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Investment powerhouse SoftBank rakes in record $11bn profit

Saudi-backed Vision Fund is already the group's second-largest pillar

SoftBank CEO Masayoshi Son is growing increasingly confident in his $100 billion Vision Fund.   © Reuters

TOKYO -- SoftBank Group's metamorphosis into an investment company is progressing rapidly, as earnings for the year ended in March were largely driven by its newly minted $100 billion war chest.

Consolidated operating profit rose 27% to a record 1.3 trillion yen ($11.8 billion) thanks to the SoftBank Vision Fund, which was launched last May. Formed with such partners as the Saudi Arabian government, the fund has invested in over 20 companies in the artificial intelligence, automation and "internet of things" fields.

The Vision Fund booked a 302.9 billion yen operating profit in fiscal 2017, largely due to unrealized gains from its nearly 5% investment in U.S. graphics chipmaker Nvidia. The domestic telecommunications business was the only segment to book a better result than the fund, at 682.9 billion yen.

SoftBank's earnings structure has changed drastically over the last decade. In fiscal 2006, the year it purchased British carrier Vodafone's Japanese operations, domestic telecom operations generated 65% of the group's operating profit. That figure dropped to 51% in the year ended in March, while the Vision Fund was responsible for over a fifth.

The transformation into an investment company is even more clear when looking at SoftBank's balance sheet. Vision Fund investments make up 9% of its total assets. When accounting for goodwill and intangible assets from the fund's investments until now, the figure climbs to 45%.

But the investment business is fraught with risk and unexpected losses can lurk just around the corner. In fiscal 2017, for example, SoftBank booked a derivative loss of 630.1 billion yen  in a complex transaction involving the sale of some of its shares in Alibaba Group Holding. Although the company booked capital gains in 2016 on the sale, the share price rose later to generate the loss.

SoftBank's consolidated sales rose 3% to 9.15 trillion yen as it sold more smartphones. Sales from British chip designer Arm Holdings, which it acquired for $32 billion in 2016, were also included in earnings from the start of last fiscal year.

CEO Masayoshi Son said Wednesday at SoftBank's earnings briefing that he is weighing whether to relist Arm. "I want to go public again in five or seven years," he said. "By that time, Arm will be reborn into a highly profitable company. That is what we are investing in now."

Arm commands over 90% of the global market for smartphone chips. Relisting the company would enable SoftBank to both earn profits and improve its financial health.

Net profit, however, plunged 27% to 1.03 trillion yen as one-time gains -- like profit from selling its stake in Finnish game maker Supercell in fiscal 2016 -- came off the books.

Son also hopes to get U.S. carrier Sprint off SoftBank's books as it shoots for a merger with rival T-Mobile around 2019, casting aside the group's telecom image even further. Sprint, America's No. 4 mobile provider, booked an operating profit of around 279.2 billion yen, up 50% from the previous year.

"It would be better to merge and achieve a similar scale with the two largest competitors rather than remain in fourth place," said Son Wednesday, speaking on the deal for the first time.

SoftBank and T-Mobile parent Deutsche Telekom agreed to combine the two carriers in April after on-again, off-again negotiations since 2013, with Son ultimately relinquishing Sprint's reins. The two nearly reached a deal last November, but it fell apart after both sides insisted they retain control of the merged unit's operations.

"I swallowed a lot of embarrassment and pride," reflected Son, saying the deal would help reduce SoftBank's net interest-bearing liabilities.

The combined company will have to invest $40 billion in next-generation services like 5G over the next three years to catch up with the top two carriers, Verizon Communications and AT&T. There is also the question of whether U.S. antitrust authorities will approve the deal. Despite the challenges, Son insists the merger "will raise competition and be a positive for Americans."

Meanwhile, SoftBank is moving to transfer its stakes in ride-sharing companies like Uber Technologies to the Vision Fund. "As the months pass, my confidence in the fund grows," Son said.

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