DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2023-Q1

[Shingo Okamura, executive]

Hello, everyone. This is Shingo Okamura. I would now like to present our earnings results for the first quarter of fiscal year 2022. First, our financial results summary and financial highlights.

In Q1, we had revenue of JPY 34.8 billion, IFRS operating profit of JPY 4.0 billion and non-GAAP operating profit of JPY 3.8 billion. In our view, this is a solid start towards our fiscal year 2022 goals, namely, to aim for a year-on-year increase in revenue and non-GAAP operating profit. Our performance is solid, both in the short term for Q1, but even more so, in my view, we have made major progress in our mid- to long-term strategy, including strengthening our business portfolio.

As you can see, here are the financial results by segment. Our Game Business performance was mainly driven by existing title performance. So we saw a decline in segment revenue. For the others, Live Streaming, Sports and Healthcare, you can see that we have good growth.

And here is the cost and expense breakdown. I have no particular comment to make here.

Now I will share about our progress towards building our long-term portfolio. When I became CEO last year, I shared my 3-year plan for building our portfolio and growing our businesses with a higher degree of visibility. Since fiscal year 2021, we have made major progress towards enhancing our business portfolio in our 2 approaches, including the use of M&A. We had a few M&A in Q1, in particular.

Some of our initiatives to date include, in the entertain approach, our international expansion of Pococha, following the good growth of live streaming in Japan. We also have IRIAM, which is a live streaming experience distinct from Pococha. By bringing IRIAM into the DeNA group, we strengthened our business portfolio. In addition to Nippontect Systems who joined the DeNA group last year, in Q1, under the health care and medical spaces, we announced that DATA HORIZON and Allm would join the DeNa group.

Amidst this 3-year midterm plan, we have now almost reached 1.5 years. With the remaining 1.5 years, we plan to shift to focus on initiatives to further grow and enhance the earnings power of our strengthened business portfolio.

For the financial highlights, we are using our healthy financial base to grow corporate value. For strengthening individual businesses, we look at non-GAAP operating profit. But overall, we are also considering ROE while aiming to grow corporate value.

You see the chart on the left for our financial information as of the end of June 2022 as well as the information on the right. First, for investment in new growth and initiatives. In May, we concluded a basic agreement to make Allm a subsidiary. In August, we converted DATA HORIZON into a subsidiary. Under increasing asset efficiency, we updated our shareholdings for policy purposes. We also conducted JPY 15.0 billion total in borrowings in Q2 for our 2 M&A. And of course, shareholder returns. We have a share buyback program for a maximum of JPY 15.0 billion that has been underway since July. All of these initiatives will be reflected on our balance sheet going forward.

Now I will go into each state area in more detail. First, entertain. For the Game Business, our Q1 performance was impacted by seasonality in Japan existing title performance. Our Game Business is a very important business for us. For the sustainability of this business, we aim to secure a good level of profit in the entertainment space despite volatility in games. And we are always reviewing our strategy. In our strategy to date, we aim to build our performance with approximately 5 titles in fiscal year 2022. Naturally, this is important.

Specifically on June 29, DeNA China launched Three Kingdoms Origin to traditional Chinese-speaking regions, South Korea and Southeast Asia. I am looking forward to seeing the performance of this game. However, we also look more broadly at this space, not just limited to games and look to create business opportunities in the broader entertainment space, making use of our partnerships and technology, et cetera.

Yesterday, we concluded a basic agreement related to acquiring a portion of stock in CryptoGames as an initiative into the Web3 space. CryptoGames works on blockchain games. Web3 is an exciting space, and we are looking to use our core competencies in this area in entertainment.

Next is the Live Streaming Business. Pococha Japan revenue was up quarter-over-quarter. And as you can see, the segment overall is continuing revenue growth trend. We are continuing to both work to grow revenue while also engaging in strategic growth investment. Let's look at each service.

First, Pococha Japan. Usage trends are solid, and we achieved 4 million downloads as of June 30, 2022. We saw a rapid growth due to COVID-19, but we had a sustained growth trend even before the pandemic. We are continuing our growth measures, including measures to acquire new users. We also announced a business alliance with UUUM today regarding broadcasters. We will incubate good model broadcasters. And it is important for us to continue growth measures that are welcomed by users, including both broadcasters and viewers. Pococha Japan continues to steadily grow.

Meanwhile, we take what we learn and apply it to our growth investments. First, IRIAM. We had 930,000 downloads as of June 30, 2022, and the highest quarterly revenue to date. This is great growth. In Q1, we proactively invested primarily in Pococha U.S. User engagement continues to be positive, and we achieved 580,000 downloads as of June 30, 2022. However, as you can see, the monthly paying unique users was down slightly in Q1. We are trying to make a sound Pococha-like community where broadcasters and viewers have a good relationship. Unfortunately, we saw some overheating with broadcasters supporting each other with gifts. We're putting measures into place to address that and establish a solid foundation for growth. That concludes the Entertain segment.

Next, I will talk about Serve. As mentioned at the beginning, we had a few major M&A in Serve, in Healthcare specifically. I will share the details in this section. First, Sports, which we include in our Serve approach. Fortunately, since the beginning of the season, we have had no restrictions on baseball attendance, and the segment performance significantly improved year-on-year. It's also not just baseball.

In the B. League, the Kawasaki Brave Thunders 2021 to 2022 season had revenue growth and operating line improvement over last season. Next season will be the fifth since the team joined the DeNA group. Our goal was to achieve profitability in that fifth season, and that goal seems feasible. Together with professional baseball, our Sports Business is recovering to its pre-COVID-19 levels, which is wonderful.

Next is the Healthcare Business. First, for our existing business, we saw continued revenue growth and operating line improvement in Q1 year-on-year. We are steadily building up our earnings power. In addition to that, we made progress in strategic initiatives for mid- to long-term growth, including strengthening our business portfolio. On the next slide, there is more detail. Our Healthcare Business to date is shown on the left. Our existing business had an annual revenue of JPY 3.0 billion with a head count of 171. To this from August, DATA HORIZON joined us as a part of our acceleration of our health big data strategy. Their annual revenue was JPY 3.0 billion with a head count of 281.

We also have under expansion and leap into a peripheral area, specifically the expansion into the medical area, our initiative to make Allm into a subsidiary. This is in progress now. Allm's annual revenue was JPY 3.2 billion with a head count of 113. These 3 will all be under this business area going forward. And as you can see, we expect to reach meaningful revenue and head count scale for the business.

Going forward, we will focus on further growth of a strengthened business portfolio and earnings-based enhancement. I also intend to continue to pursue and achieve our goal to achieve meaningful profit in the 3 years, counting from last fiscal year until fiscal year 2023. I also expect we will be able to realize synergies between these efforts. I would like to share some more detail.

During the last operating results briefing, I explained this in some detail. We intend to accelerate our health big data strategy. Our tender offer was completed in July 2022 and DATA HORIZON was made a subsidiary from August. By combining the existing businesses of DeNA and DATA HORIZON in the data health business, where DATA HORIZON has been active, we will pursue further growth, and we will accelerate our initiatives to become #1 in the data use business.

The data health business is for insured people. We will be expanding our distribution channels and strengthening sales utilizing both customer bases. We will also make use of our technical abilities and accelerate collaboration on providing solutions for insurance businesses. The data use business I described last time, our partner, Medical Data Vision, holds a large amount of medical data. And combined, the databases of DeNA, DATA HORIZON and the Medical Data Vision cover 15 million people from the healthy to those with high risk. This enables analysis and research use covering all ages. I expect we will be able to provide a meaningful business for society and customers.

Next, I would like to talk about Allm. We are looking to expand from healthcare and leap into a peripheral area. An important part of the social background is the imminent transformation and working style for doctors. Currently, more than 1/3 of hospital physicians are working more than 960 hours annually. However, from April 2024, new rules will be coming into effect, stipulating a maximum number of annual working hours, and there will be penalties for violation. Also, as you can see on the right, it is not just an issue of a shortage of doctors. The distribution is also uneven.

Faced with these issues, regional medical organizations are considering how to make their operations sustainable. The key is digital transformation in medicine to increase work efficiency. This is also a pressing issue for emergency medicine where people's lives are at stake and specialized medicine. In our view, Allm's solutions are a powerful solution to these issues.

Allm is a company with a high share of solutions encouraging digital transformation in the medical and care spaces. By converting Allm into a subsidiary, and in particular focusing on Join, a secure communication app for medical practitioners, we will focus on creating business opportunities through the spread of Join. I am also confident we will be able to achieve profitability for Allm in fiscal year 2023 and achieve continuous growth.

Join is an app for doctors used in many settings, including regional medical collaboration with other hospitals and monitoring from outside the hospital. Join has a high-level security and was the first medical device program covered by insurance in Japan. For the spread of Join, we have connections with key opinion leaders who work in many medical treatment settings all around Japan. Join and these key opinion leaders have built good relationships. As a result, Join has been introduced to approximately 20% of core hospitals. And we expect to see further use by existing customers and network effects from the spread to related hospitals and facilities.

DeNA also has an existing network through our business activities under our Serve approach. We will use our negotiation capabilities to expand the customer base. We will serve and solve social problems while also operating and expanding this business. The upside we expect from Join development is, for one, in the development of remote medicine systems after COVID-19 and addressing the shortage of doctors I mentioned before. The shortage of specialists can be addressed through digital transformation. Linkage with IoT devices will allow collaboration between hospitals and clinics.

Looking at the potential number of hospitals and beds, among other information, our estimate for the potential Japan market is in the several hundreds of billions of yen per year. I believe we will be able to grow our business in this area. The opportunity is not limited to Japan. There are also global growth opportunities, including collaboration with global pharma. Allm is already in business in 30 countries and the entertain approach, so games and live streaming, we already provide services globally. But in serve as well, we believe the opportunity for us to go global with our businesses will come.

Finally, I would like to share one example that is straightforward in the Healthcare Business. Nippontect Systems who have been part of the DeNA group since last year provides a cognitive function test system called MENKYO to prefectural police headquarters, training institutes and other test facilities around Japan. This system is in compliance with the amended legal requirements for testing the cognitive function of elderly drivers. This is a pretty straightforward service that is easy to understand.

The elderly person does the cognitive function test on the tablet and the result comes quickly. So there is a reduction in the time required, making it more efficient. This is a clear example of a service that is serving to solve the social problem. We plan to start operations in 19 prefectures in fiscal year 2022. We also plan to distribute the system to financial institutions, insurance companies and local municipalities. I wanted to share the progress we've seen in the distribution of the system.

Since I became CEO, and we shared our new mission, vision and value for DeNA, we have worked to evolve our business portfolio with our 2 approaches: to entertain and to serve; and grow our businesses. After 3 years, my intention was to share a greater level of detail, including visibility on more numbers for the performance of each of our businesses. It has been almost 1.5 years since I became CEO. And I feel that the preparation needed for our business portfolio is essentially complete.

At almost exactly the 1.5 years mark, in October 2022, we plan to hold a DeNA IR day. At these operating results briefings, of course, I share our progress and updates. But I would like to take a little more time to really get into the new serve approach as well as live streaming. I want to share the level of detail at which we are engaging in business to hopefully deepen your understanding of what we are trying to do at DeNA. More information about the exact schedule and event itself will be posted on the DeNA homepage when it's available.

This concludes our presentation for Q1 of fiscal year 2022. Thank you for your attention.

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