The material risks that the Company (SBG and its subsidiaries) believes could significantly affect investors’ investment decisions as of June 21, 2023 are outlined below. The materialization of these risks could have an adverse effect on:
- NAV (Net Asset Value) = equity value of holdings – adjusted net interest-bearing debt*1
- LTV (Loan to Value) = adjusted net interest-bearing debt ÷ equity value of holdings*1; The ratio of debt to asset holdings.
- Financial condition and results of operations
- Distributable amount of SBG
These risks do not include all the risks that the Company could face, nor is there a guarantee that measures to address such risks will be fully effective. Forward-looking statements were determined as of June 21, 2023, unless otherwise stated.
(1) Group Overall
Under the Company’s management system, the Company is engaged in a wide range of investment activities, with SBG, a strategic investment holding company, exercising overall control over its investment portfolio comprising SBG’s subsidiaries, associates, and portfolio companies. The Company’s material risks in the execution of its business are stated in subsections a. through c. below.
Additionally, please refer to “(2) SoftBank Vision Funds business,” “(3) SoftBank business,” and “(4) Arm business” for the material risks in the SoftBank Vision Funds segment, SoftBank segment, and Arm segment, respectively.
Arm was listed on the Nasdaq Global Select Market on September 14, 2023. Arm remains to be a consolidated subsidiary of the Company after the listing, and its stock price change does not affect the Company’s financial condition and results of operations. However, the stock price change has effect on the Company’s equity value of holdings, NAV and LTV since Arm represents a large portion of the Company’s equity value of holdings. (Updated on November 10, 2023)
a. Investment Activities Overall
(a) Market environment
Based on its unique organizational strategy, the Cluster of No.1 Strategy (refer to “(3) Medium- to Long-Term Strategies” under Management Policy), the Company is conducting investments particularly through investment funds (SVF1 and SVF2 as well as LatAm Funds) and strategic investments either directly by SBG or through its subsidiaries. Based on the investment theme of AI, the Company invests in companies expected to contribute to advances in the Information Revolution. Valuation of information and technology companies that leverage AI can vary significantly depending on the outlook for technological progress and market growth. Therefore, the Company’s equity value of holdings may be substantially affected by these types of sector-specific factors, in addition to general macroeconomic and monetary policy trends.
In addition, given that most of the Company’s portfolio companies are private companies, the portfolio companies’ corporate valuations and prospects for monetization are also significantly affected by trends in the venture capital market covering private growth companies and the IPO market.
In other areas, the Company may be affected by foreign exchange rate movements in connection with its ownership of foreign currency-denominated assets and liabilities.
The Company aims to conduct stable financial management to withstand the impacts of market volatility. For details, please refer to “Company-wide a. Constructing stable financial foundations” in “(4) Business Environment and Priority Issues to Address” under Management Policy.
(b) International conditions and regulatory trends
The Company invests in companies and other entities that operate not only in Japan, but also in countries and regions overseas, such as the U.S., China, India, Europe, and Latin America. Therefore, due to changes in political, military, or social circumstances and to the establishment of new laws, regulations, systems and other rules (hereinafter, “laws and regulations”) and the strengthening thereof (including changes in interpretation and implementation) in those countries and regions, the investment activities of the Company and the business activities of portfolio companies may not develop as expected. Laws and regulations include, besides those related to investment, laws and regulations related to businesses such as AI, telecommunications services, internet advertising, e-commerce, automated driving, robotics, logistics, financial services and payments, and to other corporate business activities (including, but not limited to, laws and regulations related to business permits and licenses, economic security, import and export, personal information and privacy protection, the environment, product liability, fair competition, consumer protection, prohibition of bribery, labor management, intellectual property rights, prevention of money laundering, taxation, and foreign exchange). The investment activities of the Company and the business activities of portfolio companies are directly or indirectly affected by those laws and regulations. Recently, countries have been taking steps to implement stricter regulations from an economic security perspective, against the backdrop of factors such as the Russia-Ukraine conflict and intensified U.S.-China rivalry. For example, the introduction of laws and regulations to restrict investment in specific countries or companies could constrain the Company’s investment activities, as well as cause the realization of investments to be delayed or the terms and conditions for the realization of investments to deteriorate. In addition, if heightened geopolitical risk results in supply chain disruptions, or if stricter trade regulations restrict the import or export of technology-intensive products and other items, the businesses and operating results of portfolio companies may be adversely affected.
Moreover, the investment activities of the Company may require approvals and permissions from the regulatory authorities of relevant countries, or the Company’s involvement with portfolio companies may be restricted. If the necessary approvals and permissions cannot be obtained or other restrictions cannot be avoided, the Company may be unable to successfully implement its investment or divestment plans as it expects.
The Company collects information about the changes in the external environment described above and assesses the impact they may have on investment activities, while receiving advice from outside advisers. Concurrently, the Company works to address each of these regulations. In addition, the Company continuously monitors the concentration of investments in specific countries or regions, and business sectors, within its investment portfolio. By doing so, the Company identifies risks and reflects them in its management decisions.
(c) Business development of portfolio companies
The Company aims to maximize returns from a medium- to long-term perspective by making investments in high-growth-potential technology companies that are leveraging AI. However, portfolio companies may be unable to develop businesses as envisioned at the time of the investment decision, due to factors including the technologies and business models being unable to produce results as expected, the obsolescence of portfolio companies’ technologies and business models, and intensified competitive environments. This may lead to a significant deterioration in business performance or a drastic revision of their business plans. Moreover, the Company may provide loans, loan guarantees, additional investment or other forms of financial support as deemed necessary to improve their shareholder value, if they are unable to develop businesses as anticipated. Providing such support could increase the Company’s exposure to those portfolio companies. Nevertheless, the Company has a general policy of not making investments solely for the purpose of providing relief to the portfolio companies of investment funds.
Even after making investments, the Company has a system in place in which major risk factors of portfolio companies are continuously monitored, including financial and management information, key performance indicators, differences between business plans at the time of the investment decision and actual progress, and the status of corporate governance, and the necessary measures to address those risk factors are taken. For example, the Company implements measures such as providing advice and dispatching officers to improve the management of portfolio companies.
(d) Investment decisions
In the investment decision-making process, the Company may make investment decisions while misjudging the risks concerning such factors as the technology, business model, competitive environment, financial condition, compliance, and governance of an investment target, or the integrity of the founders and managers who have critical influence. In particular, the transparency, accuracy, and completeness of information on which the Company bases its investment decisions are relatively more likely to be inadequate at private companies, which are the Company’s major portfolio companies.
In the investment decision-making process, the Company seeks to assess investment-related risks by conducting due diligence on important factors of the target, while obtaining the cooperation of, for example, outside financial, legal and tax advisers as necessary, in addition to referring to research and reviews by the relevant internal departments. Based on the results of such procedures, investment decisions are made by either the Board of Directors of SBG, the Investment Committee to which authority is delegated by the Board of Directors (refer to Corporate Governance System), or the Investment Committee of the fund management subsidiary.
b. Fund procurement
The Company utilizes a diverse range of procurement methods, such as loans from financial institutions and the issuance of bonds, as well as raising funds through asset-backed financing and selling assets.
For loans from financial institutions and bonds, if the procurement environment deteriorates due to factors such as changes in interest rates or credit rating, the Company may be unable to raise funds at the planned timing, scale, or conditions. In addition, various covenants may be attached to the debts. If these covenants are breached, the Company may forfeit the benefit of the term with respect to such obligations. Furthermore, in connection with this forfeiture, the Company may be requested to make lump-sum repayments with respect to other obligations.
For asset-backed financing using public or private equities (excluding prepaid forward contracts), if the value of eligible equity holdings declines, the Company may be required to post additional cash collateral or incur prepayment obligations. The Company may also face difficulties in raising new funds and refinancing.
Regarding fundraising through the sale of asset holdings, the Company may be unable to sell assets at anticipated prices when necessary due to factors such as delays in scheduled IPOs, sluggish market liquidity, and contractual restrictions on asset sales.
To control risks related to fund procurement, the finance departments of SBG raise funds at times that are deemed appropriate based on careful monitoring of market conditions, striving to diversify factors such as procurement method, timing, and duration. Moreover, regarding covenants attached to loans from financial institutions and corporate bonds, as well as asset-backed financing, the finance departments increase the stability of each type of fund procurement by conducting prior reviews and implementing measures based on various anticipated scenarios. Through these measures, the finance departments strive to maintain a sufficient cash position with financial discipline.
c. Management team
The Company’s major subsidiaries and investment funds are run autonomously by their respective CEOs and other leaders. However, unforeseen situations with respect to Representative Director, Corporate Officer, Chairman & CEO Masayoshi Son, who plays a pivotal role in the Company’s management, could impede the overall activities of the Company.
If such an unforeseen situation were to occur, the decision-making process could be affected. To minimize this impact, the Company has drawn up contingency plans. In addition, the Nominating & Compensation Committee periodically discusses medium- and long-term policies and succession plans.
(2) SoftBank Vision Funds business
SBG makes investments through investment funds such as SVF1, SVF2 and LatAm Funds in technology companies leveraging AI that are deemed to have high growth potential. SBG invests in these investment funds as a limited partner. Additionally, the Company’s wholly owned subsidiaries who manage these funds (SBIA, which manages SVF1, as well as SBGA, which manages SVF2 and LatAm Funds, collectively the “Managers”) are respectively entitled to receive management fees, performance-linked management fees, and performance fees, each of which is measured by reference to the investment activities of the investment funds.
The material risks at the investment funds and their Managers are stated in subsections a. through e. below. In this section (2), the phrase “portfolio companies” refers to the investees of the investment funds.
a. Business execution risks of portfolio companies
Many portfolio companies are seeking to leverage new technologies such as AI and big data to create new business models. There are various risks involved for these companies to develop their businesses as planned, earn profits, and establish a solid business foundation.
In particular, there is the risk that they are not able to develop technologies or implement business models as expected and provide products and services that meet customer needs and market practices; that unit economics may not be strong enough to fully cover the cost of the platform and continued investment in technological advancement; that they lose out to other new entrants with the latest technologies or to incumbents with strong business foundations; that they are unable to adjust themselves to their expansion into adjacent businesses or different geographies and to changes in the economic or business environment; and that they are not able to secure profits if the customer acquisition costs, such as advertising and sales staffing, significantly exceed their original plans.
In addition, as the strategic importance of advanced technology in national security has been growing in recent years, and with a backdrop of a worsening relationship between the U.S. and China, it is possible that stricter regulations in various countries will be introduced, which may adversely affect the business development of the portfolio companies.
Furthermore, many portfolio companies have funding needs for business development. If the fund-raising environment deteriorates, it may not be possible to raise funds on the expected terms, resulting in the need to cut costs materially, which may impede growth, or to raise funds on terms that dilute the Company’s share in the portfolio company.
At the Managers, the Investment Risk Department plays a central role in identifying these risks early and mitigating them through the investment approval process and ongoing post-investment monitoring.
b. Lack of opportunity to exit from investments
Due to the illiquid nature of many of the investments that the investment funds may acquire, as well as economic, legal, political, or other factors, there can be no assurance that the investment funds will be able to monetize such investments as originally planned. Additionally, the investment funds may be prohibited by contract or other limitations from selling certain securities for a period, which may mean that the investment funds are unable to sell investments at favorable market prices.
Approval of an exit strategy is a key part of the Managers’ Investment Committees’ considerations. Exit strategies are regularly reviewed and updated by the Managers’ investment teams. Exit strategies are also stress tested under various market conditions by the investment risk team to allow for forward planning. In setting up a long-term fund structure, it was anticipated that multiple economic downturns could occur and that some investments may take longer to exit than others.
c. Securities issued by public companies
The investment funds’ investment portfolios may contain securities issued by public companies. Such asset holdings are subject to risks that include increased obligations to disclose information regarding such companies, limitations on the ability of the investment funds to dispose of such securities at their discretion, increased likelihood of shareholder litigation and insider trading allegations being brought against such companies’ executives and board members, including employees of the Managers. In addition, there may be increased costs associated with addressing each of the aforementioned risks.
The primary mechanism employed to mitigate the market risk following a liquidity event is to follow a deliberate plan for selling down the positions to minimize the market impact and to maximize the value of the proceeds. The Managers also examine whether to hedge the foreign-exchange risk should the securities be denominated in a currency whose exchange rate relative to USD is volatile.
Additionally, the operational and compliance risks that arise while managing the investment funds’ public securities positions are managed through an appropriate control framework involving the Managers’ operation, compliance, and enterprise risk functions, including the investment risk teams. These controls include policies, staff training, whistleblower helplines, pre-trade approval processes, such as the approval of trading counterparties, and post-trade reconciliations and monitoring.
d. Concentration of investments in specific business fields
The investment funds hold investments in multiple companies in specific business fields, which may lead to a high level of concentration of investments in said business fields. In such business fields, a deterioration in the business environment, such as sluggish demand or intensified market competition (including competition among portfolio companies), could result in a deterioration in the results of operations, such as a decrease in the profitability of a portfolio company, an inability to develop a business in accordance with expectations at the time of the investment, or a deterioration in the market’s valuation of said business fields. Such developments could adversely affect the results of operations or the fair value of portfolio companies.
Concentration risk is measured and reported by the respective Manager’s investment risk team to senior management and considered by the relevant members of the Managers’ Investment Committees and boards. Diversification is implemented or the risk is accepted through the investment process, including review by the Managers’ respective Investment Committees.
e. Securing and retaining human resources
The Managers seek to maximize the equity value of the investment funds that they respectively manage, by carefully selecting investments and promoting growth after investment through the provision of a wide range of support. For the success of these investment activities, it is essential to secure and retain capable personnel who possess broad knowledge of technology and financial markets as well as specialized skills in managing investment businesses. The potential inability of the Managers to secure or retain an adequate number of capable personnel could have an adverse effect on the maintenance or expansion of the investment scale and future investment performance of the investment funds they manage.
In order to maintain their broad investment and management capabilities, the Managers provide various HR support programs and ensure the human capital in the firm has the requisite skill sets to meet business objectives. Efforts include regularly reviewing performance / organization design and training & development, to moving staff across the organization to ensure they fulfil their potential.
(3) SoftBank business
SoftBank Corp. and its subsidiaries (collectively herein (3), “SoftBank Corp.”) mainly conduct telecommunications business, internet-related business, and financial business including cashless payments. The material risks at SoftBank Corp. are stated in subsections a. through e. below.
a. Changes in market environment and competition
The mobile communications market is undergoing major changes mainly driven by factors such as the strengthening of pro-competitive policies and new entrants from different industries, and users are also increasingly seeking more inexpensive and varied services. In order to address the market environment described above, SoftBank Corp. deploys services, products and sales methods that fit consumer preferences. However, if SoftBank Corp. is unable to meet the expectations of consumers for price plans, voice and data communications quality and so forth, or if the service and products provided by SoftBank Corp. have significant defects, there are no assurances that SoftBank Corp. will be able to maintain its current number of subscribers. Moreover, the introduction, amendment, or change in interpretation or application of laws, regulations, systems, and so forth, could result in the effective restriction of services and products that SoftBank Corp. can deliver to its customers, or of sales methods and price plans, etc., causing SoftBank Corp. to experience a decline in revenue and to incur a larger financial burden.
In certain instances, SoftBank Corp.'s competitors may have a competitive advantage over SoftBank Corp. in terms of capital, services and products, technology development capabilities, price competitiveness, customer base, sales capability, brands, public recognition, or overall capability in all of these, for example. If these competitors were to sell services and products that harness these competitive advantages to a greater extent than at present, SoftBank Corp. may be placed at a disadvantage in sales competition, including price competition, may be unable to provide services and products, or acquire or retain customers, as anticipated, or may experience a decrease in ARPU.
Furthermore, in the telecommunications, internet and cashless payment related markets, newly emergent services and products offered by recently founded startup companies and new entrants can occasionally achieve widespread adoption by garnering the support of users. While SoftBank Corp. will strive to provide services and products that can garner user support by grasping the opinions and trends of users, the services and products of startup companies and new entrants could raise competition with SoftBank Corp.'s services and products. Moreover, it may be costly for SoftBank Corp. to develop the newly emergent services and products needed to demonstrate competitiveness.
SoftBank Corp. may conduct internal realignment for purposes such as streamlining overlapping business resources, speeding up decision-making, and generating greater synergies among businesses. However, if SoftBank Corp. is unable to sufficiently capture the expected benefits of realignment, SoftBank Corp. could face problems such as trouble with and delays in the integration of services to be rolled out, adverse effects on strategies and synergies, and disruptions associated with realignment.
b. Response to technology and business models
SoftBank Corp.'s primary business domain is the information technology industry, which is subject to rapid changes in technology and business models. For example, the field of generative AI, as exemplified by ChatGPT, has been evolving rapidly and is expected to have a significant impact on existing business models. SoftBank Corp. is constantly undertaking measures such as surveying the latest technology and market trends, conducting verification trials to introduce services with highly competitive technologies, and considering alliances with other companies. However, there are no assurances that the development of new technologies will proceed on time or results will be delivered as planned, or that common standards or specifications will be established, and commercial viability will be achieved. Even if the aforementioned measures are undertaken, SoftBank Corp. may be unable to develop or introduce outstanding services, technologies and business models in keeping with market trends due to the inability to appropriately adapt to changes in the market environment in a timely manner, such as the emergence of new technologies and business models, or due to the inability to deploy equipment and facilities rapidly and efficiently. In this case, SoftBank Corp.'s service offerings could lose competitiveness in the market, possibly curtailing the number of subscribers that SoftBank Corp. is able to acquire or retain, or reducing ARPU.
c. Leakage or inappropriate use of information and inappropriate use of products and services supplied by SoftBank Corp.
In its business operations, SoftBank Corp. handles customer information (including personal information) and other confidential information. SoftBank Corp. strives to build a framework to protect and manage information assets appropriately, including the appointment of a Chief Information Security Officer and education and training sessions on information security for officers and employees. However, this information could be leaked, lost, or involved in a similar incident, either intentionally or accidentally by SoftBank Corp. (including officers and employees of SoftBank Corp. and people related to subcontractors), or through malicious cyber-attacks, hacking, computer virus infections, or other form of unauthorized access or other means by a third party.
Moreover, if the products and services supplied by SoftBank Corp. are used inappropriately for crimes and so forth such as fraud and the like, it could impair public trust in SoftBank Corp. and SoftBank Corp.'s credibility.
Such an occurrence could reduce SoftBank Corp.'s competitiveness, and give rise to significant costs to SoftBank Corp. for payment of damages and modification of security systems, in addition to having an adverse impact on SoftBank Corp.'s credibility or corporate image and making it difficult to acquire or retain customers.
On October 1, 2023, Z Holdings, as the surviving company, completed an intra-group reorganization involving mainly itself, LINE Corporation and Yahoo Japan Corporation, and changed its trade name to LY Corporation. At LY Corporation, efforts are being made to establish and strengthen systems to ensure that data governance across the entire group within LY Corporation functions smoothly and appropriately.
These efforts will continue, however, if the countermeasures and measures to strengthen governance fail to function effectively, there is a possibility of administrative sanctions on SoftBank Corp. from the authorities, impairment of public trust in SoftBank Corp., a decrease in demand for SoftBank Corp.’s services, the formulation and implementation of additional countermeasures, or the occurrence of data leaks. (Updated on February 9, 2024)
d. Consignment of operations
SoftBank Corp. consigns in whole or part, to subcontractors, their customer sales activities, acquisition and retention of customers, and telecommunications network construction and maintenance for various services and products, along with the execution of other related operations. In addition, SoftBank Corp.'s information search services make use of other companies' search engines and paid search advertising distribution systems. While SoftBank Corp. strives to reduce risks in the supply chain, if these subcontractors (including their officers and employees, or related parties) are unable to execute operations in line with SoftBank Corp.'s expectations, or if a human rights infringement-related issue occurs, such as a case where the information of SoftBank Corp. or its customers is obtained without authorization or used outside of its purpose and so forth, it would also have a negative impact on SoftBank Corp.'s credibility or corporate image. This could hinder business development and the acquisition and retention of customers.
Furthermore, if these subcontractors should fail to comply with laws and regulations, SoftBank Corp. could be held accountable for non-fulfillment of its supervisory responsibility by, for example, receiving a warning or administrative guidance from the regulatory authorities, and SoftBank Corp.'s credibility or corporate image could deteriorate, making it difficult to acquire and retain customers.
e. Service disruptions or decline in quality due to faults in related systems and other factors
In the provision of various services by SoftBank Corp., including telecommunications networks, systems for customers, and the cashless payment service PayPay, there is a possibility that a major problem could occur if SoftBank Corp. were to become unable to continuously provide the services, or were to suffer a decline in the quality of the services, due to human error or problems with equipment or systems (including factors due to natural disasters and other unpredictable events), or cyber-attacks, hacking or other form of unauthorized access or other means by a third party. SoftBank Corp. has built redundancy into its networks, along with clearly defining restoration procedures in preparation for systems faults and other incidents. In the event of a system fault or other incident, SoftBank Corp. conducts restoration activities with appropriate capabilities in place, such as setting up an Incident Response Headquarters according to the scale of the incident. Even with these measures in place, SoftBank Corp. may be unable to avoid disruptions of services or declines in quality. If such disruptions of services or declines in quality were to become widespread or significant time were required to restore services, SoftBank Corp.'s credibility or corporate image could deteriorate, making it difficult to acquire and retain customers.
(4) Arm business
Arm’s operations primarily consist of licensing semiconductor intellectual property (IP), including the design of energy-efficient microprocessors and associated technologies. Arm licenses its CPU and related technologies to semiconductor companies to design into computer chips. These chips are built into end products such as smartphones, digital TVs and electronics for cars, by systems companies. Arm’s revenue includes licensing fees for Arm’s technology, and royalty received on chips with Arm’s products that the licensees have shipped. The material risks at Arm are stated in subsections a. through j. below.
a. Change in the industry business dynamic
Demand for Arm’s technology and services is dependent on the semiconductor and electronics industries, which are volatile and competitive. The revenue Arm generates from licensing activities is largely dependent on the rate at which semiconductor and systems companies develop and adopt new generations of Arm’s products, which is affected by the demand for these companies’ chips and other products. Decreasing demand from systems companies for chips based on Arm’s products would directly and adversely affect the amount of royalties Arm receives.
Arm’s success depends substantially on the acceptance of its products and services by semiconductor and systems companies. There are competing architectures in the market and there is no certainty that the market will continue to accept Arm’s products.
The semiconductor and electronics industries have also become increasingly complex and subject to increasing design and manufacturing costs. Many of Arm’s customers utilize third-party vendors for electronic design automation tools and the manufacture of their semiconductor designs. Arm works closely with those third parties to ensure that its technology is compatible with their design tools and manufacturing processes. However, if Arm fails to optimize its products appropriately or if Arm’s access to such tools and processes is hampered, then Arm’s products may become less desirable.
In order to mitigate against these risks, Arm’s management team regularly reviews its strategy and long-term product development plans to test that Arm is developing products to meet future needs. Arm works with many partners and companies in the semiconductor and electronics industries and is well positioned to detect any change and act accordingly.
The market for Arm’s products is intensely competitive and characterized by rapid changes in design and manufacture technologies, end user requirements, industry standards, and new products. Arm anticipates continued challenges from current and new competitors, including established technologies such as the x86 architecture, and by free, open-source technologies, including the RISC-V architecture.
Arm’s competitors may devote greater resources to the development, promotion and sale of products, they may offer lower pricing and different customer engagement models and their performance, features and product quality may be more desirable than that of Arm. Arm may therefore have to invest substantial resources to further develop its ecosystem that allows it to compete with alternative architectures. If Arm is unable to anticipate or react to these competitive challenges, its competitive position could weaken.
Arm mitigates against these risks by working closely with leading semiconductor companies. Arm’s established ecosystem includes many software and chip design engineers who understand how to build Arm-based chips and write software optimized for Arm processors. Arm invests in this ecosystem to help further reduce the total cost of developing and maintaining a portfolio of Arm-based chips.
c. Customer concentration
A significant portion of Arm’s total revenue is generated from a limited number of key customers. As a result of this customer concentration, Arm is particularly susceptible to adverse developments affecting its key customers and their respective businesses.
In order to mitigate against this risk, Arm typically develops multiple processors each year, reducing the impact of a customer deciding not to move forward with Arm.
d. Fragmentation of the global market
The global market for Arm’s products may be impacted by geopolitical factors. A shift towards geopolitical rivalry could lead to the fragmentation of the global semiconductor market, as certain countries want more end-to-end control of architecture, leading to increased architectural fragmentation and a reduced role for a global architecture. For Arm, this could lead to increased costs to support region specific products, reduced revenue as a result of lost investment in territories that no longer use Arm products and potential market loss and future licensing opportunities.
Arm mitigates against this risk by working with trade authorities to reduce the risk of any impact of new trade barriers and reviewing its strategy to ensure that it is developing products in line with the future needs of the industry.
e. Concentration on China
A significant portion of Arm’s revenues are derived from Chinese semiconductor companies and original equipment manufacturers, or OEMs, and from non-Chinese semiconductor companies and OEMs that utilize Arm’s products in chips and end products sold into China. Arm’s failure to maintain China-sourced revenues, access new and existing markets in China or gain traction for new business areas in China, or Arm’s loss of market share in China, could materially and adversely affect Arm’s results of operations and competitive position.
In the past decade, China has been a significant source of semiconductor industry revenues and growth. However, the near-term growth prospects of the Chinese semiconductor industry are unclear due to the uncertain effects of ongoing economic stress caused by the COVID-19 pandemic, trade and national security policies, and elevated levels of indebtedness. A prolonged downturn in the Chinese semiconductor industry or economy generally could materially and adversely affect Arm.
In addition, political actions including trade protection and national security policies currently do and could in the future limit or prevent Arm from transacting business in China.
Arm mitigates against these risks by ensuring that any U.S/China policy changes are kept under close review. In addition, Arm regularly reviews Arm China’s*2 sales pipeline and licensing contracts in order to monitor and manage developments in the Chinese market.
f. Changes in business model
Arm has in the past made and may in the future make changes to its business model. Arm can provide no assurance that customers will accept these changes. In such case, Arm may not realize the anticipated financial benefits of such changes as anticipated, on the expected timeline or at all.
In addition, increases in the number or value of licenses signed in the future may not materialize in the same way or at all under a new business model and, therefore, licensing revenue may be lower than expected. Further, the use of a new business model may have unexpected consequences for Arm, including making Arm’s products less attractive to customers.
In order to mitigate against these risks, Arm undertakes extensive reviews in relation to its new business models, including undertaking discussions with its customers in advance of implementing key changes, in order to ensure that any risks are identified and managed appropriately.
g. Protection of IP rights
Arm’s success and ability to compete depends significantly on protecting its intellectual property rights. Arm primarily relies on patent, copyright, trade secret and trademark laws, trade secret protection and contractual protections, such as confidentiality, invention assignment and license agreements with its employees, customers, partners and others to protect its intellectual property rights. The steps Arm takes to protect its intellectual property rights may be inadequate. Arm also may not be able to obtain desired patents. Arm’s exposure to different legal jurisdictions may also impact its ability to exercise its contractual and other rights around intellectual property in such jurisdictions. If Arm is unable to successfully navigate the relevant legal and regulatory environment and/or enforce its intellectual property and/or contractual rights in relevant jurisdictions, its business, results of operations, financial condition and prospects could be materially and adversely impacted.
Litigation may be necessary to enforce Arm’s patents and other intellectual property rights. Any such litigation could be costly and would divert the attention of management and technical personnel from normal business operations.
Arm is involved in pending litigation, including but not limited to a lawsuit with Qualcomm, Inc. and Qualcomm Technologies, Inc. (together “Qualcomm”) and Nuvia, Inc. Arm can provide no assurances regarding the outcome of the litigation or how the litigation will affect Arm’s relationship with Qualcomm, which is currently a major customer of Arm. Arm’s involvement in such litigation could cause significant reputational damage in the industry, in its relationship with Qualcomm and/or other third-party partners.
Arm mitigates against these risks by closely monitoring developments in relevant jurisdictions in relation to patents, litigation trends and incidence of claims.
h. Infringement of proprietary rights
Arm has in the past been and it may in the future be subject to claims by third parties alleging infringement, misappropriation or other violation of third-party intellectual property rights. Under Arm’s customer agreements, it agrees in some cases to indemnify customers if a third party files a claim asserting that its products infringe such third party’s intellectual property rights. Such claims can result in costly and time-consuming litigation, require Arm to enter into royalty or licensing arrangements, subject Arm to damages or injunctions restricting the sale of its products, invalidate a patent, require Arm to refund license fees to its customers or to forgo future payments or require Arm to redesign certain of its products.
Arm mitigates against these risks by designing and implementing its products without the use of intellectual property belonging to third parties, except under strictly maintained procedures and with the benefit of appropriate license rights.
i. Brand and reputation
Arm’s brand and reputation are critical factors in its relationships with customers, employees, governments, suppliers, and other stakeholders. Arm’s reputation can be impacted by catastrophic events, incidents involving unethical behavior or misconduct, product quality, security, or safety issues, allegations of legal noncompliance, internal control failures, corporate governance issues, data breaches, workplace safety incidents, environmental issues, the use of its technology for illegal or objectionable applications, marketing practices, the conduct of suppliers or representatives, and other issues that result in adverse publicity. If Arm fails to respond quickly and effectively to these corporate crises and other threats, the ensuing negative public reaction could significantly harm its brand and reputation. Arm’s brand and reputation may also be damaged by the actions of third parties that are imputed to Arm, for example, through Arm China.
Arm mitigates against these risks by investing in the verification and validation of its products. Arm has rigorous quality assurance and verification and validation processes to reduce the risk of faults or bugs. Arm regularly gathers feedback from its customers and partners to determine whether the perception of Arm is changing, and ensure that corrective action can be taken early if customers are becoming less satisfied with its products or behavior.
j. Export restrictions and trade barriers
Arm’s headquarters are in the U.K., and it currently operates in jurisdictions around the world, including the U.S., China, India, Canada, South Africa and Europe. Risks associated with these international operations include exposure to political, economic and financial conditions and expected and unexpected changes in legal and regulatory environments.
Arm is subject to governmental export and import requirements that could subject Arm to liability or restrict its ability to license its products. If the U.S. Department of Commerce were to broaden U.S. export restrictions on foreign-origin items, this could subject more of Arm’s products to U.S. export controls and restrictions. Furthermore, if the U.S. Government implemented expanded economic sanctions on certain customers and trading partners, that could impact Arm’s freedom to license its products to designated countries or entities.
Trade relations between countries where Arm does business have recently been volatile and the U.S. government has imposed export sanctions on certain of Arm’s trading partners and entities. These measures may increase costs and/or reduce distribution in key markets.
Arm mitigates against these risks by maintaining strong relationships with the U.S., U.K. and EU export control authorities in order to effectively monitor any policy and regulatory developments.
The Company conducts investment activities pursuant to laws and regulations in each country. If the Company and its portfolio companies (including officers and employees) conduct activities in breach of those laws and regulations, regardless of whether they were aware of the breach or not, the Company and its portfolio companies may be subject to administrative sanctions or legal measures. As a result, the credibility and corporate image of the Company and its portfolio companies may be impaired, their contracts may be canceled by business partners, or a financial burden may be incurred. Furthermore, in countries and regions in which the Company and its portfolio companies conduct business activities, tax laws and regulations may be newly introduced or amended, or their interpretation or enforcement may be revised, leading to additional tax burdens. Views differing with that of tax authorities may also give rise to additional tax burdens.
The Company has established the SoftBank Group Code of Conduct, which applies to all officers and employees, in order to go beyond compliance with laws and regulations and conduct corporate activities based on high ethics. The Company also works to strengthen the Group compliance structure and carries out activities to increase the knowledge and awareness of officers and employees, such as training. In addition, the legal departments collect information on new or revised laws and regulations, while receiving advice from outside advisers.
b. Intellectual Property
Infringement of SBG’s SoftBank brand by a third party could impair the corporate image or credibility of SBG and subsidiaries that employ the SoftBank brand. Additionally, infringement of the intellectual property of subsidiaries and portfolio companies by a third party could have a negative impact on these companies’ business development and results of operations. On the other hand, if the Company and its portfolio companies were to unintentionally infringe on intellectual property rights held by a third party, the Company and such portfolio companies may be prevented from using the intellectual property or subjected to claims for compensatory damages, license fees, and so forth from the third party.
In light of the importance of SBG’s brands in supporting sustained business growth, SBG strives to strategically obtain trademarks worldwide, while evaluating the intellectual property activities and strategies of subsidiaries and forming intellectual property partnerships with subsidiaries. Through these and other efforts, SBG aims to protect and utilize intellectual property throughout the Group as a holding company.
The Company faces the possibility of lawsuits by third parties claiming compensatory damages for the alleged infringement of rights or benefits. These third parties may comprise shareholders, portfolio companies, business partners, and employees (including current and past shareholders and employees of portfolio companies). Such lawsuits could hinder the Company’s investment activities or may impair the Company’s corporate image, as well as create a financial burden.
The Company believes that it is crucial to take the lead and implement essential activities to address Environmental, Social and Governance (“ESG”) factors. However, the Company’s ESG activities may diverge significantly from the expectations of internal and external stakeholders, including investors (for example, investors may judge that ESG factors are not sufficiently integrated into the Company’s governance structure and management strategy, or that measures to address climate change or human capital, including diversity, are inadequate). In these cases, the Company’s evaluation by stakeholders may deteriorate and adversely affect its investment and financing activities. In addition, the Company may be unable to adequately assess the opportunities and risks associated with the ESG aspects of portfolio companies. In these cases, portfolio companies may be unable to develop their businesses as expected by the Company. Additionally, if ESG-related regulations over investment companies are tightened, the pace of investment may slow down or the cost to address such regulations may increase.
SBG has a Sustainability Committee, which is chaired by the Chief Sustainability Officer (“CSusO”) appointed by the Board of Directors. The Sustainability Committee regularly discusses ESG-related material issues and countermeasures, along with strengthening ESG-related response measures and disclosures. In investment activities, each investment entity analyzes the opportunities and risks associated with the ESG aspects of portfolio companies and carries out comprehensive investment evaluations.
e. Information security
Amid the rising threat of cyber-attacks around the world in response to recent international conditions, the Company and its portfolio companies may be unable to completely prevent cyber-attacks, hacking, computer virus infections, or other forms of unauthorized access or internal misconduct. The inability to prevent such events could lead to the leakage, alteration, or loss of information, or cause other such security incidents. Such occurrences may impair the credibility and corporate image of the Company and its portfolio companies and may hinder their business activities. The Company and its portfolio companies may also incur financial losses or additional cost outlays or other responses may be needed to address such occurrences.
The Chief Information Security Officer (CISO), who is appointed by the Board of Directors, is responsible for the information security of the Company. Under the leadership of the CISO of SBG, the Company endeavors to protect information assets by identifying vulnerabilities and risk factors that could threaten information security and by implementing information security measures focused on organizational, physical, technical, and human dimensions according to risk.
- Equity value of holdings and adjusted net interest-bearing debt each exclude amounts to be settled at maturity or borrowings that are part of asset-backed finance. Additionally, the calculation of adjusted net interest-bearing debt excludes, from the Company’s consolidated figures, interest-bearing debt and cash and cash equivalents, etc. attributable to entities managed on a self-financing basis such as the listed subsidiary SoftBank Corp. (including its subsidiaries such as LY Corporation and PayPay Corporation), SVF1, SVF2, LatAm Funds, and Arm Limited, as well as SB Northstar, an asset management subsidiary.
- Arm China is a joint venture between SBG’s subsidiary and Chinese investors, through which Arm accesses the Chinese market.
- Generally, company names and organization names are abbreviated for joint-stock companies, limited liability companies, incorporated associations and certain other entities. The following company names or abbreviations have the following definitions unless the context suggests a different meaning, or they are otherwise stated.
|Company names / Abbreviations
|SoftBank Group Corp. or SBG
|SoftBank Group Corp. (stand-alone basis)
|SoftBank Group Corp. and its subsidiaries
|*Each of the following names or abbreviations indicates the respective company and its subsidiaries, if any.
|SB Northstar or asset management subsidiaries
|SB Northstar LP
|SoftBank Vision Fund 1 or SVF1
|SoftBank Vision Fund L.P. and its alternative investment vehicles
|SoftBank Vision Fund 2 or SVF2
|SoftBank Vision Fund II-2 L.P.
|SoftBank Latin America Funds or LatAm Funds
|SBLA Latin America Fund LLC
|SoftBank Vision Funds or SVF
|SVF1, SVF2, and LatAm Funds
|SB Investment Advisers (UK) Limited
|SB Global Advisers Limited