SoftBank logs $7bn Q2 loss as AI power costs bite

This quarter's loss shows that AI infrastructure construction costs are hitting earnings as well as valuations, fuelling the discussion on whether such spending yields adequate returns. A record net asset value and a stable loan-to-value ratio keep worries about the balance sheet in check. Yet the slide in pro forma net asset value to approximately ¥44.7 trillion at prices as of November 9 highlights the company's vulnerability to the current sell-off in technology stocks. A formal revaluation of OpenAI would be the most obvious catalyst for a rise in SoftBank's shares. The writedown on data-centre power costs also supports the view that electricity availability is a limiting factor for AI capacity, a theme taken up in UBS's latest strategy note.

SoftBank Group delivered its results after the Tokyo stock market had closed on Tuesday, November 10, a detail that may have slipped past some readers.

The company made upfront payments for AI data-centre power, with the cost now showing up in its quarterly results. Meantime, any upside from its OpenAI stake remains unbooked.

Summary:

• SoftBank Group had a net loss of roughly ¥1.12 trillion ($7 billion) in the fiscal second quarter, compared with a ¥2.5 trillion profit a year earlier.
• The biggest drag was a writedown of about $3.7 billion on prepayments for US data-centre power gear, along with losses on Intel and increased financing expenses.
• Revenue came in at ¥2.22 trillion, exceeding the ¥2.02 trillion consensus forecast.
• Net asset value hit a record of ¥59.8 trillion at September-end, with a loan-to-value ratio of 15.9%, yet at November 9 prices it had fallen to around ¥44.7 trillion.
• An additional ¥3 trillion in OpenAI took SoftBank's holding to roughly 13%, and the valuation from the new funding round has not been incorporated yet.

In its fiscal second quarter, SoftBank Group swung to a net loss of roughly ¥1.12 trillion ($7 billion), turning a ¥2.5 trillion profit from the same period last year into a loss. The factors included a writedown on US AI data centre equipment, a drop in the value of its Intel stake, and higher financing costs.

The largest single charge was a writedown of roughly $3.7 billion (around ¥600 billion) on nonrefundable deposits for power-generation gear intended for US data centres. An executive explained on the earnings call that SoftBank had made interim investments to secure the gear ahead of time, expecting shortages. Losses on investments such as Intel and increased borrowing costs also contributed.

Revenue exceeded expectations. Sales for the July-September period reached ¥2.22 trillion, topping the LSEG consensus of ¥2.02 trillion, helped by expansion in telecoms and AI computing.

In the first six months of the fiscal year, SoftBank recorded investment gains of about ¥1.7 trillion, a drop of ¥2.2 trillion from a year earlier, resulting in a net loss of about ¥770 billion.

Balance sheet figures paint a separate picture. Net asset value climbed to a record ¥59.8 trillion by September-end, an increase of ¥20 trillion from the close of the previous fiscal year. The loan-to-value ratio remained stable at 15.9%, and the group had roughly ¥5 trillion in cash. But recent market volatility has left its mark: at November 9 prices, pro forma NAV was about ¥44.7 trillion.

OpenAI stays at the heart of the investment thesis. In the latest period, SoftBank put an additional ¥3 trillion into the maker of ChatGPT, lifting its ownership to about 13%. The company noted that any rise in OpenAI's value from a recent funding round has not been recorded in its accounts, as an official announcement is awaited, leaving room for a potential positive impact in subsequent periods.

SoftBank announced this week that it would join with Grab and Malaysia's PETROS to contribute a total of $1.85 billion in initial capital for building AI infrastructure in Malaysia.

The results underscore the expense of SoftBank's aggressive AI infrastructure strategy. In the latter half of the fiscal year, investors will closely watch the OpenAI revaluation and the company's financing costs as key variables.