our consolidated result a few weeks ago. So I believe there is not much big surprise for you.

And as a flash news basis, that we are – our consolidated result is as you can see on the slides, net sales EBIT, net income has been impacted largely. First of all net sales, as you can see from the slide not much big impact, but EBIT. On the green bar, this is our Telecom business, especially the domestic Telecom business, it’s been constantly growing.

However when you look at blue portion, blue bar, which is SoftBank Vision Fund segment has been decreased largely and dragged the EBITDA overall result and that applies to our net income result as well.

So what happened to the Softbank Vision Fund? Softbank Vision Fund, one, we have invested over 88 companies so far. In the cumulative investment is about ¥1.4 trillion, valuation gain – realized game plus valuation gain. So dark blue is the realized gain and valuation gain is indicated in light blue.

In total, valuation loss is about ¥1.5 trillion. So all 26 companies was a gain and 27 companies that are marked down – 47 companies that are mark down, excuse me. And last year this was a big positive about ¥2 trillion in total EBIT was recorded. So compared to that this year, this time is the big loss.

On the other hand, cumulative investment in Vision Fund of which valuation gain and valuation loss wise actually about ¥100 billion valuation loss is the number that we are recording, which is the cumulative investment balance.

Moreover, cumulative investment was ¥8.8 trillion and about ¥0.1 trillion or ¥100 billion investment loss was made. And this investment is not only from our fund from SoftBank Group, but also we have partners who also invested in SoftBank Vision Fund. Great portion is our other partner, so-called LP or Limited Partners preferred equity which is 7% fixed distribution is made.

In the blue, are the performance-based distribution, which is equity. Softbank is investing in dark blue portion amongst the equity and that’s the direct investment from SoftBank Group in SoftBank Vision Fund, light blue and gray portion is from our partners for this Vision Fund. That is the total picture of the structure for commitment.

In the total Vision Fund performance wise for preferred we have 7% fixed distribution and for common equity, connectivity, excuse me, is minus 7% and blended IRR is minus 1%. This is the fund – entire fund performance.

For SoftBank Group of which as I mentioned in the previous page, the dark blue portion which is the equity portion only. So for SoftBank Group IRR, including managers performance fee negative 6%. That is the performance for overall Softbank Vision Fund.

And amongst the investee of SoftBank Group there are eight companies who went public. In the performance of those eight companies are, on our next slide, the column A is the investment cost and column B is the gross return to Vision Fund and on right their own right – on the second from the right is the gain – gross gain or loss to Vision Fund 1. So those eight listed companies performance wise about ¥150 billion positive.

As of today this will be a bit better number. But as of the March number ¥150 billion is the gain that we are recording. That’s for our SoftBank Vision Fund. And for the other assets of our holdings that I would like to also cover, Alibaba. This is the biggest holdings amongst all the holdings of assets as of today. If you look at the share price of Alibaba, since this year, especially China has started receiving the impact from new coronavirus. But as you can tell from this share price, although that they have dropped once, but actually they hit the bottom and the increasing trend. As of today actually domestic in China has been seeing the increase in shipments of Alibaba and the business performance is becoming back to normal.

On domestic telecom business, 4% increase in revenue, 11% increase in operating income, the biggest ever. Free cash flow, adjusted free cash 2% increase. On top of that, we have completed the merger as of April the 1st 2020, that Sprint merged with T-Mobile. If we wouldn’t been able to close this merger under the coronavirus circumstance it may be the big impact to our business overall. So I believe it could be a big problem for us.

But fortune that we were able to close this transaction as of April the 1st 2020. As a result, against the new T-Mobile U.S SoftBank Group has 24% of equity that’s the ownership ratio. After the merger, stock price has been performing pretty well and we are expecting a lot of synergies are from this merger.

Another important asset for us is Arm. ARM-based chip shipment, as you can see it has been growing exponentially. And right after we acquired Arm, we have been investing and increasing numbers of employees, actually engineers. We were committed to hiring more engineers as a part of our strategy.

But revenue will not double earlier than hiring engineers. So in the meantime, this cost could have impact on cash flow, but we believe that this is going to be helpful for Arm to grow further.

In fact, in mobile sector, Arm has been received pretty well. But after we acquired Arm, as you can see smartphone market has been growing, which is of course helpful for Arm. But on top of that, cloud and the data center sector more and more companies have adopted Arm-based a chip.

In fact in the space of cloud, Amazon’s a AWS is the global number one and AWS has been utilizing Arm chip more and more, consequently processing gets 65% faster and also it help to reduce or save costs by 40%. So going forward Arm chip is going to be used more and more by Amazon. In fact, Amazon announced that already, not only Amazon’s AWS, but Microsoft Azure, VMware, and NVIDIA. More and more companies global companies have adopted Arm based-chip for their cloud servers and that’s a global trend. So the growth of Arm I have confidence.

We talked about Alibaba, SoftBank KK, Sprint an Arm and Vision Fund. Those are five key assets for us and I cover the high level of those assets status. So all in all, we have shareholder value as of the end of December 2019, we have ¥29 trillion of equity value of holding and we have net debt of ¥6 trillion. So from shareholder’s perspective, shareholder value was ¥23 trillion, that was in December 2019. And more recently as of May 18th, this year equity value of holding went down by ¥500 billion and the net debt increased by ¥800 billion.

And the why it increased? Because in the past three or four months we repurchased our own stocks and also we invested in SoftBank Vision Fund and also we announced financing and financing cost was incurred. So total was about ¥800 billion. That’s why net debt increased by ¥800 billion since December. So consequently shareholder value went down by ¥1.4 trillion since December. However, it was not like a 30% decline – excuse me, or something like that.

Whenever we talk about earnings results and we have a lot of pages in our presentation. I think this is the most important slide and the other slides are just a supplementary form as far as I am concerned. So long as you take a look at this particular page deeply you will realize where we stand.

Both sales EBIT and net income those are metrics from accounting perspective. But I believe that the fact of the matter is, which is very important is shareholder value decreased. Equity value of holding went down and net debt went up because of that shareholder value decreased by ¥1.4 trillion that’s the fact. So this decrease is a significant challenge obviously.

New York Stock Exchange and Nikkei went down in March dramatically, and like I said earlier, at the Great Depression our share price sharply decreased to one tenth of pre-Great Depression and SoftBank are into [indiscernible] we saw our value decreased to one 100. So compared to that dramatic decrease, of course, we have seen decline in our shareholder value, but it was not as shocking as what we saw in some other occasions before. Maybe it sound like an excuse, but, challenge remains a challenge for us against very trying background and coronavirus outbreak.

We announced ¥4.5 trillion of selling or monetizing assets and by getting ¥4.5 trillion we will repurchase of our own shares up to shares 2.5 trillion. For the first tranche ¥500 billion. In the past few months we have been acquiring back our shares in the market. And this morning we have among out of ¥2.5 trillion in addition to ¥500 billion that the first buyback program, next ¥500 billion buyback program has announced this morning today.

So this out of ¥2.5 trillion, which has been resolved at the board meeting recently. So that being announced this morning Tokyo time. Board meeting was held last Friday night. As a timely disclosure the morning of Monday which is today that we have disclosed this information of resolution and the source for that is from financing using Alibaba share including Ford contract, floor contract and collar contract. So those are the three types of financing scheme that we will be raising, ¥1.25 trillion and using such funds we would like to use those proceeds for buybacks and so on. And also based on other ways of asset disposals and funding that we would like to do our buybacks and so on.

In loan to value that we are focusing as an important KPI from finance point of view. And on the normal cost, that we would like to keep, manage loan to value less than 25%. That is our internal discipline, internal finance policy. And in abnormal case 35% in normal case, managing less than 25% percent that is our internal disciplines for our activities. And under such circumstance with coronavirus and so on we rather like to forecast even more safety management. So last time at the earnings I believe that was 16% and as of today this is 14%. So I believe that we are heading even safe for management of the business.

In dividend, we would like to be also managed safely fiscal ‘19. Interim dividend ¥22, year end ¥22 and annual dividend ¥44 in total which has already been announced and we will exactly do as we announced, but for fiscal 2020 due to the current economic crisis as for dividend not that we would like to fix the amount, but in case need – we need further money or so that we would like to keep this as a to be decided. To be decided meaning that there could be a case of no dividend as well. We don’t consider – we don’t think of increasing dividend, but most probably between zero dividend to the current level of dividend is somewhere that we are looking into at this moment.

As an option for the management, we would like to keep the flex rooms there so that we would be able to choose the option based on the circumstance. And for fiscal 2020 this fiscal year both interim dividend and year end dividend we would like to keep our options available at this moment which is the first thing ever since the foundation of business, but we would like to keep those dividend amount to TBD at this moment.

So novel coronavirus has been spreading around the world and also causing huge crisis to the humankind’s. as SoftBank Group as part of this social contribution or contribution to the society that we’ve been supplying at cost to medical sales for such devices, including test kit, masks, goggles, face shields, protective suits and so on.

So there are many medical stuffs or peoples are having difficulty getting those test kits or the suits or masks. And I’ve been hearing that there are some people who are wearing just a raincoat instead of protective suits because there is a shortage of such suits and also masks are very in short in those medical facilities that they at least wanted to change or replace their masks once a day. But because of a shortage of the mass that they have to use for three days, four days and so on.

It’s not the issue of money, it’s issue of the just the procurement of those kits and those equipments. And I heard that in taking advantage of my network friends and so on around the world I ask for their help, and as a result that they were able to procure those equipments. Although that we’re hitting the biggest loss ever since the foundation, therefore that we wouldn’t be able to make it free of charge for everyone. Of course, for the antibody test kit that we will be supplying with free of charge, but others that we will be no profit for other equipments, just ask for the cost and distribute such equipments to those concerned parties.

So having such a contribution to the society, but also the most important things for us is to contribute to the society through our core business, which is to create the new world with the information revolution and happiness for everyone. That’s our corporate philosophy, which we would like to satisfy in those unicorns, that who can make that happen. And support those entrepreneurs and businesses is my role and those unicorns has been also facing big difficulties under such circumstance. For them new customers, new clients they’ve been already serving their services or acquiring their customers with negative profit and so on.

But because of the coronavirus situation they’ve been seeing a big drop in sales, like I mentioned the travel our business has been impacted by 90%. Of course, worldwide between countries, transportation, business trip, travel has been prohibited because of country policy in many countries right now. So that their sales of course has been dropped because of that and they’ve been impacting too many of the unicorns around the world.

On top of that they do need money, but the cash management wise, that why is that they’ve been having a difficult time in experiencing negative free cash flow and so on. When you put it into fixture, so they’ve been writing up the steep road and originally speaking they were able to keep going. But because of the value of coronavirus all of the sudden happened and unicorns been dropping jumping into such valley.

And this is a big crisis for many of us, but even under such circumstance some of them have been able to jump up the valley and flying up with their wings to catch up with their momentum and they could even fly higher when they face the difficulties and there are such unicorns out there as well.

Back in 1929 in the 25 years, well, necessary to recover the Great Depression and that was one examples from the stock exchange and so on. After the Great Depression when the economy came back, whether the same industries got recovered or not, in fact, the old industries were heavily impacted. And they ended up going bankrupt and beyond the valley of the Great Depression, industries that came back dramatically were new industries back then, like automobile, home electronics, oil, manufacturing, electricity, food processing. Those new industries at that time rebounded.

So not traditional industries, but new industries were the ones that rebounded significantly after the Great Depression or the great crises like the Great Depression. So likewise, we are seeing valley of coronavirus, so new industry or new technology is rather like online meeting, food delivery are the ones to be rebounded and online education, online medical care, online shopping and video streaming service, without touching physically people can touch emotionally online, whether it be in medical or in other areas. So for a new industry and for new era, I think those technologies will lead the rebound and that trend will be accelerated I believe.

Our unicorns are facing serious challenges against the background of coronavirus outbreak, but I believe that some of them will fly over the valley of the coronavirus and go beyond and fly high.

Our philosophy information revolution, happiness for everyone, that’s our consistent vision since the foundation of our company. So we remain committed to this vision, and we’re back to the basics, and we will continue working hard. This shock for corona outbreak will accelerate the paradigm shift for a new era. And we are looking for it to navigate through the challenges. Thank you very much.

Thank you very much. Now we’d like to open for questions.

Question-and-Answer Session

Operator

So floor is yours.

Unidentified Analyst

My name is Owada [ph] from Nikkei Paper. Can you hear me okay.

Masayoshi Son

Yes.

Unidentified Analyst

So thank you for taking my questions. I have on Vision Fund. And my first question, so thinking about this fiscal year, in the next fiscal year which is 2020, why do you think about the new investments? And about IPO market, how do you think about it for this year. And you mentioned about fixed distribution of 7%. That I believe that you’ll be making a follow up investment and so on. And source for this fixed distribution can be short, and how do you going to manage that?

Masayoshi Son

Yes, thank you very much for your question. As for SoftBank Vision Fund 1, which is about ¥10 trillion and about ¥8.8 trillion has been used for the investment which I have mentioned earlier in the slides, remaining money or remaining funds are saved to make a distribution, fixed this ambition of 7%. Therefore we do have enough source for the distribution.

And also, as for follow-on investments, which we will need some fund for that, but that’s also included in those savings. So new investments for SoftBank Vision Fund 1 is no longer exists and the remaining amount or remaining fund will be used for the distribution of fixed coupon and also the follow-on investments.

As for new investments, I am thinking that SoftBank Vision Fund 2 using our own money and we’ve been continuously making investments because the performance Vision Fund 1 is not that great. Therefore we decided not to do the marketing for Vision Fund 2 for the partners for a while and in the meantime we would like to use our own money to do the investments through Vision Fund 2.

If the performance is not very good then of course, the money for Vision Fund 2 cannot be asked for other people. It’s not popular. Vision Fund 2 funds that the people may ask to me it’s not okay, that’s the answer from me. Honestly speaking, it’s not okay. That’s why we’ve been using our own money to continuously invest.

However having said that, Vision Fund 1, we will be able to – we may be able to see the companies that can boost our performance gradually. So once we see the better performance in Vision Fund 1 then we may be able to have some offer from the people other than us to participating in Vision Fund 2. That’s my optimistic view about the future of Vision Fund. Thank you.

Unidentified Analyst

So new investment is not really frozen, you’re continuously investing?

Masayoshi Son

Yes, we’ve been continuously investing. The new investment does not mean that we have enough money to do so. So that we do learn the lesson from Vision Fund 1. So we became more careful to choose the investees to do the investments. Thank you.

Unidentified Analyst

I have second question. So ¥4.5 trillion asset disposal program that I would like to ask you, ¥1.25 billion financing using Alibaba share and I believe you’ve been using some ownership of Alibaba share for this financing, but this forward contract and collar transactions, there are many schemes that you’ve been using. But can you give us a little bit more color on those transactions.

Masayoshi Son

It can be a bit long to explain one by one for a transaction, but this is a very general for the contract. So four years later we settle or something like that, so that we effectively sell, but its going to be settled in four years. And we raise money in front – upfront, that’s being the scheme we’ve been using in that before and it’s the similar scheme.

And also floor contract, this is to raising money and save the upsides to some extent. Collar transactions, the is the two year collar transaction. We sell once and raise money, but some will be maintained with us for upside in future. So at the time we invest in video we used the collar transaction scheme, which we disclose later and this is a similar scheme that we use for that case. For details, our finance team will be able to answer your questions, but that’s the big picture. Thank you very much.

For any other questions, I believe that I would like to take more as many questions as possible, so can you keep those questions to one. Thank you.

Ryo Inoue

Ryo Inoue from Asahi Newspaper. My question is, shareholders value you mentioned and Vision Fund was supposed to be a growth engine, but our performance was negative. So at this time do you think that Vision Fund is a failure? And what’s your view on the future growth?

Masayoshi Son

While failure, I assume you want me to say failure, but remember we invested in ¥8.8 and that cumulative loss was ¥100 billion. Do you want to call it a failure or not bad. It’s I think up to a year. By the way since December to March end into that three months New York Stock Exchange and the Tokyo Stock Exchange dropped significantly.

Prominent investors, even them lost 30% of their holding, 20%, 30% declined since December through today, New York down exchanges and Tokyo exchange listed companies lost by 17%, 15% and Vision Fund invested at ¥8.8 trillion and ¥100 billion just less than 1% of negative.

And whether you call it failure or not, I think it’s up to your view. As far as I’m concerned, I would say not bad against such a very poor market climate.

Ryo Inoue

My supplementary question. So you mentioned that you continue investment, but you continue – you will continue investment even against a Corona outbreak for example?

Masayoshi Son

Well, we will continue, but not aggressive investment. We will take cautious steps for future investment. Thank you very much.

Next question please?

Unidentified Analyst

My name is Lka from UK Newspaper [ph] I have one question please. So you show us that the valley corona, some coronavirus in some of the unicorns went down, some of them fly out. So for those unicorns who are dripping down the value of coronavirus and who fly away? What are the differences in between those unicorns?

Masayoshi Son

So, yes 88 companies of which 15 companies could go bankrupt. That’s my assumption at this moment and about 15% can fly away and still make success – and make it successful. Remaining about 60 unicorns can do so and so. And later on like in 5 years, 10 years if we look back those 15 unicorns fly away, fly over the valley can account for about 90% of the total value of our investment, meaning at the bust of the Internet bubble, Alibaba, Yahoo!, just a few companies account for about 90% of the future value then for us remaining. Some of them went bankrupt. Some of them survived, but just about so and so performance. So I would say about the same thing could happen for – over this time.

Next person please.

Takahiko Hyuga

Takahiko Hyuga from Bloomberg. I have two questions, if I may or please keep one, make it one please. At the press conference on 11th of February you mentioned that tide was changed. Now you began to see spring after the long winter and the performance back then was pretty good you said. But hearing what you have said today you sound very optimistic to the market, to the public.

Back then even we were beginning to see the sign of a coronavirus outbreak. And you mentioned that you didn’t stop financing. HAWKS Bond annual amount is about ¥1 trillion. I wonder if you have a plan for issuing bonds like HAWKS Bond for retail investors?

Masayoshi Son

Yes, three months ago I said yes, tide was shifted and that was what I believed and that was actually happening. So back then my view was we were about to get rebounded from the bottom and impact of this COVID-19, significant impact from the virus back then was not predicted by many people, including myself. I was rather optimistic in February, but now like I mentioned earlier COVID-19 present significant threat to the humankind.

While, we started seeing some improvement with regards to infection cases. And in Japan, emergency declaration may be lifted, but also some people say that second wave may come in fall or winter. So we can’t just be simply optimistic.

Antibody for medical treatment and vaccine for obviously medical treatment should be available for people to start living life more comfortably. We will see when it happens and regards to bonds for retail investors, it depends on how our performance goes and the needs in the market. We will continue seeing what’s going to happen. Thank you. Next question please.

Unidentified Analyst

My name is Masuno [ph] from Nomura Securities. So how are you going to compete against the investment activities? In overseas some of the activities are seen by raising some money for new investments, for you the Vision Fund 1 has already been stop investing, but how you’re going to compete against your competition – competitors those investees that you have already invested by SoftBank Vision Fund 1. And other investees I believe that the Arm is something that we have high expectation and they – we are also assuming that it’s going to grow, but set aside Arm, how you’re going to compete in the market?

Masayoshi Son

Yes. Thank you for your question. For Vision Fund 1, amongst the investee out of the SoftBank Vision Fund 1, 8 companies has already been public. And I believe those companies who went public we are quite sure that we will be able to collect those money that we invest and we will be able to use those proceeds for investment in Vision Fund 2. That’s something that I’ll make it available for us.

And it’s going to be recycling inside of Vision Fund that something is going to be available for us. And at this time we have announced the ¥4.5 trillion program and we will be receiving such proceeds out of the programs and of which that the ¥2.5 trillion for buyback for our own shares. So we will like to exercise – execute those transaction in order. But the majority of those proceeds can be used for or improving our balance sheet and some will be used for our new investment.

Luckily our positions in the market, we have already been set that good ground to investing in unicorns. So if there is any good opportunity out there we have a ground to be able to receive such information based on such information. Without stretching too much that the way would like to consider positively about the new investments as well. Thank you.

Next question please.

Unidentified Analyst

Hayato [ph] from Kyoto Press. In the past you experienced Lehman shock and IT bubble burst, you navigated through those challenges and the current coronavirus outbreak, how much impact this has from your perspective. I think of course, out of your control. But what’s your view compared to the past crisis.

Masayoshi Son

As a business maintenance, I’ve been leading a long life, as a business man. And right after the bubble was burst, I suffered. And right after that I started Yahoo! BB, and back then it was on the verge of cliff. And in fact half of my body was leaning over the cliff. Maybe I was holding my body with two fingers only. And the Lehman shock, if you will, rather than holding my body with the two fingers is like holding my body with one arm, try not to fall off the cliff.

This time even though it’s a global crisis, but in 12 months or so we are expecting, monetizing around ¥4.5 trillion and enhancing our financial position and using Alibaba shares, we financed ¥1.2 trillion.

When we did that we were able to execute that without having significant impact on Alibaba share price, when we tried to sell one of our assets, people would say that, well, you shouldn’t you shouldn’t do that because that could have a significant negative impact because the stock price will go down.

But we were able to complete execution successfully by using Alibaba shares and the remaining portion within two months or so we should be able to complete executions. So it wasn’t – it’s not like holding my body with two fingers or one arm. So compared to the past a crisis this time I am just looking down the bottom of the valley from above. Any other questions?

Debra Katz

May name is Debra Katz from Wall Street Journal. Thank you very much. So you have announced a big buybacks of so your own share to the market and also you yourself is a major shareholder of the company. And the majority of your holdings has been used as collateral. Is there any – is that can be an issue for you going forward the governance point of view?

Masayoshi Son

My own loan, my own borrowings some hundreds of billions of yen and the value of the holdings of SoftBank Group for myself personally is some trillion yen equivalent. More specifically about two point some trillion yen assets for my own and I say – I have a borrowing of about ¥500 billion.

So against the assets it’s about 20% is the kind of a status. So I wouldn’t say that’s a big issue or risk from my understanding. Does that answer my question.

Debra Katz

So recently you yourself and also some co-holders, so about 70% up to about 70% or I will say 67% are used as collateral. That number it’s been out there. Is this wrong or what?

Masayoshi Son

Depending on the share price at the time, the haircut for the loan may be different, so that sometimes that we’ve been having a bigger haircut than the loan itself. But as of today it’s been improved quite largely. Next question please?

Unidentified Analyst

Iga [ph] from NHK. Thank you for taking my question. About Sprint or new T-Mobile, you mentioned that you’re expecting synergies from the merger. And from asset perspective asset for sale going forward. So what’s your view on that in the future?

Masayoshi Son

For T-Mobile after getting merged with Sprint has been seeing their performance pretty well, and synergies from the merger should be materialized from cost perspective and from spectrum perspective and from customer acquisition perspective. So new T-Mobile’s performance and value, our ownership value I have high expectations from that.

But which asset that we have should be used for financing, we are open to different options and scenarios. Thank you. Any other questions?

Unidentified Analyst

My name is Tokita [ph] from TV Tokyo. I would like to ask you about the valuation of unicorns, for example, WeWork, which being discussed since last year. And Masa, you mentioned that in AI era, online usage is going to be very frequent, but the real office is going to be suffering due to the shortage of demand.

So out of the unicorns you mentioned 15 companies may go bankrupt and 15 is going to go successful and 16’s are or so, so. So amongst your investment amount, can you elaborate a little bit more?

Masayoshi Son

So, yes. So out of 88 companies the big segment is those ride -sharing business such as the DiDi, Uber and so on. Those are the big portion. And then medical segment is another one, which went public and showing a good performance in same medical companies. But some of them are utilizing AI to explore the new types or new business.

When it comes to WeWork, OYO, those O2O type of business, off-line, online combined business model is also there amongst some investees. Region wise 40% in US, 40% in China and the remains, are the other areas. That’s the kind of allocation. And at this time purely online type of business was actually doing better in spite of such a circumstance.

And when it comes to O2O online to off-line a combined type of business models, especially those shared economy type of business such off-line portion. Online is okay, but the off-line portion because that they have to close offices, you can not travel. So there are such aspects due to this coronavirus. And that’s of course becomes difficult to keep up their business.

On the other hand, after the end of this coronavirus situation, do you want to have a 20 year lease for office? Maybe that’s not a situation anymore after the Corona. So it’s going to be very uncertain going forward.

At the Great Depression I mentioned, 25 years were necessary to recover and this time again I believe actual economy is going to be suffering for quite a long years in negative way and currently very uncertain for the future. And some of them are doing good, and some of them have some – or create some demands for office. But rather than 20 years contract for lease may be better to use WeWork for short-term period, so that they can use the office in efficient way.

So that’s another new demand post-Corona, and also for the management of hotel business, some of those small hotels, individual hotels, rather than spending your own money to recover from this current circumstance, rather they like to join OYO Group and connecting online to take an advantage of the new technology developed by head office and acquire the customers, that may be new needs for those businesses.

So right now it’s probably a most difficult time for those companies, but post-Corona, I believe there are some opportunities for those business still that can be recovering due to the new demands.

And for your reference, in ride-share business, Uber in the United States are still having difficult situations and Uber itself has disclosed their performance. But DiDi in China, on the other hand, they – we had a video chat last Friday, but they said they are seeing recovery of the business using such ride-share services and also seeing the signs of improving their business performance. Therefore I believe that will be also expand into other – hoping that’s going to be expanded to other countries as well.

Unidentified Analyst

Tsuruo [ph] from Citigroup Securities. My question is about SoftBank Vision Fund. Downside risk for this term ¥900 billion loss was incurred in SoftBbank Vision Fund and other investment. But Masa mentioned that 15 companies in the portfolio may go bankrupt. So those risky companies, I wonder if you provided for valuation loss for those companies and in order to avoid additional loss what kind of measures SoftBank Vision will have to keep further loss from happening?

Masayoshi Son

So currently foreseeable valuation loss, we look at it very conservatively to have a good view on potential valuation loss, but not us evaluating valuation loss. But we have several outside third parties who do evaluate valuation loss and also we have a governance in place to check the most appropriate valuation loss. So that’s the current status with regards to potential valuation loss.

But going forward nobody knows what will happen, especially when it comes to potential second wave, that could be bigger than the first wave. I’m talking about the coronavirus. So we can’t promise that there will not be additional valuation loss.

So again, we will take very cautious approach in managing our investment. So there is a chance of further downside risk. That’s something that we keep always in our mind for safe driving. So that’s why SoftBank Group contributes its own money and borrowing, both, we tried to reduce and also we tried to have ¥4.5 trillion worth of cash or cash equivalent in hands. So that’s why we are working on selling or monetizing our assets.

So we will keep a close watch on what and how things go. So I can’t guarantee there will be no additional valuation loss. In fact, more than valuation gain, there is more chance of valuation loss than valuation gain. That’s my view. Of 88 companies, 15 may go bankrupt I said, so for those 15 risky companies in principle we will not provide our financial support only to rescue them, but they don’t have much borrowings. We don’t want to cause any trouble to lenders. In fact, those companies don’t have a lot of borrowing like I said.

The investment that we have made may lose some of its value, but that’s valuation loss of the investment we will have made in the past, but from cash flow perspective, in principle we’ll not provide cash to those fragile companies for rescue. Next question please?

Unidentified Analyst

My name is Kotohiro [ph] from Newspeakcut. Vision Fund, I would like to ask you about Vision Fund. So IRR 20%, which is high number, but at the same time the short period for the investment so that you are betting on winning horse that you mentioned before. But this time, at the same time that we realize that the unicorns are very fragile in the – under such circumstance environment, were vulnerable against those environments?

Masayoshi Son

Yes. So when you look at the 5 to 10 years span, I believe we still see a good possibility there ahead. After the burst of the Internet bubble, it was disastrous. At the financial crisis it was disastrous again. But still when we look back, we were able to overcome those difficulties or that disastrous situation, but still we were able to regain our power as Internet companies to grow after the Internet bubble burst.

So this time, investee of SoftBank Vision Fund I believe it’s going to be the same. After we go through this valley of coronavirus some of them will be able to grow, at least 15 companies will grow successful even after overcoming this coronavirus valley. And also 15 companies may go bankrupt and I’m not going to be – we don’t have any plan to have additional investment in such bankrupting company and out of ¥8.8 trillion those companies that may have a bankruptcy possibility is relatively small size. Those large size investees are actually surviving and they’re doing steady.

It seems like they may have a good chance of going through this valley of coronavirus. Exception is WeWork. WeWork, I already mentioned that we made a failure on the investing in WeWork, and I’ve been admitting that several times. I was foolish. I made a wrong decision. I didn’t right look at WeWork right. That’s my honest feelings about that.

Other than those, I believe those major investees are relatively doing good, and I am having a good possibilities of growing. Those go bankrupt is going to be relatively small.

Unidentified Analyst

A question again, so IRR 20% and also thus short investment life, how do you think about that?

Masayoshi Son

That’s how you compare. Normal venture capitals are investing in early stage. So for them compared to them of our investment period is relatively short. When you count towards the IPO and also the possibilities or chances to go public is higher compared to those venture capital.

So if you do the comparison early stage companies has even more bigger chances of go bankrupt. And IRR can be even in a normal course, venture capitals average 13%. So compared to that I believe our case is not that bad at all. And you’re checking every day those listed securities Nikkei average, New York Dow Jones 10 some percent has decreased compared to the end of December last year. So compared to that I believe we are surviving in good way. So that’s kind of a reality. I believe. So everything gets comparison.

Unidentified Analyst

How about IRR 20%? Is that going to be changed?

Masayoshi Son

I think we’ll be able to achieve that. Still I have a belief in that. At this moment, we have suffered most. However when you look at 5 to 10 years, at the very last close, I believe – I’m still in belief that we’ll be able to achieve that. But nobody can tell at this moment, we have to wait and see. And at this moment under the coronavirus situation we’re already suffering in most.

So if you ask me whether we’ll again achieve IRR 20, I will say because I am very optimistic, that’s for sure, so I need to say that and maybe I’m too optimistic to say that if I say yes. So – but that’s only you can tell when you see the results, until then you can not tell. And I may be wrong too. Next question please.

Unidentified Analyst

Saito [ph] from Nikkan Kogyo Shimbun. Talking about Board candidates and also Jack’s retirement what’s your view on that? And two independent director will be added, and the total independent director will be 4, and from the perspective of reducing investment risk and in order to increase probability of investment success, what’s your view from a governance perspective? Thank you.

Masayoshi Son

Jack Ma, for me, is my friend and comrade in my life, shared our view. In fact, 6 months ago or so. Jack stepped down from CEO position of Alibaba, and Daniel was successor as CEO. And Jack has been not on the front line of their business, so that was an announcement. And the stepping down from SoftBank Group’s board, I believe, and he said to me actually was something that he decided on his own. That’s sad, but we still keep in contact directly and right before the COVID-19, we met face to face every month to have dinner, to talk about businesses, talk about our lives and we will remain friends for the rest of our life, I believe.

And talking about the governance, we plan to have total 4 independent directors and I’m founder of the SoftBank and in oftentimes, I’m seen, perceived as one man, just one person there at the top to lead the business. But the reality is we have a lot of discussions and heated arguments every day in our management team. But we have shareholders and we have creditors.

For us to run the business, we are listed company. So we make sure that our governance is placed in place and I will stay vigilant and I will stay serious about how we run the business from governance perspective. Thank you.

Operator

We are very sorry, but due to the time constraint we would like to end the session after taking questions from two more people. Thank you very much. And next question please.

Unidentified Analyst

My name is Yamada [ph] from Toyokasei. Can you hear me okay? So you mentioned about IRR for Vision Fund, and you said that some of them are so, so, the 40s are so, so and 20S go bankrupt, 20s go well?

Masayoshi Son

So I will say 15, 15 is going to go grow well, 15 may go bankrupt, meaning IRR I will say a very disastrous in return? Remaining 60 companies we have fixed distribution of 7%. So for those 60 companies I believe that we will be on the edge that we’re able to pay out this 7% of fixed distribution. So it’s not perfect, but we have principal and also like to need to distribute 7% of coupon, so that the cost in principal – so after invest we need to exist.

But as a result of exit for those 60 companies may not give us a very good profit, 15 big loss of money, but the remaining 15 can even cover or exceed the return providers. So in overall about 20% IRR may be able to provided from those unicorns with wings to be able to fly over the value of coronavirus. So 15 is going to be account for, 20% of IRR in total investment of Vision Fund. That’s the kind of performance we are expecting. And myself, I’m believing in such a future and we will do our best to make that happen. But nobody can tell until we just finish. So – and nobody can tell until we finish – we do that.

So I therefore – for those who look at the pessimistic way, then the value of the investment by Vision Fund can be ¥3 trillion, out of the sum of the parts graph that we’ve been calculating and that can be a zero if you are pessimistic, you would say zero value for Vision Fund.

For those principals that we invested in for Vision Fund there is no loan, there’s no borrowings, so that as a capital we invested in of ¥3 trillion and we – if you are pessimistic, you value SoftBank Vision Fund at zero then there will be no further negative from there.

But even still we have Alibaba, which is public securities. We monetize some this time or T-Mobile shares. We have Softbank Corp’s shares. Some of those four assets that actually exceed our market cap itself. So value wise the sum of the parts has exceeding our market cap itself.

So if you want to be pessimistic, how much I passionately talk about our Vision Fund properly, simply put, you should just zero, you should see a zero value for a Vision Fund.

Sometimes people may say SoftBank Group is so confusing you cannot really understand at all. Vision Fund, those disclosed information because it’s a group of the private companies investees, so that it’s really difficult to see the information that makes SoftBank Group so confusing.

And if you are looking at the P&L balance sheet, you can not tell at all, it’s too complicated. You’d never be able to understand SoftBank Group, some of them has been criticizing us as that, but for those people I want you to be a little bit calm down and actually it’s not that complicated. As a matter of fact, we are very simple for Vision Fund. If you want to be pessimistic, why don’t you count it zero for Vision Fund for now. Remember this is public security, so you can tell the value and also high liquidity, so that you can see somebody out of it.

Softbank Corp domestic telecom business its growing steadily and also this is again the public securities, so that you can see the share price on the market. T-Mobile after a merger – up until the merger with Sprint, actually Sprint has a big borrowings since so on, so that you may be seeing some uncertainties for the future of Sprint.

However, after the completion of merger between T-Mobile and Sprint and now we have about 24% of those combined company and the share price changes every day basis. So the only uncertainty is the value of Arm, because this is a private securities and relatively large portion, and at the same time EBITDA actually decreasing since the acquisition itself.

But still I myself believe in the future of the technology in Arm and they are growing, so that the value – some of them – some of you may think that in different way. So you may pick whatever you like for numbers. But with this market – high market share company, for Arm, I believe it’s no need to split zero for Arm value. Actually maybe you can see the full amount of acquisition cost or you may want a decreasing half. That’s up to you.

But for Vision Fund you may have lots of questions, you may have lots of scepticism and because of the value of Corona how many companies can survive, that’s another question. How deeply we discussed, but we’ll never be able to tell the future. We cannot be that much ascertain.

So I believe for the calculations why don’t you just split it in zero for the account for the Vision Fund for those who are pessimistic because Vision Fund value there is no loan, only the 7% of coupons you don’t have to pay these loan. This is not the loan. So that for Vision Fund no debt on them, so that our shareholders value which is about ¥3 trillion that we invest in SoftBank Vision Fund, if you counted zero then there is no further negative from there. That’s the kind of the view that you may be able to use.

Me, myself, actually, that it’s still growing. It has a good value inside of that SoftBank Vision Fund. But that’s my subjective view. For you don’t you choose your own. And if you are pessimistic why don’t you count it zero. Then there is no further negative from there. That’s how I would suggest.

Masayoshi Son

So we are very sorry, but we need to end question-and-answer session. Due to the time constraint and like earlier, this COVID outbreak is something that we should overestimate. That’s why we decided our monetization plan. And we also announced a stock buyback and for future investment we will take a cautious steps and when it comes to managing the investment we have made, we will again take cautious approach.

As far as I am concerned, however, I’m not that pessimistic. Compared to the risks that I suffered from in the past, this time it is not that bad or again in the last earnings call I’ve mentioned that tide was shifted and it may have sounded very optimistic and this time the tide has shifted again and things get probably worsen. But we will keep working hard to survive. Thank you very much for your time and attention today. Thank you.

Operator

Thank you very much. This concludes the SoftBank Group Corporation earnings results announcement for the fiscal year ended March 31st 2020. The video footage of this meeting will be distributed on demand on our website. Thank you very much once again for joining SoftBank Group Corporation earnings results announcement for the fiscal year ended March 31st 2020. Thank you.


Originally published on Seeking Alpha

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