PDF ANNUAL REPORT 2017

SoftBank Group Corp. ANNUAL REPORT 2017

Trajectory of

Bringing

the Information Revolution the Future Forward

Essential Information

Management Organization

Financial Section

Corporate Information

046

Financial Section

Financial Strategy 047 Management's Discussion and Analysis of 049 Results of Operations and Financial Position

Consolidated Financial Statements 079 Notes to Consolidated Financial Statements 087

Independent Auditor's Report 180

SoftBank Group Corp. ANNUAL REPORT 2017

Trajectory of

Bringing

the Information Revolution the Future Forward

Essential Information

Management Organization

Financial Section

Corporate Information

047

Financial Strategy

Balancing investment for growth and improvement of the financial position

Yoshimitsu Goto

Senior executive corporate officer, head of Finance Unit, SoftBank Group Corp.

Review of fiscal 2016

Fiscal 2016 was a busy year for the SBG's Finance Division. From June through August 2016, the Company raised $16.8 billion, mainly by monetizing a portion of its Alibaba shares and selling its Supercell shares, then in September, it completed the acquisition of Arm for approximately ?3.3 trillion. In conjunction with the Arm acquisition, SBG raised ?1 trillion through a bridge loan to finance a part of the acquisition price and issued its first hybrid bonds with the aim of increasing its cash on hand. I believe these financing activities were possible due to SBG's credit standing, which has been bolstered by its track record of continued growth and full utilization of its various assets. As a result, the Company was able to move swiftly and capture emerging growth opportunities.

One of Japan's largest share buybacks

Another major topic in fiscal 2016 was our execution of one of the largest ever share buybacks for a Japanese company. Following a Board of Directors' resolution in February 2016, SBG repurchased ?500 billion worth of its own shares by August 2016. Furthermore, SBG retired 100 million shares of treasury stock (8.3% of the number of issued shares) in October.

The Company considers its credit investors to be its most important stakeholders alongside equity investors. While shareholder returns are always one of the Company's foremost priorities as a stock corporation, such returns should be delivered consistently with the interests of credit investors and maintain the creditworthiness of the Company. Therefore, the share buyback was funded through the sale of certain assets so that we could satisfy both equity and credit investors.

Significance of the SoftBank Vision Fund from a finance perspective

The Company has aggressively undertaken strategic investments, but there is a limit to the debt leverage that the Company alone can take on for continuing to make large investments. To accelerate our strategic investments, the SoftBank Vision Fund ("SVF") was established. SVF manages capital contributed by SBG and global investors (all sharing the same vision) as limited partners and is operated by the Company's overseas subsidiary, which is a general partner. Investments of $100 million or more within SVF's investment strategy are to be made through SVF in principle. SVF is a completely independent organization from a credit

SoftBank Group Corp. ANNUAL REPORT 2017

Trajectory of

Bringing

the Information Revolution the Future Forward

Essential Information

Management Organization

Financial Section

Corporate Information

048

Financial Strategy

and finance perspective, and the funds procured by SVF (other than contributions from SBG) will have no recourse to the Company. Therefore, participating in strategic investments through SVF will have less impact on the Company's financial position than conducting such investment activities on its own.

SBG will invest up to $28 billion in SVF in phases over the next five years. To fund these investments, SBG will contribute a portion of its Arm shares as an in-kind contribution.*1 It will also consider various forms of debt financing, including instruments that are eligible for a certain degree of equity treatment from a credit rating perspective, such as hybrid bonds, along with monetization of certain investment assets. In addition, some of the Company's shareholdings are also intended to be sold to SVF.

The Finance Division will help SBG succeed in raising these funds to satisfy its contribution to SVF, while concurrently improving its consolidated financial position. The entire division is united behind this mission.

*1 The in-kind contribution will be approximately 24.99% of the total number of issued shares of Arm or its operating subsidiary, which satisfies $8.2 billion of SBG's total contribution.

Initiatives for improving the Company's financial position

Following the acquisition of Arm, the Company's net leverage ratio (ratio of net interestbearing debt to adjusted EBITDA) at the end of fiscal 2016 was 4.2 times,*2 having temporarily deteriorated by 0.4 of a point from the end of fiscal 2015. We will now work to bring the net leverage ratio back down, primarily by building up adjusted EBITDA over several years. Improving the Company's financial position will also increase the breadth of its fund procurement arrangements. This is an important theme for encouraging even more investors to consider investment opportunities in the Company.

*2 Calculated by treating 50% of the amount procured with hybrid bonds as equity. Arm's adjusted EBITDA has been annualized for the calculation.

Message to investors

SBG's Finance Division is committed to supporting rapid decision-making by management and contributing to maximization of the Company's enterprise value. Fiscal 2017 has witnessed the inauguration of SVF, and it will also prove to be the starting year of the SoftBank Group as a global enterprise. By providing solid support for this new beginning, the Finance Division will make every effort to ensure that the Company meets investors' expectations.

Net leverage ratio

(Times) 7

6.2 times (Immediately after Vodafone K.K. acquisition)

6

5

4.2 times

4

3

2

1

1.1 times

0

6

3

3

3

3

3

3

3

3

3

3

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Consolidated basis

Notes: 1. Net leverage ratio = net interest-bearing debt / adjusted EBITDA 2. Until fiscal 2011: JGAAP, including finance leases and preferred securities 3. Calculated by treating 50% of the amount procured with hybrid bonds as equity 4. Adjusted EBITDA for fiscal 2014 has been revised retrospectively due to GungHo becoming an equity method associate. 5. Adjusted EBITDA for fiscal 2016 is calculated by annualizing adjusted EBITDA of the Arm segment.

3

'17

CY

SoftBank Group Corp. ANNUAL REPORT 2017

Trajectory of

Bringing

the Information Revolution the Future Forward

Essential Information

Management Organization

Financial Section

Corporate Information

049

Management's Discussion and Analysis of Results of Operations and Financial Position

- Operating income: ?1.0 trillion (up 12.9% yoy) with Sprint turnaround

- Net income attributable to owners of the parent: ?1.4 trillion (increased 3x yoy)

- Acquired Arm in September 2016

Analysis of consolidated results of operations

Overall results for fiscal 2016

Continuing operations Net sales Operating income Income before income tax Net income from continuing operations

Fiscal year ended March 31

2016

2017

8,881,777 908,907 919,161

496,484

8,901,004 1,025,999

712,526

919,631

Discontinued operations Net income from discontinued operations

Net income Net income attributable to owners of

the parent

61,757 558,241 474,172

554,799 1,474,430 1,426,308

Change

19,227 117,092 (206,635)

423,147

(Millions of yen)

Change %

0.2 % 12.9 % (22.5)%

85.2 %

493,042 916,189 952,136

? 164.1 % 200.8 %

Reference: Average exchange rates used for translation

Q1

USD / JPY 121.34

Fiscal 2015

Q2

Q3

121.91 121.07

Q4

116.95

Q1

109.07

Fiscal 2016

Q2

Q3

102.91 108.72

(Yen)

Q4

113.76

Note: Abbreviations for accounting periods used in Management's Discussion and Analysis of Results of Operations and Financial Position are as follows: "fiscal 2016" for the fiscal year ended March 31, 2017, "fiscal 2015" for the fiscal year ended March 31, 2016, and "fiscal 2017" for the fiscal year ending March 31, 2018.

(Continuing operations)

1. Net sales

Net sales increased by ?19,227 million (0.2%) year on year to ?8,901,004 million. Net sales of the Domestic Telecommunications segment and the Yahoo Japan segment increased, and the Arm segment was newly added. Meanwhile, net sales of the Sprint segment and the Distribution segment decreased. Net sales of the Sprint segment increased in U.S. dollar terms but declined in yen terms due to the stronger yen.

2. Operating income

Operating income increased by ?117,092 million (12.9%) year on year to ?1,025,999 million. Segment income increased by ?31,183 million in the Domestic Telecommunications segment and ?124,938 million in the Sprint segment. The newly established Arm segment also added ?12,919 million of segment income.

On the other hand, segment income declined by ?32,968 million in the Yahoo Japan segment, reflecting the inclusion in fiscal 2015 of gain from remeasurement relating to business combination of ?59,441 million for the consolidation of ASKUL Corporation. Segment loss in the Distribution segment deteriorated by ?8,763 million to ?10,047 million. This included ?30,260 million of impairment loss for fiscal 2016 on goodwill of Brightstar.

Net sales

(Billions of yen) 10,000

8,504.1

7,500

8,881.8

8,901.0

Operating income / Operating margin

Adjusted EBITDA / Adjusted EBITDA margin

(Billions of yen)

(%)

3,000

40

2,564.5

2,325.2 28.8

2,250

2,041.6 26.2

30

24.0

5,000

1,500

20

918.7

908.9

1,026.0

2,500

750

10.8

10.2

11.5

10

0

'14

'15

'16

FY

0

'14

'15

'16

FY 0

Operating income Operating margin

Adjusted EBITDA Adjusted EBITDA margin

SoftBank Group Corp. ANNUAL REPORT 2017

Trajectory of

Bringing

the Information Revolution the Future Forward

Essential Information

Management Organization

Financial Section

Corporate Information

050

3. Income before income tax

Income before income tax decreased by ?206,635 million (22.5%) year on year to ?712,526 million.

(a) Finance cost Finance cost increased by ?26,567 million (6.0%) year on year to ?467,311 million, mainly due to an increase in interest expense at SBG.

(b) Income on equity method investments Income on equity method investments decreased by ?53,847 million (14.3%) year on year to ?321,550 million. This was mainly due to a decline in income on equity method investments related to Alibaba.

Alibaba's IFRS-based adjusted net income for the twelve months ended December 31, 2016*1 increased by CNY 4,692 million (7.6%) year on year to CNY 66,045 million. However, the Company's income on equity method investments in Alibaba declined by ?50,491 million (13.3%) to ?330,164 million due to the stronger yen and a decrease in the Company's interest ratio in Alibaba following the sale of a portion of Alibaba shares.

Reconciliations to IFRSs for the twelve months ended December 31, 2016 mainly reflect the amount of changes in the fair value of Alibaba's financial instruments at FVTPL (Fair Value Through Profit or Loss) as income and loss. Reconciliations to IFRSs for the same period of fiscal 2015 mainly incorporate the reversal of a gain on remeasurement of CNY 24,734 million included in net income on a U.S. GAAP basis. The gain had been recognized in association with loss of control of Alibaba Pictures Group Ltd.

*1 The Company applies the equity method to the financial statements of Alibaba on a three-month time lag, as it is impracticable to conform the reporting period of Alibaba due to the contract with Alibaba, among others. However, the Company performs necessary adjustments for material transactions or events arising during the lag period and publicly announced by Alibaba.

(c) Gain on sales of equity method associates Gain on sales of equity method associates was ?238,103 million compared to a gain of ?12,428 million in fiscal 2015. This was mainly due to the sale of a portion of Alibaba shares to Alibaba, two Singaporean sovereign wealth funds, and Alibaba Partnership.*2

*2 Alibaba Partnership is not an associate of Alibaba.

(d) Derivative gain and loss Derivative loss was ?252,815 million compared to a gain of ?12,788 million in fiscal 2015. This was mainly attributable to loss on valuation of derivatives of ?232,729 million recorded in relation to a collar transaction included in a variable prepaid forward contract for Alibaba shares.

The collar transaction is measured at the end of each quarter based on fair value (primarily linked to the share price of Alibaba). The cumulative derivative gain and loss for the three years from the conclusion of the variable prepaid forward contract on June 10, 2016 until the settlement date will be a loss of $900 million, equal to the amount of derivative assets initially recognized.

(e) Gain and loss from financial instruments at FVTPL Loss from financial instruments at FVTPL was ?160,419 million compared to a gain of ?114,377 million in fiscal 2015. This mainly resulted from recording a loss as the amount of changes in the fair value of the Company's financial instruments at FVTPL from the end of fiscal 2015 to the end of fiscal 2016. Financial instruments at FVTPL included preferred shares of Jasper Infotech Private Limited, which operates the e-commerce website in India, and ANI Technologies Private Limited, which operates the taxi booking platform Ola also in India.

(f) Other non-operating income and loss Other non-operating income was ?7,419 million compared to a loss of ?63,992 million in fiscal 2015. The primary components for fiscal 2016 were as follows:

Dilution gain from changes in equity interest

Fiscal year ended March 31

2016

2017

14,903

77,540

(Millions of yen) Primary components ? Gain from private placement of new shares by Alibaba

Foreign exchange gain and loss (41,414)

? Gain from settlement and translation of foreign currency53,336 denominated borrowings from a foreign subsidiary

Loss relating to loss of control

? Loss due to SOFTBANK GROUP CAPITAL APAC PTE. LTD.

?

(79,278) becoming an equity method associate as a result of a

private placement of new shares

Impairment loss on assets classified as held for sale

? Loss due to a difference between the valuation of the

248,300,000 GungHo shares tendered by the Company,

?

(42,540) out of the 272,604,800 shares held, at the tender offer

price of ?294 per share and their carrying amount on a

consolidated basis

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