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Sony (SONY) Q1 2022 Earnings Call Transcript

Motley Fool - Mon Aug 1, 2:39PM CDT
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Q1 2022 Earnings Call
Jul 29, 2022, 3:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Unknown speaker

Now, it's time to start Sony Group Incorporated consolidated announcement. My name is Okada from PR, and I'll be the facilitator for this meeting. I'd like to first ask Mr. Totoki, executive deputy president and chief financial officer, senior vice president, who will be giving the presentation about our projection for the rest of the year and the results of first quarter of 2022.

We are planning to finish this in about -- and with that Totoki-san, we will --

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Thank you very much. I would now -- I will start with discussing business environment around our company. The forecast announced in May was based on growth outlook of the global economy as of January, as well as major risks at the time of forecasting, such as the direct impact from the situation in Ukraine and the impact of COVID-19 in China. Business demand had changed significantly since then, and there are concerns about more slowdown of global economy, primarily due to rapid inflation, as well as responding monetary policy by different countries.

We are working to assess the impacts from those environmental changes and will take prompt actions to address them as a top priority in managing our business. And a forecast we disclosed today incorporates those impacts of reasonable degree based on current circumstances. ET&S and I&SS are highly sensitive to changes in macro environment, but we are also paying close attention to all other segments, including G&NS, music, picture and financial services. And we are taking steps to mitigate risks in managing our business.

Now, I will explain the following topics. FY '22 Q1 consolidated sales increased 2% year on year to 2 trillion 311.5 billion yen and consolidated operating income increased 26.9 billion yen to 307 billion yen, both of which were a record-high for the first quarter. Income before tax increased 8.2 billion yen year on year to 291.4 billion yen. And net income attributable to Sony Group Corporation shareholders increased 6.4 billion yen to 218.2 billion yen.

Consolidated operating cash flow, excluding the financial services, saw an outflow of 167.4 billion yen, primarily driven by increasing working capital and the impact from currency adjustment due to a weaker Japanese yen. This slide shows result by segment of FY '22 Q1. Now, I'll explain FY '22 consolidated result forecast. Consolidates sales are expected to be 11 trillion 500 billion yen billion, 100 billion yen lower than the previous forecast.

And operating income is expected to be 1 trillion 110 billion yen, 50 billion yen lower than the forecast. Q1 operating profit was higher than the forecast. But in order to cover uncertainties in business environment from a second quarter and onward, we decided to maintain full year operating income forecast as announced in May for the five segment, except G&NS, where we have revised our view for general gaming market. Consolidated operating cash flow, excluding financial service, is expected at 820 billion yen, 230 billion yen lower than the previous forecast to reflect actual results in Q1.

The assumed foreign currency rates have been updated to approximately 130 yen to the U.S. dollars and approximately 138 yen to euro. This slide shows our forecast by segment for FY '22. I'll now explain the situation in each of our business segments.

First one is G&NS segment. FY '22 Q1 sales decreased 2% year on year to 604.1 billion yen primarily due to a decrease in software sales, including add-on content partially offset by favorable impact from foreign exchange rates. Operating income decreased significantly by 30.5 billion yen year on year to 52.8 billion yen, primarily driven by decrease in software sales and increase in gaming software development costs. Despite an upside of bigger sales due to currency, FY '22 sales are expected to decrease by 40 billion yen from previous forecast to 3 trillion 630 billion yen, primarily due to revised forecasts of software sales for the year reflecting the result of Q1.

Because of the factors such as decreasing software sales and negative impact of foreign exchange rates. Together with the earlier-than-expected closure of Bungie acquisition resulted in 13 billion additional yen for transaction for the year, FY '22 operating income is expected to decrease by 50 billion from our previous forecast of 255 billion yen. PlayStation users total game play time declined 15% year on year in Quarter 1. Gameplay time in June improved 3% compared with May and was down only 10% versus June 2021.

But this is a much lower engagement level than we anticipated in our previous forecast. We believe the main reason for this is that the growth of the global game market has recently decelerated as opportunities have increased, have opportunities have increased for users to get out of home as COVID 19 infections have subsided in key markets. With this in mind, we intend to take action to increase user engagement in the second half of the fiscal year, during which major titles, including first-party software are scheduled to be released, primarily by increasing the supply of PlayStation 5 hardware and promoting the new PlayStation Plus services. For now, we have made no change to our 18 million unit sales forecast for PS5 hardware in FY '22.

But since we are seeing a recovery from the impact of the lockdown in Shanghai and a significant improvement in the supply of components, we are working to bring-forward more supply into the year-end holiday selling season. Sony Interactive Entertainment completed its acquisition of Bungie on July 15th of this year. And collaboration between the two companies has begun. In addition, the acquisition of Haven Entertainment Studios announced in March was completed on June 27.

In addition to enhancing the content development capability of our existing studios, we are working to strengthen our first-party software by creating new IP and accelerating the roll-out of live game services and multi-platform titles through synergies with the studios we have acquired. Next is the Music segment. Q1 sales increased a significant 21% year on year to 308.1 billion yen, primarily due to the impact of foreign exchange rates and the streaming revenue increase. Operating income increased 5.6 billion yen year on year to 61 billion yen, primarily due to the positive impact of foreign exchange rates.

The contribution to operating income from Visual Media and Platform accounted for slightly more than 10% of the operating income of the segment for the quarter. FY '22 sales are expected to increase 40 billion yen from our previous forecast to 1 trillion 280 billion yen, mainly due to the foreign exchange rates impact. The operating income forecast didn't change from our previous forecast. Our Q1 streaming revenue continue to grow with revenue recorded music growing 27% and music publishing growing 42% year on year, 8% and 20% respectively on the U.S.

dollar basis. We are monitoring the impact of the global economic slowdown on streaming services, but we have not changed our view that the global music market, including both recorded music and music publishing, will grow steadily over the next several years at a growth rate in the high single digit. In recorded music, we are producing many hits such as Harry Styles' album Harry's House, which has become a huge hit worldwide. As a result, we averaged 47 songs in Spotify's weekly global top 100 songs for the quarter, a significant increase from the average 36 songs we recorded last fiscal year.

In addition to strengthening our ability to continue to generate hits, we are working to expand and diversify our profitability foundation by enhancing artist services through The Orchard and AWAL, expanding our business in emerging markets and collaborating with business partners in new areas such as social and gaming. Next is the pictures segment. FY '22 Q1 sales increased a significant 67% year on year to 341.4 billion yen, primarily due to the foreign exchange rate impact and the increase in the delivery in television production and the revenue increase from films released in the previous fiscal year in motion pictures. Operating income increased a significant 25.3 billion yen year on year to 50.7 billion yen due to increase in global sales of segment.

FY '22 sales expected to increase 50 billion yen compared to our previous forecast to 1 trillion 380 billion yen, primarily due to foreign exchange rate. The forecast for operating income is unchanged from our previous forecast. Theatrical revenue in the U.S. appears to be due to be recovering with box office revenue in some weeks exceeding 2019 levels, thanks not only to the large-scale films aimed at young audiences, but also hits in the family genre where it was believed COVID-19 would make it difficult to attract audience.

We are also looking forward to the movie Bullet Train, starring Brad Pitt to be released in August in the U.S. Demand for premium content continues to be strong due to increased competition among the video distribution services. As an independent major studio that provides product to a variety of partners, we see this as an opportunity. In addition, in Media Networks, the service integration between Crunchyroll and anime distribution business, Funimation, is proceeding smoothly, and the number of paying subscribers and the businesses' financial performance are growing at a pace that exceeds our expectations.

Next is the Entertainment Technology and Services segment. FY '22 Q1 sales decreased 4% year on year to 552.3 billion yen, mainly due to a decrease in television unit sales resulting from the impact of lockdown in Shanghai and worsening market conditions, partially offset by the favorable forex impact. Operating income decreased 18.2 billion yen year on year to 53.6 billion yen, mainly due to the impact of the decrease in television sales. FY '22 sales are expected to increase 50 billion yen from our previous forecasts to 2 trillion 450 billion yen, mainly due to the forex impact, partially offset by our incorporating the risk of market deceleration into our forecast for the second half of the fiscal year.

The operating income forecast is unchanged from our previous forecast due to a faster-than-expected improvement in the utilization of our manufacturing facility following the Shanghai lockdown and a faster-than-expected improvement in supply constraints for components centered on semiconductors, mainly for digital cameras. Q1 operating income significantly exceeded our previous forecast. On the other hand, new risks, such as global economic slowdown, especially in Europe, and the adverse effects of the strong dollar on our financial results, have recently become apparent. We have planned to apply the upside to profit we enjoyed in Q1 to these risks and implement additional measures, such as improvements in product mix and cost controls and to anticipation of even more risks.

The inventory level at the end of June is a little high, even when we exclude the increase in valuation of the inventory due to the yen depreciation and the strategic stockpile of parts that we are concerned about procuring. And we plan to adjust that level in preparation for the expected softening of demand in the product market going forward. Moreover, we are steadily promoting the transfer of production across multiple facilities, decentralizing the production of key components, and digitalizing and further optimizing our operations. We will continue to strive to maintain and improve our profitability by responding swiftly to market changes.

Next is the Imaging and Sensing Solutions segment. Sales for the quarter increased 9% year on year to 237.8 billion yen, mainly due to the forex impact. Operating income decreased 8.8 billion yen year on year to 21.7 billion yen, mainly due to an increase in R&D and depreciation expenses despite the positive forex impact. FY '22 sales are expected to decrease at 30 billion yen from the previous forecast to 1 trillion 440 billion.

The operating income forecast is unchanged from our previous forecast. Our forecast this time assumes that we cannot expect a recovery in the Chinese smartphone market this fiscal year after considering the trends seen in the Chinese market during Q1. And we have incorporated deceleration of the middle- and low-end finished product market, as well as lower sales of the mobile image sensors to reflect this deceleration. On the other hand, in response to growing needs for video recording, the introduction by smartphone manufacturers of our larger die-size, high-resolution image sensors in their high-end line-up is steadily progressing.

We believe that this trend toward higher-resolution quality and improved functionality of cameras has become even more apparent. From the second quarter onward, we anticipate that the larger die-sized sensor adoption by customers will accelerate further and drive sales growth for mobile image sensors. In addition, due to an easing supply and demand equilibrium for logic semiconductors, it has become possible to gradually increase the production of high-value-added image sensors, the production of which was previously restricted due to supply constraints. Therefore, we expect that the product mix will gradually improve from the latter half of this fiscal year.

Moreover, when it comes to automotive image sensors and our AITRIOS and other solutions businesses that are expected to grow significantly over the mid- to long-term, we will continue to proactively invest in the development of technology and the expansion of the businesses themselves. Last is the Financial Services segment. FY22 Q1 financial services revenue decreased a significant 28% to 297.8 billion yen, mainly due to a decrease in net gains on investments in the separate accounts at Sony Life Insurance Ltd. Operating income increased a significant 57.3 billion yen year-on-year to 81.3 billion yen primarily due to the recording of a gain on the sale of real estate completed in April and the absence of a loss recorded in the same quarter of the previous fiscal year from an unauthorized withdrawal of funds, both at Sony Life.

As Sony Life previously announced, the judicial procedures to recover the funds from the unauthorized withdrawal were completed in July. The FY '22 financial services revenue and operating income forecast are unchanged from our previous forecast. With the large-scale and rapid changes in the business environment this fiscal year, the risks and issues that need to be addressed are wide-ranging and diverse. In each business, we aim to thoroughly grasp the situation accurately and respond promptly to changes in the business environment, and we plan to continue to operate the business with the highest level of caution.

At the same time, we will steadily continue our efforts to achieve long-term growth. This concludes my remarks.

Unknown speaker

So that was the presentation from Mr. Totoki, who will be followed by this. So, we will have a media Q&A from 16:20 and Q&A for investor analysts from 16:45. We are scheduled to be covering about 20 minutes for questions.

For those of you who have registered question ahead of time, please make a phone call to that designated phone number, please. Now, there were details about the procedure and the process for the questions. Please make sure that you go through the details and follow the protocol, if you haven't pre-registered the questions before. And please observe -- and you will be able to observe question and answers that we'll be tagging on this internet streaming.

Thank you. [Commercial break] So, we'll be starting the Q&A session for media people. So, please wait a few more seconds. Thank you.

Thank you for waiting. And we now would like to start the Q&A session with the media representatives. And to respond to questions, we have Mr. Hiroki Totoki, executive deputy, president, and CFO; and also Ms.

Naomi Matsuoka, senior vice president in charge of corporate planning and controls, support for financial business and common area; and also Mr. Hayakawa, senior VP in charge of finance and IR. And we will start with the Q&A session. Please limit your questions up to two questions only.

And if you have a question, please operator your phone with the asterisk and the one, button one. We have Ms. [Inaudible] of Nikkei BP.

This is [Inaudible] from Nikkei newspaper. Can you hear me?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Yes, we hear you.

Unknown speaker

Thank you. I would like to understand the gaming business situation. If we look at the materials the software sales was at about 25% decrease. And this is also the reason why you have reduced the forecast for the year.

And maybe the reopening of the markets is the reason. And the growth of the gaming world, maybe as the -- for the industry as a whole, it's slowing down. So, in the midterm, do you think it has already peaked out? So, that is my first question. My second question.

This is more about the future. When it comes to gaming and semiconductors. Recently, mainly in the Western markets, there's inflation. And there's also others' concerns about recessions.

So, what is related to your company is the consumer's lifestyle. When it comes to gaming PS5 and software, there might be impact to the demand. And for the semiconductors, the image sensors. Including the high-end consumers.

Maybe there's impacts in the market. So, I'd like to understand if there's any impacts that you're feeling and what is the level of the risks that you're feeling for the future? Can you explain those situations to me? Thank you very much for the question.

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

I think you asked me two questions regarding gaming networks, services with the situation and now. And also, in the Western markets mainly, there's this concern of a recession. The gaming network associated and what its impact on I&SS as well. So, I would like to answer both questions.

Regarding the gaming market, like you said, the software sales has gone down 25%. There were two factors to this. One is the reopening, apparently. And secondly, I showed you earlier, the PlayStation user's gaming time.

I talked about the trend. If you look at that, I think it's apparent. And also compared to the previous fiscal year major titles, sales has decreased. The number of titles have gone down.

So, I believe those are the two major reasons. The engagement itself. for some time, for the downwards trend in June, that stopped. And for July, we saw a slight recovery.

That's my understanding. So, we need to carefully observe the situation around this. Therefore, the changes in the trend is something that we need to. Incorporate into our future expectations.

And for the mid- to long-term growth and trends, for now, we don't have any serious concerns. And for the game and network services and I&SS impact from the economic situation point of view, for PS5 demand, the supply has not been sufficient. So, for this, the demand has not gone down. And first of all, we need to really meet the demand.

I think that is the important thing to do. And also, regarding the image sensors, especially for the smartphones and for the high-end smartphones, we would have to see what the sales situation is going to be. In China, the demand is slowing down. And I don't think, in this term, we will be able to see a recovery.

And I said that in my presentation. So, the mid- to low-end products demand slowdown is actually significant. So, for the high-end products and from a global perspective, the demand for our image sensors as of now has not gone down. And for now, the demand is quite robust.

However, obviously, this depends on the economic trends. But especially in the second half, we would have to look at the global smartphone demand very closely. That's all.

Unknown speaker

Now, I'd like to take you to the next question. [Inaudible] from Toyo Keizai.

Hello. Can you hear me?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Yes, we hear you.

Unknown speaker

OK, very good. Thank you very much. I'm [Inaudible] from Toyo Keizai. Thank you very much for your presentation.

I have two questions. First question is again about gaming. Now, in the first quarter, software sales has decreased, as I understood. And but like you said, externality was main driver.

But is there any other reasons whether from competitors or maybe internally, is there any reason that dropped down, the sales performance of software gaming -- software? The other thing is that progress you make and particularly for semiconductors in a mid-term perspective. You have there are some concerns about that. And for pictures, there are certain drivers that can influence on that, semiconductors also, do you expect something like a turnaround upsides coming in the mid-term perspective in semiconductor?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Thank you for your question. First question was on gaming. Is there any other factors that drove down slowdown of sales performance in gaming software except externality that was different. Second question was your question was about first quarter progress being made in light with full year performance, particularly on the question around semiconductor business.

As I understood first question, the factors outside of externality, it goes back to my earlier presentation. Last year, we had a big titles, big contents we launched. In this financial year, particularly in the first quarter, there's nothing similar in terms of the magnitude of the size of the long content. We are kind of -- we had not as many big titles as before.

Now, progress for I&SS. First quarter actually in the first quarter was performing better than our expectation because our sales and profit plans were focusing more growth coming from second quarter and afterward because of customers trend the product life cycles for customers. These are the inputs that we took. In that sense, the progress that we've made for this first quarter in this financial, I&SS business actually performed quite well in the first quarter.

Thank you.

Unknown speaker

Let's move to the next question. [Inaudible] from TV Tokyo.

OK. Thank you. And once again, my name is [Inaudible] of TV Tokyo. And most recently, the depreciation of yen was taking place.

All of a sudden today, yen went up. And how -- what's your view on this rapid changes up and down and also what your prospect for this exchange rate? Thank you.

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

And true, most recently exchange forex market is changing rapidly. And our response to that is since we also do have some management measures higher cost, and we'll respond. The impact of exchange rate at the start of the fiscal year for the consolidated operating income other than the financial services gaming and ET&S and I&SS is these three segments, our sensitivity, the one in down is 1 billion yen and for euro, that's 7 billion difference. As Totoki-san has pointed out, it's moving frantically up and down.

But to mitigate the risks, we want to make sure we get enough margins. And also, the impact of the forex rate is very different depending on the segment. I want to make sure that we have a robust cost structure. So, that's how we tried to respond in our operation.

That's it.

Unknown speaker

Let us move on to the next question. [Inaudible] from Nikkan Kogyo newspaper.

My name is [Inaudible] from Nikkan Kogyo newspaper. Can you hear me?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Yes, we hear you.

Unknown speaker

Thank you very much. I have one question. Regarding the operating income, you have a revised it downwards for the year. Why is that? So, game and network service is the main reason why you have done that.

Out of that, in this area, what is the biggest factor for this revision? Is it reduced sale in software titles.

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Thank you very much for the question. As you have said for the full year, the downward revision is because of the G&NS. At the beginning, we made a forecast for software sales, especially for the first quarter. We were quite confident, but we believe there was this gap in the results.

We thought that the reopening. Would be much more stronger. But based on the results for the Q2 onwards sales, we have updated the information, and we have made the best estimation for now. That's all.

Unknown speaker

We'll take it to the next question. [Inaudible] from Bloomberg, your next.

Yes. I'm [Inaudible] from Bloomberg. I hope you can hear me.

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Yes, I can hear you.

Unknown speaker

OK. Thank you. Now, two questions about gaming business. Software sales have been it was decreased as you explained about a few times.

But the hardware, the PS5 hardware shipment was not catching up with the demand. Do you think that's the reason for lower software demand? The other thing is about consumer products, whether the cameras and other products are getting hit from raw material cost increase, supply chain, and currencies. There are a lot of hit changes are coming. Do you think PS5 also needs to increase its price point? Do you think it needs to be considered?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Well, thank you very much for the questions, both of which were about game and network services with regard to your question. So, software sakes, Is the PS5 -- the hardware itself was not being supplied enough for distribution. Is that the reason? Now, hardware supply are not meeting expectation of customer, why we're not shipping enough volume to cover the demand, we acknowledge that as a fact. We want to address that to improve as soon as possible.

As I hate to repeat myself, there are two big constraints that we are imposed with. The one is the parts and components availability. The other one is supply chain. The logistical parts and components availability is high.

A lot of improvements. Sure, we are very hopeful that this is quite optimistic about that. For supply chain disruption, we actually got a quite a hit from first quarter. In the first quarter, hardware volume for sales was quite smaller than what we expected at the beginning of the year.

So, supply chain disruption is something that we hope to get or completely be addressed. In any case, we would like to take our product. A day is always better. We want to deliver as much as soon as possible.

Eight medium shipment as a target has not been changed, but we are trying to produce them as soon as possible in ready for holiday season this year. Second question was about potential price increase for PS5, PlayStation 5. At this point in time, see, there is nothing I can tell you, share you anything specific about prices. So, please take it as my answer to your question.

Thank you.

Unknown speaker

We have a limited time. So, make the next person the last person to ask a question. And if you have a question, please press asterisk and followed by one on your telephone device. Hearing none, I would like to conclude the Q&A session with the media representatives.

And the Q&A session for investors and analysts. We will start at 4:41. [Commercial break] We will be starting the Q&A session for investors and analysts. It will be a few more seconds.

Thank you very much for your patience. And I would like to start the Q&A session for investors and analysts. My name is [Inaudible]. I belong to the financial department IR group.

And on behalf of the Sony Holdings Group, we have these people responding to your questions. And how to operate your phone device and other points to be noticed. Please refer to the invitation you should have received. Now we'd like to start the Q&A session, and we ask you to limit your questions up to two questions only.

If you have a question, please press asterisk and one on your phone device. The first Mr. Ono-san of Morgan Stanley MUFG. Please.

Masahiro Ono -- Morgan Stanley -- Analyst

Yes, thank you. I'm Ono from Morgan Stanley. I have two questions. One is about games.

The other question is about I&SS. So, first question, on gaming. Now, PS5 shipment has been -- well, the component parts situation has improved as you said, but the supply has been slow more so on launch. And the third-party software has been postponed by third-party content creators.

But do you think -- you earlier talked about how, you know, you said the volume expectation was maybe too optimistic at the beginning. But do you think software has got the impact because of the supply shortage? Or what about user engagement, too? With the PS, there were a lot of excited to be, you know, users who want to play with PS5. They got, for the lack of a better word, get frustrated and maybe had the -- like shifted its behavior. So, can you talk about your perspective of how consumers are behaving based on that for those facts? The other thing is about I&SS, especially for the mobile customers.

You know, how do you see the risks and the inventory availability for that. You said, meet the low end for the Chinese market versus the inventory. You said, there is a concern for the inventory, but you are confident about high end. But I think you talked about the lot of inventories, which are commodity items.

So, can you talk about the risk associated with those -- that situation?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Well, thank you for the question. Two questions. First question is on games. Second question on the I&SS.

Now, first question, the supply of PS5 is the slower supply to demand. Is that the reason why users decided to stay away, therefore slow down the sales of software? And as a hypothesis, well, how do I see it? Well, this is a very difficult question. But for us, the supply of hardware will for sure increase user engagement for sure, because actually that's been proven from the data that we are paying attention to. So, somebody who are playing with PS5 tends to have very high engagement, which is a very positive sign by itself.

But from that perspective, PlayStation 5, it's after supply. More people use the hardware then positive impact, we expect positive impact to come quickly. So, in that sense, in the second half, the volume of PS5 are going to significantly increase. So, after the second half, you know, we have our own title.

Third-party contents are also being planned for their launches. So, after the second quarter, there's a momentum which we can build on to escalate that engagement. So, your question about inventory was about -- this question initially for image sensor, for mobile. So, we are looking at production capacity and the demand forecast.

And we are going to be acquiring strategic inventories. And the inventory is going to be having a higher availability last year. More recently, in the first quarter, the shipment has slowed down a bit. Inventory right now is trending higher than our expectation.

But our -- this is within a reasonable range. Looking at the growth projection on our forecast. How do I see it moving forward especially -- so we are expecting to see starting to expand more sales in the second quarter. So, inventory levels going to lower down.

It's going to be coming to the normal level. But for the strategic inventories, we are going to deliberately have additional excessively inventory in 2024, 2023. So, for the time being, we expect the inventory level for the -- particular for strategic inventory components to stay the same. Now, I talked about many of the components are commodity parts.

Generally speaking, I will stay with that statement. But when the demands change, I think, you know, you might be concerned that if the demand slow down, too much of the inventory may turn around as a risk. But we are going to be adjusting to capacity for FY '23. We'll be able to flexibly not be able to control that based on the reaction from the marketplace.

Thank you.

Unknown Speaker

Let us move on to the next question. [Inaudible] from BofA Securities, please.

Thank you. This is [Inaudible] from BofA Securities. I have two questions. First question regarding operating income plan.

You have made a downwards revision. The cash flow, operating cash flow plan, the downward revision is a negative 230 billion yen. So, that's my first question. Secondly.

For I&SS, in your explanation, you talked about smartphones mainly. On the other hand, when it comes to the operating income plan due to forex impact, 7 billion yen. So, for three quarters or so, it's more of 30 billion yen is the impact of forex. For the industrial equipment and security cameras image sensors, are there things that were not included in your explanation? So, those are having a significant position.

So, I would like to understand that situation. And from a housekeeping perspective, if you can give me any operating capacity factor information, that would be helpful.

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Thank you for the question. Regarding the first question, the downward revision of the operating income and also the cash flow situation, the working capital and the tax, those are the factors. But the Hayakawa will be expanding the details.

Sadahiko Hayakawa -- Senior General Manager, Finance Department

Thank you very much for the question. As it was explained and in the speech and the performance was also explained, the operating cash flow is a negative. This is also impacting the expectations. The working capital has gone down.

And due to the depreciation of the yen, from a cash flow statement perspective, there was an adjustment made due to forex. So that is significant. And also, regarding the operating income, it has gone down by 50 billion yen. And the operating cash flow is 230 billion, and the gap between the two, regarding the 230 billion yen negative, regarding the 50 billion.

This is the G&NS downwards revision of profits. And also, for the working capital increase for this I&SS and also the increase in inventory for ET&S is significant. And regarding I&SS, as Totoki explained after 2Q -- second quarter and over, the sales is going to be significant, especially in the fourth quarter. So, the account receivables will increase and inventory will also increase as well.

But for this, the operating cash flow will come back from the next fiscal year. So, that is why the operating capital is involved. For the forex calculation, this is quite significant for this fiscal year. The yen is depreciated.

So, that is quite significant. And also, as of May -- compared to May, the cash tax payment has gone up. And for pictures and television, production has also gone up. And, also, lastly, regarding the adjustments for the forex, the operating cash flow portion has gone to the negative side.

If you look at the cash flow statement, I think it's clear. But for the so-called balance sheet, for the foreign currencies is also being included in the calculation, and we see an offset for the first quarter result. You see that there's an offset. So, from a capital allocation perspective, the operating cash flow looks like a negative.

But from a balance sheet perspective, it has come back. So, I think -- for the forex adjustment. I think that could be said. Thank you.

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Thank you very much. And as for I&S, the impact of -- positive impact of forex is offset by the profit in the industrial applications and the security cameras. And as I said, that the macroeconomic slowdown risk, which I mentioned earlier is concern that the large customers of ours in this area is in China. And so, we anticipate the risk of a possible slowdown for industrial usage.

But this maybe a somewhat of a conservative response we may have. And in terms of the sensors capacity and the actual input and in the supplement material, there is some information we hope you will refer to. At the end of this quarter, 142 -- 114K slices per month. And, also, in terms of input, 124K slices per month.

Unknown Speaker

OK. Let us move to [Inaudible] of J.P. Morgan Securities.

Yes. My name is Ida from J.P. Morgan. I thank you very much.

I have two questions. General questions, both of which. And our first question is about operation, the cost approach about that operation. So, because the demand has quite shifted, right? That was like -- in your announcement, there were a lot of evidences of demand have shifted.

And Totoki-san you mentioned about very quick agile response. But after first quarter being closed, is there anything that you want to change versus not change in terms of operation? Can you do highlighting changes and not changing operations? And speaking about changing operation, in the first quarter, you saw quite -- the cash flows got worse than before. So TV, the consumer products like -- wants to manage the inventory level. And the sensors there is a downward adjustment.

And the production capacity, the plan was if they're not being made, the inventory level is going to go up at the end of the period. So again, based on those things, what are the things that you would change versus not change in terms of your operation? Second question is about your approach, about the full year plans. You have, yes, I understand made some adjustments. But having said that, there are some uncertainties right now.

What are certainties like a potential risk? For example, holiday season gain or the high-end products revenue or sales sort of projections are not changing. Do you see any risks for those businesses at all? If and the unknown risk become materialized, do you have any buffer to be able to cushion that on surprises? Is that also part of the numbers that's included in a full year?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Well, thank you for your question. First question was a change is a shift on demand and a quite substantial one. And your question was what are we going to change and what are we not going to change? Second question was about potential risk for rest of the year. So, I will take these two questions.

So, first, what are we changing or not changing? In that respect, what we are not changing is building block for mid to long-term strategy growth. The investment, therefore, the amount of investment may adjust. But what we are committed to do will not change. We will not change our stance and comments for our investment for the future.

What we are changing for this financial year is mostly on how we are using expenses and control of inventories, I would say. Speaking first on expenses, for example, entertainment in overseas, company overseas businesses in entertainment industries are now becoming very conservative for recruitment. And so, when there are headcounts who are open positions, we try the -- not the traditional approach, but they will have taking more traditional conservative approach than traditions. And the marketing and sales expenses are also looked at, not spending them.

So, operational teams are making sure that they are trying to make improvement with risks in mind. Now, for inventory control, so on all segments, a huge attention is being given to inventories. For gaming network, first of all, inventory is not a problem because supply is not being able to catch up with demand. But for.

ET&S and for I&SS, all the segment are -- well, the inventory went up. There are three reasons why the inventory went up. One is a currency change. Weaker Japanese yen, therefore, it's on the surface level look like a bigger inventories because of the value change in currency.

And we had a quite a long month of supply shortages. We have to make sure that we have access to this strategy material. And also in terms of inventory control, the bigger influence actually comes from parts and components. So, normalizing parts and components is something that we are focusing on right now.

Inventory for I&SS goes back to my comment actually. In FY '23, we have plans to capacity expansion. But the question is, what's timing in which we are going to turning that switch on? That would be the one control mechanism that we will use. And this next one is related to the second question.

Is there any risk about high-end smartphones? So high-end smartphone, if there is going to be risk and become reality for the high-end smartphone? And so, we have these scenarios. If our scenario, the reality becomes slower than that scenario. If that's happens, the timing of the capacity expansions will be adjusted or postponed slightly later. That would be the way to control it.

The other one risk about holiday season is our gaming business. While the economy being slowed down, therefore, is having an impact on the gaming business sales performance. I don't think that will be our risk. Not from the economic slowdown and [Inaudible] is probably the bigger reason.

So, after second quarter, when the big contest title comes out, we'll be able to test and see how the -- it's going to perform. And that will be a good indicator for us to assess the holiday season. Thank you.

Unknown speaker

Let's move on to the next question from Mizuho Securities, Nakane-san, please.

Yasuo Nakane -- Mizuho Securities -- Analyst

Yes. Thank you. I have two questions. First of all, for music and pictures.

The second is two areas. The first quarter progress performance was better than expected. From pictures and music, I would like to understand the situation. And up to -- the second quarter compared to the budget, is it higher or lower? What is the range? And for now, it looks healthy and there are some continuing factors.

So, I'd like to understand the situation. Regarding Bungie, you said that the acquisition has been completed and the cost will change from 44 billion to 57 billion. I would like to understand the situation we're going to have from next year onwards. And I'd like to understand the business situation and the timing of the consolidation.

Can you give us an update, please?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Thank you very much for the question regarding the situation regarding music and pictures. Regarding music, in the first quarter, it was -- it did very well. And Spiderman and other titles made a major contribution. For the entertainment area, the profit contribution was very high from that perspective.

And dramas have been produced for TV. There were many deliveries made. So, this quarter it performed very well. And are we seeing a decrease -- from this point onwards, we're going to Spiderman first major titles, the Spider-Verse has been postponed to the next term.

We have already made that decision. So, that would have a negative impact. So, that's why it's flat. And regarding music, it's in line.

The streaming market is doing very well. It's growing. And our share and margin are both also performing very well. And regarding games, so, we'll have to look at the situation next year onwards.

But regarding the costs for the acquisition, the expense for the FY '23 compared to this year, it will be an increase about 20% -- by 20%. And also, Bungie business having an impact on the whole both in terms of revenue and profit, I think it will be minimal. Thank you.

Unknown speaker

We're running out of time. So, we will limit only one question from per person. And so, now, [Inaudible] from [Inaudible].

Well, thank you very much. So, since I can only ask one question, this is related with the previous question. But there's some -- this is a general question. Now, compared with year on year on the last budget, 1Q -- Q1 and a full year, there are certain things that you have incorporated versus not incorporated.

There are a lot of ins and outs. I'd like to kind of clearly understand them. First of all, Q1, so Shanghai lockdown, about 30 billion yen, right? ET&S is actually doing quite well. We got pictures ahead of the plan.

And games, no, I&SS also have slight changes. So, a lot of changes were upsides. And the financial services also looks like that. So -- but the actual currency, so positive negative.

Also there are a lot of ins and outs, positive or negative to currency. Can you just summarize -- like so how much currency actual, you know, impact compared to last year. For the full year, so this is a game -- gaming -- gaming is the only one who you have made the adjustment. But I&SS also have performed slower a bit.

But there are -- if there are any other positives in the other businesses, could you mind making some comments about them?

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

OK. So, year on year versus last year, there were a lot of things that, you know, we have incorporated. And so, currency versus last year, let me pick that up as a first discussion point. You know, at the beginning of the year, this financial year in terms of currency, when we started this planning process, the currency forex impacts were -- we actually incorporate certain changes that could happen.

So, in Q1, about 30 billion yen in positive -- I'm talking about impact for the bottom line. And that's in the overall -- at high level, that's about the impact that we gained from currency change. The other thing -- so there are changes following the upside and downside. It's kind of complicated to describe.

The reason why I say that is what we announced at the beginning of financial year, back then, lockdown in Shanghai was very clearly there. We could see that coming. And geopolitical impact, we have actually incorporated the geopolitical developments. But global economic slowdown, including China, is something that we didn't really anticipate in corporate.

And that's the environment change that we only saw afterward. And we have updated them based on those new developments. And what's being incorporated or what's not being incorporated, you know, it's quite messy, you know, you feel like. Well, partly, because there was a positive from currency.

But how much risks are we going to be incorporating? I guess that's what you're asking. But major [Inaudible] are very different from business to business. And the demand, how demand is going to go up or down. And economic slowdown, the depth of and the length of economic slowdown, right, that is the very important factor in determining that, which is very difficult to predict.

What we can do is get as clear as possible in terms of intelligence that we can gather right now. So, positive impacts on currency are not completely being reflected for risks. But as a matter of fact, in first quarter -- this is just first quarter, we have three more quarters to go. So, in a sense, that's -- yeah, that's the only thing that I can say at least at high level.

Thank you.

Unknown speaker

Next person and the last question is [Inaudible] with Credit Suisse.

And regarding gaming and that has been the forex, and also the external factors. But is there a specific positive factor, for example, R&D and platform expansion. And also, I understand there's a launch for [Inaudible]. And if you could update us with those positive impact developments.

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

And from second quarter onward, positive factors, you ask, PS5 hardware. PlayStation 5 hardware production is now experiencing much less restrictions from component supplies. That, I believe, isn't one big factor. And we want to produce as many units as possible.

In terms of production capacity, we have enough. And because Shanghai lockdown is already being resolved. And as I mentioned earlier, that the logistics lead time has not recovered to the level pre-COVID-19, so it will take a little bit longer. So, even considering that, we want to produce more units as soon as possible.

And in terms a third-party and first-party from second quarter onward, as I mentioned earlier, major hit titles are expected. And that is going to be a positive factor, obviously. In terms of platform mix extension, new PS5 has on the positive side that, as of the end of June, we were able to roll out as was planned. And so, customers are moving to the new platform.

But how much of this is going to impact. Too early to say because we just rolled it out in end of June. We need to collect more data to say anything conclusive. But I don't think -- I think we had a very good start.

That's it.

Unknown speaker

OK, now we have reached the scheduled ending time for Sony Group earnings announcement for Q1 FY '22. And thank you very much for your participation. Thank you.

Duration: 0 minutes

Call participants:

Unknown speaker

Hiroki Totoki -- Executive Deputy President and Chief Financial Officer

Masahiro Ono -- Morgan Stanley -- Analyst

Unknown Speaker

Sadahiko Hayakawa -- Senior General Manager, Finance Department

Yasuo Nakane -- Mizuho Securities -- Analyst

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