SoftBank's Son Sees Profit Surge Amid Scrutiny Over Saudi Ties

(Bloomberg) -- SoftBank Group Corp. founder Masayoshi Son is starting to see the benefits of his enormous technology investments -- along with the scrutiny that comes from taking money from Saudi Arabia.

SoftBank reported second-quarter profit of 706 billion yen ($6.2 billion), far exceeding analyst estimates, thanks to multi-billion dollar gains from his many deals. SoftBank shares rose as much as 4 percent in Tokyo on Tuesday. Yet Son also faced repeated questions during a post-earnings briefing in Tokyo about his relationship with Saudi Arabia, the biggest investor in his $100 billion Vision Fund.

Son has been remaking SoftBank from primarily a telecommunications operator into a technology investment firm. His investments contributed 393 billion yen to profit in the quarter, more than all the other businesses combined. The company cited increased valuations of India's online hotel startup OYO Rooms and graphics card maker Nvidia Corp. among its gains.

“The Vision Fund is showing profits worthy of SoftBank 2.0,” Son said at a briefing in Tokyo. “Next year, I believe we will not only exceed these results, but may even deliver an operating profit on the level that Japan has never experienced before.”

Key Insights

• SoftBank reported earnings that exceeded the highest of analyst estimates compiled by Bloomberg. The profit surge was driven by gains from investments in technology companies.
• Son proactively addressed the controversy over a murdered Saudi journalist and his company's relationship to the kingdom's government. Still, he faced repeated questions about the issue.
• Son also said that SoftBank will proceed with an IPO for its Japanese wireless business and vowed that he would maintain profits by cutting costs.

SoftBank has faced criticism over its relationship with Saudi Arabia in the wake of the murder of government critic Jamal Khashoggi by Saudi agents. The kingdom contributed $45 billion to the Vision Fund as Son forged personal ties to Saudi Crown Prince Mohammed bin Salman, whose associates have allegedly been implicated in the killing.

Son began his Tokyo press conference by addressing the murder, his first public comments on the incident. He said he pressed the Saudis to get to the bottom of the Khashoggi killing and hold the guilty accountable. However, he said SoftBank will continue to use Saudi money for investments because he has an obligation to help the country diversify its economy.

“It is a terrible tragedy that should not have occurred,” he said. “On the other hand, we have accepted an investment from the citizens of Saudi Arabia. It is an important investment for the economic diversification of Saudi Arabia, to get their economy away from depending solely on crude oil. We cannot turn our backs on the Saudi people.”

Son's proactive comments didn't end the scrutiny. He faced several questions about the Saudi relationship and what the possible implications of the investigation are.

As for the financial results, they showed that predicting Vision Fund contributions on a quarterly basis remains a challenge for investors and analysts. The fund benefited as its stake in Oyo doubled in value to about $200 million, while shares of Nvidia rose 19 percent last quarter. SoftBank also saw a surprise profit at Sprint Corp., the U.S. wireless operator that it is planning to sell.

"The earnings numbers themselves are extraordinary,” said Mana Nakazora, chief credit analyst in Tokyo at BNP Paribas SA. "Perhaps it can't be helped due to accounting procedures, but it is becoming harder to understand where the profits are coming from."

Son went on to explain that his Vision Fund is capitalizing on a surge of innovative technology companies. The fund has backed 60 unicorns -- startups worth $1 billion or more -- in the past two years, he said. He then took time at the briefing to highlight a few of the promising startups in his portfolio. He joked, however, that he didn't have enough time to talk about all the strong companies.

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SoftBank is aiming to raise capital to be able to keep making investments in tech startups. The company is planning an IPO for its domestic telecom operation, which may raise 3 trillion yen. It has the potential to be the largest such offering ever -- with about 30 percent of the equity to be listed on the Tokyo Stock Exchange on Dec. 19, people with knowledge of the matter said last month.

But the plans have come into question after NTT Docomo Inc., Japan's biggest mobile carrier, said it may cut rates 40 percent and “return” 400 billion yen to customers. That sparked a sell-off among the country's three major wireless operators, which lost a combined $34 billion the day following the announcement.

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Son said the competition won't hurt his company's profits. He said that SoftBank aims to cut costs by trimming about 40 percent of the wireless business workforce, largely by introducing automation technology. Some employees will be reallocated to other parts of SoftBank.

“I can make a commitment right here that profit and revenue in the mobile business will continue to grow,” Son said.

SoftBank shares had climbed 29 percent from the start of the year through their peak in late September, but they gave up all of those gains since amid the negative news and a decline in technology stocks.

Son was also asked whether the Saudi relationship had prompted any startups to say they wouldn't accept Saudi money. He responded by saying he didn't know of any cases -- and there was clear evidence to the contrary. One of the questions he fielded in Tokyo was from a Brazilian entrepreneur who wanted to know whether Son would be interested in hearing more about his country -- and his fintech startup.

“We are always open,” Son said with a smile.

--With assistance from Yuki Furukawa and Yuji Nakamura.

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Peter Elstrom

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