SoftBank reported a massive loss of $6.2 billion in Q3, with WeWork causing a $1.5 billion loss in the first half of the fiscal year. Despite this, SoftBank remains committed to investing in AI. | Earnings Report

On Thursday, November 9th, SoftBank Group, which has been pushed into the public eye again due to the bankruptcy filing of the former unicorn WeWork, released its second quarter financial report for the fiscal year, which is the performance for the third quarter of the 2023 calendar year.

In the second quarter, SoftBank Group's revenue increased by 3.7% year-on-year to 1.67 trillion yen (approximately 11 billion US dollars), which is basically in line with market expectations.

However, the net loss for the quarter was 931.1 billion yen (6.17 billion US dollars), marking the fourth consecutive quarter of losses. In the same period last year, SoftBank Group achieved a net profit of 3 trillion yen by selling Alibaba shares. The market originally expected a profit of nearly 280.3 billion yen for the quarter ending in September.

SoftBank stated that the loss of 183 billion yen in profit indicators for the quarter was mainly due to the depreciation of the yen, primarily caused by liabilities denominated in US dollars.

For the first half of the fiscal year from April to September of this year, SoftBank Group recorded a total loss of 1.41 trillion yen (approximately 9.3 billion US dollars), nearly 11 times the loss of 129.1 billion yen in the same period last year. Total revenue was 3.23 trillion yen, a year-on-year increase of 1.4%, compared to a nearly 7% increase last year.

In terms of investment business, which is the most concerning to the market, SoftBank Vision Fund, which just turned a profit in the second quarter of the 2023 calendar year, reported a net loss of 258.9 billion yen (approximately 1.7 billion US dollars) for the third quarter. However, this loss narrowed significantly by 75% compared to the net loss of 1.02 trillion yen (approximately 6.75 billion US dollars) in the same period last year. In the previous quarter, SoftBank Vision Fund achieved a profit of 61 billion yen due to the rise in technology stock prices, marking the first time in six quarters to achieve investment gains.

This is mainly due to the fact that SoftBank's first Vision Fund (SVF1), established in 2017, achieved an investment gain of 21.3 billion yen in the third quarter of the calendar year, marking the second consecutive quarter of positive returns. This was due to the successful US IPO listing of Arm, a chip design company owned by SoftBank, in September.

As a result, SVF1's investment gains for the first half of the fiscal year amounted to 3.4 billion US dollars. However, as of the end of the third quarter, the fair value of its portfolio of invested companies decreased by 3.7% compared to the end of the previous quarter, with the fair value of listed companies in the portfolio falling by 2.6%. According to a summary by The Paper, this is due to the decline in the stock prices of companies such as SenseTime and Vir Biotechnology, partially offset by the rise in stock prices of companies such as Didi. And SoftBank's Vision Fund mainly includes: Vision Fund 1 (SVF1), which attracted significant investments from the Saudi and Abu Dhabi wealth funds, Vision Fund 2 (SVF2), which is fully funded by SoftBank, and LatAm Funds, among others.

This has resulted in positive earnings for Vision Fund 1 in the second quarter, offsetting losses from smaller investment tools totaling over $2 billion.

Since its establishment, SVF1 has achieved a total profit of $14.8 billion, with a total investment of $89.6 billion and cumulative returns of $104 billion. However, Vision Fund 2 has accumulated losses of $2.07 billion since its establishment, with a total investment of $52.2 billion and cumulative returns of $31.5 billion. In the first half of the fiscal year, it incurred investment losses of $2.4 billion, mainly due to the write-down of WeWork's note value to zero.

On Monday, WeWork filed for bankruptcy protection for its North American business in the United States. SoftBank stated that it incurred a total loss of 234.4 billion yen (approximately $1.55 billion) in the first half of the fiscal year due to investments and financial support for WeWork. Some media outlets reported that SoftBank's cumulative losses on WeWork totaled $14.3 billion.

It was also reported this week that just a week before WeWork filed for bankruptcy on October 31, SoftBank paid nearly $1.5 billion to the lenders led by Goldman Sachs. Including this payment, SoftBank has invested over $16 billion in WeWork since its initial investment in 2017.

SoftBank's CFO stated that they are reentering the investment mode and that "AI will be the main strategy." They also mentioned that the completion of the write-down of WeWork will have little impact.

Founded in 2010, WeWork reached its peak valuation of $47 billion in the private market. However, its fortunes declined after its failed IPO in 2019 and the ousting of co-founder Adam Neumann. The COVID-19 pandemic further worsened its situation in the commercial real estate leasing industry. From its listing through a SPAC in 2021 until its trading halt this week, its market value was less than $50 million.

In its bankruptcy filing, WeWork stated that it "cannot overcome the legacy real estate costs and industry headwinds" and plans to terminate 69 office lease agreements, most of which are located in one of the most expensive locations in the United States, New York City. However, some analysts believe that despite the bankruptcy erasing much of the investment value, SoftBank still has the opportunity to partially offset the losses by converting some of the existing debt into equity in the restructured company. Public data shows that since its establishment, the Vision Fund has invested over $140 billion in hundreds of startups worldwide. However, due to the majority of these companies not yet being profitable and the "tech winter" of the past two years, the fund has incurred investment losses of up to ¥6.9 trillion ($53 billion). In the previous fiscal year ending in April of this year, the fund recorded a record-breaking annual loss of $32 billion.

At the annual shareholders' meeting in June of this year, SoftBank Group founder and billionaire Masayoshi Son admitted that his decision to make a significant investment in WeWork was a "stain" in his life. Since the third quarter of last year, SoftBank's investment strategy has shifted to a "cautious defensive mode," and Son no longer attends earnings conference calls. Today, SoftBank's CFO, Yoshimitsu Goto, who took over as the host of the meetings, stated:

"As a company, SoftBank needs to accept the fact that the investment in WeWork was a failure and learn from it for future investment activities. WeWork is unlikely to have any further negative impact on SoftBank's balance sheet as it has already been written down."

He also mentioned that the value of Arm has tripled since SoftBank's initial investment, from ¥33 trillion to ¥85 trillion. SoftBank's investment portfolio also includes assets worth over $29 billion that can be liquidated soon, including ByteDance and Japan's largest QR code payment application, PayPay. Currently, SoftBank has sufficient cash on hand, and "we have entered an investment mode."

In the second quarter of 2023, SoftBank invested a total of $1.8 billion, and in the third quarter, it invested $1.5 billion. Although these amounts are much lower than the hundreds of billions of dollars invested per quarter during its peak, they are more than three times higher than the $500 million invested per quarter from the third quarter of last year to the first quarter of this year. The SoftBank CFO stated that if there are good deals, they may make larger-scale investments, with "artificial intelligence being the main strategic focus."

Masayoshi Son has previously stated, "Either embrace AI or be destroyed," and this year he has bet on autonomous driving technology that disrupts transportation and logistics.

This aligns with Son's announcement in June of shifting to an "attack mode" in terms of investment and his excitement about the potential of AI technology. The SoftBank CFO stated during today's earnings conference call that SoftBank aims to be a leader in the AI revolution, and Son has been "fully committed and engaged in discussions on how the AI revolution will completely change people's lives."

Critics of SoftBank's investment strategy have previously pointed out that although Son has invested over $140 billion in hundreds of startups in recent years, he missed out on leading AI revolutionaries such as OpenAI and Anthropic, resulting in significant losses due to the bankruptcies or closures of companies like WeWork, Katerra, OneWeb, and Zume Pizza. This year, Son Masayoshi seems to be catching up with the AI investment pace of tech giants, especially in the field of autonomous driving technology that could disrupt transportation and logistics. However, the current investments are more cautious, with smaller scale compared to before, and more inclined to directly invest through SoftBank Group, bypassing the Vision Fund as a technology investment tool.

For example, SoftBank has agreed to invest over $1 billion in autonomous freight startup Stack AV and has formed a $100 million joint venture with Symbotic called GreenBox Systems to develop AI warehousing. SoftBank has also added $280 million to the artificial intelligence mapping and navigation software developer Mapbox. In October, Son Masayoshi advised business leaders to "embrace artificial intelligence or perish."

Tomoaki Kawasaki, a senior analyst at Japanese securities firm Iwai Cosmo Securities, said that due to the uncertainty in the short-term development, it is currently difficult to be optimistic about SoftBank Group. However, people's focus is no longer limited to how SoftBank's investment portfolio is "bleeding," but rather on whether SoftBank's bet on artificial intelligence can improve shareholder value and asset net worth.

Currently, SoftBank's asset net worth has slightly increased from $103 billion at the end of June to $109 billion at the end of September. The CFO of SoftBank stated that the weak yen has helped boost this figure.