SoftBank profits beat forecast by wide margin as tech investments pay off

Japan’s SoftBank Group smashed through analyst expectations and reported a quarterly profit for the first time in more than a year, providing a badly needed boost for the volatile tech conglomerate and its founder Masayoshi Son.

SoftBank said on Thursday it made a net profit of ¥950bn ($6.4bn) in its third quarter to the end of December, well ahead of analyst consensus forecasts of ¥373bn from Bloomberg and ¥196.5bn from data provider LSEG. A year ago, it recorded a ¥783bn loss.

SoftBank last posted a profit in its fiscal second quarter of 2022, after selling a stake in Chinese ecommerce group Alibaba.

The group’s tech-heavy Vision funds made an overall investment gain of ¥600.7bn in the third quarter, helped by gains from companies such as TikTok owner ByteDance, food delivery app DoorDash and a “recovery in public assets”. In the same quarter last year, the Vision funds recorded a ¥730bn loss.

However, despite what SoftBank chief financial officer Yoshimitsu Goto saw as “a steady improvement” in performance in the Vision funds, they are still running at a cumulative loss of just under ¥3tn, or close to $20bn.

“We are . . . so very close to being above the water now,” said Goto, referring to the Vision funds’ performance.

Strong results on Wednesday from UK chip designer Arm, which is 90 per cent owned by the Japanese group, had already pushed Softbank’s shares up 11 per cent on Thursday, for a year-to-date gain of more than 20 per cent.

In its second earnings report since going public in September, Arm said it was seeing higher royalty and licensing revenues amid strong artificial intelligence demand. That endorsed Son’s vision for SoftBank, which has focused on AI deals.

The SoftBank chief executive has been exploring a range of opportunities, including a potential investment in OpenAI and advanced discussions to fund the “iPhone of artificial intelligence”.

Last June, Son told shareholders the company was going on the “counteroffensive” after years of asset sales and losses at its Vision funds, including on start-ups such as WeWork, the once high-flying desk-renting start-up that declared bankruptcy last year.

On Thursday, Goto said that Son is “exploring AI strategy . . . but anything that he likes to do always leads to Arm . . . chips or Arm technology”.

Goto added that the company had gone through “a dramatic shift from being an Alibaba-centric company to an AI-centric company” in which Arm made up 32 per cent of assets, with the Vision funds making up another 38 per cent as of the end of December.

Arm’s surging stock market value, as well as a December windfall of $7.6bn worth of new shares in T-Mobile — awarded as part of a merger deal with Sprint in 2020 — improved the results and have burnished the group’s image with investors.

“It was a solid quarter,” said Kirk Boodry at Astris Advisory. “Arm drove the share price today, but the quarterly results offer a reminder that other parts of the business can contribute, as both T-Mobile and Vision Fund helped SoftBank to its first profit in five quarters. We were encouraged by the VF results, particularly as both funds reported gains on the valuation of private portfolio companies.”

However, the discount between the stock market’s valuation of SoftBank Group and the rising value of its listed assets still stood at close to 50 per cent in the third quarter, said Goto.

He added that even with Thursday’s bump in Arm’s share price, the discount was still “40 something per cent” and “a very serious issue we will have to look at”.

Boodry said in a note to clients that “markets have been hesitant to allocate full value to short-term changes” in net asset value, while others said the discount reflected a diminishing faith that Son was picking the right strategy in his investments.

“The market doesn’t like his shift into early-stage investments given the probability of success is lower than late-stage investments,” said David Gibson, an analyst at MST Financial, who added that the discount also represented a judgment on how soon the IPO market might revive.

“The market is not convinced capital markets are open yet and hence Son cannot realise capital values,” said Gibson.