Venture

Quick Notes From SoftBank’s Uber-And-WeWork-Dinged Earnings

SoftBank, a Japanese conglomerate most famous abroad for its market-bending Vision Fund, reported earnings this morning, detailing the cost of some of its less profitable wagers.

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The company, part mobile phone operator and part investment maven, put together a roughly $100 billion vehicle with the Vision Fund, largely fueled by foreign dollars and fit with a complicated makeup. In the Vision Fund’s early days, it made rapid-fire bets into companies of all sorts, looking to deploy hundreds of millions or billions per wager. Some of the bets are performing well, some less so. Awkward for SoftBank and its funded vision of taking huge stakes in some of the world’s most famous companies, it’s precisely those bets that have proved troublesome.

The Vision Fund put money into Uber, for example, in a complicated transaction that has since lost value. Vision Fund money helped turn WeWork into the mess detailed in its S-1, only to, now, take a writedown on the cumulative investment. The Vision Fund also put money into Slack, which has seen its value drop as the public markets’ enthusiasm for its long-term growth story, it seems, has slowed.

Notably, the Vision Fund is up from its base figure of invested capital, something that might come as a surprise. However, the recent issues with some Vision Fund bets has come home to roost in the form of negative earnings. And while the Vision Fund has made money on paper in aggregate and its future sibling one sits somewhere on the horizon, it wasn’t a good quarter for SoftBank.

Results

If you haven’t read the coverage yet, here are the toplines that we care about from the corporate reports you can find here, and here:

  • SoftBank, apart from the Vision Fund and its smaller companion fund (the Delta Fund), made money, including operating income of 265.9 billion Yen in Q2, and 557.1 billion Yen in H1 as a whole.
  • Inclusive of the Vision Fund and Delta Fund’s results, the company’s Q2 operating income came to -704.4 billion Yen after a 970.03 billion Yen operating loss from the Vision and Delta Funds.
  • What drove those huge losses? “Unrealized gain and loss on valuation of investments” of 982.2 billion Yen in the second quarter.
  • What drove the unrealized losses? According to the company: “Loss from financial instruments at FVTPL (net) of ¥351.8 billion*; reflecting a valuation loss of ¥374.7 billion recorded for the investment in WeWork held by a wholly owned subsidiary of the Company.” Or more simply: WeWork.
  • More clearly, SoftBank states that following “WeWork’s business plan was revised significantly” the company “fair value of WeWork’s entire equity decreased to $7.8 billion as of the second quarter-end, and consequently the changes in the fair value of investments held by the Company’s wholly owned subsidiary and SoftBank Vision Fund were recorded as a loss in the second quarter.”

In dollars, SoftBank lost $6.5 billion in the quarter, including a $4.6 billion charge relating to the value of WeWork, according to Bloomberg who executed the currency conversions. All told the Vision Fund took an $8.9 billion charge.

That’s all pretty bad, but expectedly so. No one really thought SoftBank would be able to avoid a huge writedown regarding WeWork. It was always going to happen.

But if we knew all this was coming, why are we going over the bad news in detail? Partially because we’re living through a business case that’s among the most fascinating ever written. And because we should note the other side of the coin, the fact that the Vision Fund’s investments (a full list is on page four of this document) are doing kinda ok. Here’s the company, noting their performance, and underscoring its hope that the Vision Fund 2 will launch:

From $70.7 billion to $77.6 billion is about 10 percent. That’s not bad given the issues we’ve seen in some of the portfolio’s investments. I do not want to say that Vision Fund is doing fine and that the Vision Fund 2 is definitely coming; I don’t know enough to say that. But if SoftBank can tell people that even with a mistake like WeWork it can still generate returns, perhaps the Vision Fund 2 will launch after all.

Illustration: Li-Anne Dias.

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