SoftBank swings to $7bn quarterly loss on US data center equipment hit

What happened

On Tuesday, November 10, SoftBank Group reported a net loss of ¥1.1153 trillion for its fiscal second quarter, according to Seoul Economic Daily, which cited the earnings report. Analysts polled by Bloomberg had expected a ¥129 billion profit. A year earlier the group earned ¥2.5022 trillion, helped by a jump in the value of its OpenAI stake. The Financial Times (FT) reported it was the group's first quarterly loss in almost two years and linked it to a writedown on US data center projects. Revenue still grew 15.6% to ¥2.2154 trillion.

What it means

The core of the loss is an unusual one. According to Reuters, SoftBank booked a $3.7 billion charge on advance payments for power generation equipment meant for US data center projects, including a big development in Pike County, Ohio, after its plans shifted. Finance chief Yoshimitsu Goto said fierce competition for energy supply pushed the group to order gear before long-term specifications were settled. Those orders could not be refunded when canceled and carried fees, the chief accounting officer added. SoftBank said it may receive rebates of up to $2.1 billion on future purchases, which could soften the blow over time.

The bigger worry may be debt. SoftBank raised a record $56.5 billion during the quarter, Reuters reported, through an $11.87 billion term loan, a $10 billion dollar bond and a ¥1 trillion yen bond, and it lifted the margin loan secured on its Arm shares by $5 billion to about $25 billion. A margin loan is borrowing backed by shares the borrower already owns. Financing costs climbed to ¥461.9 billion from ¥174.7 billion a year before, roughly 2.6 times higher. Seoul Economic Daily, citing data providers Quick and FactSet, said the yield on SoftBank bonds with five years left to maturity rose to 8.22% from 7.72% at the end of September.

Much of that money is going into OpenAI. SoftBank put another $10 billion into the ChatGPT maker last month, completing a $30 billion pledge and bringing its total investment to $64.6 billion for a stake of about 13%. Because SoftBank marks its holdings at fair value, meaning current market prices, swings in tech shares hit its profits right away. Bloomberg said declines in Arm, Intel and Coupang weighed on this quarter, and the Vision Fund unit lost ¥81.6 billion when analysts had expected a profit. A $1.3 billion gain on its ByteDance stake only partly offset that.

The timing is awkward. Reuters noted that SoftBank shares jumped 14% on Tuesday before the numbers came out, yet have nearly halved since the start of June as investors cooled on AI. Goto declined to discuss OpenAI's latest funding round but said an announcement was very likely in the third quarter.

The bull case

Supporters argue the equipment charge is a one-off tied to a scramble for scarce power gear, and that up to $2.1 billion in rebates could claw part of it back. Revenue is still rising, the OpenAI pledge is now fully paid, and a new OpenAI funding round could lift the value of SoftBank's 13% stake. Nvidia has also committed $3 billion to SoftBank's SB Energy data center unit, which plans to go public.

The bear case

Critics see a group borrowing heavily at rising cost to back assets whose value moves with volatile tech shares. Interest costs more than doubled, bond yields have climbed above 8%, and more debt is now secured on its Arm shares. If AI valuations keep sliding, losses at fair value could deepen just as funding gets pricier, and Goto conceded that valuing assets the group no longer needs could become an issue.