DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2021-Q1

[Isao Moriyasu, executive]

I would now like to start the DeNA Fiscal Year 2020 Q1 Operating Results Briefing. First, I'd like to discuss the financial results summary. Revenue was JPY 30 billion. IFRS operating profit was JPY 12.6 billion. Non-GAAP operating profit was JPY 2.5 billion. The Sports business was significantly negatively impacted by COVID-19. But the Game Business and Live Streaming business showed good performance, leading to a non-GAAP operating profit overall.

Next, on Slide 2, is the most important message we want to share for this presentation. In Q3 of fiscal year 2019, the profitability of our Game Business has significantly worsened and we reported a significant impairment loss. We also had significant losses in our new businesses, making for a very challenging overall situation. At that time, we identified these 3 major initiatives as short-term focus areas.

In the 6 months since then, we have produced good results in all 3 areas. In the Game Business, we have a new hit title, and existing titles are also showing solid performance. On the cost side, we are also seeing good performance in our streamlining efforts, and I feel that our earnings base has become stronger.

The slide reads optimize growth investment approach in new business areas. To provide an update, some services that were operating at a loss are now no longer consolidated. In addition, the Live Streaming business has seen rapid top line growth and become profitable. That had major impact on overall performance.

Finally, we have been reducing fixed costs. Each business has been working hard to reduce costs, and the corporate and common functions, essentially shared company costs, have also been significantly streamlined. We've reduced costs by over JPY 500 million compared with Q1 last fiscal year. These 3 factors combined to enable us to achieve a clear V-shaped recovery and non-GAAP operating profit, excluding sports, with Q3 fiscal year 2019 as the bottom.

Even compared to 2 fiscal years ago, we have achieved a higher level of performance. It's not the case, but we had some onetime spike that occurred in Q1.

We saw good performance in both the Game and Live Streaming business for July. With COVID-19, many people have been staying at home, and this has changed their demands for services. I feel this has impacted us as well, and we intend to continue working in our Game Business and Live Streaming business to continue to grow and establish a solid business foundation as we all deal with COVID-19. It's not clear when we will no longer be impacted by COVID-19, but when that time comes, we can expect contribution from the Sports Business again, which will be an add-on. That's our view on our business.

We have changed our segments from this announcement. In the Automotive business, our core services are no longer consolidated. So we have put it inside New Businesses and Others. Up to this point, we have talked about our social live streaming services, including SHOWROOM and Pococha. But as live streaming is a more common global way to refer to this type of service, when we decided to create this new segment, we decided to call it the Live Streaming business.

Next is the financial results summary by segment. For the Game Business, we did see a decline from Q4, but compared to Q1 last fiscal year, on a year-on-year basis, we had an increase in both revenue and operating profit. For the Live Streaming business, last fiscal year, we had solid growth. But in Q1 this year, we saw a dramatic increase in top line, and this also led to the business becoming profitable.

The Live Streaming business is mainly Pococha and SHOWROOM. But looking at the revenue for Q1, about 70% came from Pococha. For the operating profit, the majority came from Pococha.

For New Businesses and Others, we have multiple loss-making businesses that are no longer consolidated and the amount of losses has decreased significantly.

Next is our slide on the cost and expense breakdown. Now I would like to present each of our individual businesses. First, the Game Business. Typically, Q1 has weaker performance than Q4 since we have several major titles with anniversary events in Q4. And that held true for this year as well. We had major titles with events in Q4 that then had weaker performance in Q1.

But many of our existing titles actually exceeded our initial expectations and performed well. That was true for both Japan and international games. We also had the traditional Chinese version of Slam Dunk launched in late May. So it had a little more than a month of contribution. But it became a hit, exceeding our expectations. This combined to lead to a virtual currency consumption increase on a year-on-year basis.

On the cost side, we have also streamlined quite a bit, and we recorded a year-on-year increase in operating profit as well. It is down compared to Q4, but very good performance.

More specifically about Slam Dunk. This is a partnership title with Toei Animation. It first launched in Mainland China in December last year. This was a hit in line with our expectations, and we have been working on making this title available outside of Mainland China.

We first launched the game in the traditional Chinese areas of Taiwan, Hong Kong and Macau. Their total population is about 30 million compared with a population of 1.4 billion in Mainland China. This means that the user bases are on completely different scales. But when we compare the initial 30-day and 60-day revenue performance of the traditional Chinese version versus the simplified version, they're actually comparable. This makes the traditional Chinese version a major hit.

We launched in South Korea last month and were seeing solid performance there. We will continue to explore options for new launch regions and work on the live operations of the game. But it's safe to say that Slam Dunk is a hit title.

Our strategy for the Game Business is to leverage our 3 strengths. We use our strong relationships with IP holders to develop major IP titles in Japan and China. And then we do not limit ourselves to launching the game in one country, rather we publish for users around the globe. Slam Dunk is a success example from this strategy. It is the first game that came out of China and was successful globally for us. We have a good pipeline based on this strategy and we will work to create more hit titles from our games coming at the end of this fiscal year into the beginning of the next fiscal year.

Next is the Sports business. We were impacted by COVID-19 and the baseball season wasn't able to start for a while. And I know that was frustrating for many fans. On June 19, we finally had the season start. And from July 17, we have been able to have spectators in the stadium, albeit only 5,000 people. Unfortunately, right now, it isn't possible to fill the stadium to capacity with spectators to cheer for the team. We have been proactively looking for ways to make use of online methods, in particular, to provide value and give fans a way to enjoy spectating, and we plan to continue doing so.

In our new business areas, we reorganized our business portfolio into 3 approaches 6 months ago. And we have been pursuing multiple new business initiatives, in line with those approaches. First, we have disciplined investment in line with growth conducted by DeNA. This approach includes services like Pococha and KenCom. Under the second approach, we look for flexible capital policy options or for a partner to help us grow the service. And if we can set up a good structure, then we will do so. This includes, for example, the taxi dispatch app, MOV, which underwent a business merger and is now part of the new entity Mobility Technologies.

SHOWROOM is another example where we took this approach. We had, of course, invested in these businesses ourselves up to this point and incurred losses to build up the business. These businesses, we're able to find partners who value their projects highly. And hence, we're able to raise new funds. This does mean that these businesses are no longer consolidated in DeNA, but it's led to new value and to a new and better structure with these partners. And we will support them to continue to grow and achieve even higher business value.

Now I would like to talk about our new business segment, the Live Streaming business. Up until now, we had called this Social Live Streaming, and our focus area has not changed. We have a chart here outlining the space with a live versus archive axis. Of course, we focus on live. The other axis is the type of stream, whether it is pure content or communication with the live streamer. Our focus area is the live and communication quadrant. That is what we have been referring to as Social Live Streaming, and we will continue to pursue efforts in this area through our newly named Live Streaming business.

This business has been bolstered by COVID-19. In particular, it's really challenging to find opportunities for face-to-face communication in our current environment. But through our service, people are able to experience that communication online. Users really like this offering. We have been seeing good growth up until this point, but we've really been bolstered by our current environment.

I would like to touch on our strengths in the Live Streaming business. We have a great deal of experience operating mobile and social games. And while the value provided to users in the Game Business versus the Live Streaming business is different, we have been able to use our live operations know-how from the Game Business in the live streaming space.

For social games, we run live operations to get users to enjoy the games for a long time. In the Live Streaming business, we have been thinking about and implementing mechanisms to help users enjoy the service for a long period of time. I think we've gotten a great response from users so far. It's also characterized by being a community service. That means we need to generate excitement and make it a good community for everyone. And we have been able to use our live operations know-how in this respect as well.

In social live streaming services, live events serve an important role. We plan a variety of different events, including events to appeal to different types of users so that we can appeal to a wide variety of users. We've seen good results in these types of live operations. And it's a sign of how our game know-how is useful in this space.

As this is a communication service, we have to make sure that problems do not occur and ensure the environment is healthy. In this regard, we have operated the social network Mobage for over a decade. And we have know-how and a customer support structure built up that we can use to make sure that we keep this environment healthy. We'll keep doing that important work and invest to grow our service in this area.

This concludes my presentation. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]