DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2018-Q3

[Isao Moriyasu, executive]

I would now like to start DeNA's Earnings Presentation for the Third Quarter of Fiscal Year 2017.

On Slide 2, we have the financial results summary. For Q3, revenue was JPY 32.8 billion; IFRS operating profit was JPY 12.6 billion; non-GAAP operating profit was JPY 2.3 billion; and non-GAAP operating profit, excluding sports, was JPY 3.3 billion. The difference between our results and our initial forecast from 3 months ago was due to our recognition of approximately JPY 10.7 billion in other income during Q3 fiscal year 2017, which was profit recognized from the cumulative amount of the exchange differences related to the West subsidiaries. This led to a major increase in IFRS operating profit, meanwhile, our non-GAAP results did not meet our expectations. The main factors were that the game business and to an extent the E-commerce business did not reach our expectations. I will touch more on the reasons for that later.

Next, on Slide 3 is our financial results by segment. I mentioned that our results did not meet our expectations. Quarter-over-quarter, operating profit for both the game business and E-commerce business declined slightly. Meanwhile, in the sports business, operating profit fell quarter-over-quarter due to being in the off-season for baseball. But the loss improved on a year-over-year basis. Our participation in the Japan series and subsequent good performance had both direct and indirect benefits for our business.

For our cost and expense breakdown, please turn to Slide 4. There were no major quarter-over-quarter fluctuations. Marketing expenses, which are our main variable cost were higher than usual due to holiday initiatives, particularly in games. These costs were higher than the normal quarterly level of JPY 3 billion, this quarter we were JPY 3.5 billion.

Please turn to Slide 5 for the game business. We expected to see high virtual currency consumption growth in the game business over the holiday season, which is a high traction time for games in general. By increasing the user base through proactive marketing activities and driving excitement through special in-game events. However, our performance did not meet expectations. One title in particular, that I have discussed before, Gyakuten Othellonia, has had a good cycle of using marketing to bring in new users and grow revenue up through Q2. We aimed to grow this title further in Q3. But the performance of our November marketing initiatives led to lackluster performance for our holiday season initiatives. This title had a relatively larger impact on overall performance. As you can see from the graphs, virtual currency consumption increased slightly overall quarter-over-quarter, but operating profit for the segment decreased quarter-over-quarter. The conversion rate from virtual currency consumption to operating profit has worsened.

Going forward, we will continue to grow our promising titles further, while carefully monitoring expenses such as marketing and operating expenses, as we head into the new fiscal year.

I would now like to discuss updates in the game business. First, I'd like to talk about our partnership with Nintendo. Starting with Super Mario Run, as I mentioned last time, Super Mario Run received a major update to version 3.0 in September last year. It achieved 200 million total downloads and the number of downloads has continued to increase since then. We are maintaining a base of approximately 20 million monthly active users. This is a game that a wide variety of users around the world can enjoy.

Next, I would like to talk about Fire Emblem Heroes. Fire Emblem Heroes received a major update to version 2.0 in November 2017, enabling us to maintain and grow the number of active users. We are also seeing good business performance. February 2 was the one year anniversary of the apps release. We have implemented a variety of initiatives for users to enjoy, including the special campaign, celebrating the apps anniversary and are also running TV commercials.

Next, I'd like to touch on Animal Crossing: Pocket Camp. Animal Crossing: Pocket Camp was newly released during Q3. Many users are enjoying this game. And female players make up a high percentage of the active user base. Through adding game content, continuous updates and holding events, we aim to create a service that consumers can play daily. And that simultaneously contributes financially.

Now I'd like to discuss next fiscal year and beyond. In the Nintendo partnership, we have a number of titles that have been launched. We will continue to service existing smart device apps, so that users can enjoy them over the long term. For future titles in our partnership, today, we can discuss a smart device app from the Mario Kart franchise, Mario Kart Tour. That we plan to release during the next fiscal year. We will announce further details such as the launch date at a later time.

Now I'd like to talk about our game business, excluding Nintendo, which is on Slide 8. This quarter, we launched a new game called Megido 72. This is an RPG with very unique and highly strategic battles, a well-developed story, good character development and is overall a well-polished game. It's an original title so the user base is not yet large. But our current users are really enjoying the game. We are aiming to grow this title further going forward.

Next is our E-commerce business on Slide 9. Our processing settlement and auction business continue to show stable performance. Meanwhile, in travel, our transaction volume has been strongly growing these past few years, but recently, the growth pace has slowed. Our product mix has changed to include more products, such as plane tickets and sales channels with lower profitability. And the slowed transaction volume growth has been insufficient to offset the effects of the change in the product mix, leading to lower revenue and operating profit on a year-on-year basis. We have gained more clarity on the issues we are facing and we intend to regain momentum in this business going forward.

Please turn to Slide 10 for the sports business. We reached the Japan series this year for the very first time since we took over the team. Our team has gotten stronger. Our fan base has grown and we are seeing positive effects from the synergies between the baseball business and stadium operations. Since we made it to the Japan series, merchandise sales have maintained a high level, even in the off-season. And our official documentary, which is called FOR REAL, has seen increased popularity and high unit sales this year. And I sense that we are expanding our fan base. We have reached the limit of our stadium capacity, as we are now at over 96%, which impacts our future growth potential. We are working on our expansion plan to address that issue. By 2020, we intend to add about 6,000 seats to our existing about 29,000, and we will pursue other available initiatives in the meantime. One example is our flex pricing system for ticket sales. For popular matches or other special events, we can adjust the price to increase earnings. There are also numerous possibilities for initiatives in merchandise and sponsorships, and I believe, it is possible to achieve more growth.

Turn to Slide 12 for our guidance for Q4. We expect IFRS revenue to be JPY 32.5 billion; IFRS operating profit to be JPY 0.7 billion; non-GAAP operating profit to be JPY 1.2 billion; and non-GAAP operating profit, excluding sports to be JPY 2.9 billion. I'd like to explain our assumptions behind our guidance for non-GAAP operating profit, excluding sports. We expect to see a slight increase quarter-over-quarter in both the game business and the E-commerce business. Meanwhile, in New Businesses and Others, we have some proactive initiatives ongoing in Q4 in automotive and expect to have losses of approximately JPY 1.5 billion. Lastly, under other expenses, we expect to have approximately JPY 1 billion in asset retirements and impairment.

Turn to Slide 13 for our full year fiscal year 2017 guidance and our dividend forecast. While there has been no change to our dividend policy, we expect to maintain the dividend payout level from last fiscal year at JPY 32 per share, with an expected dividend payout ratio of 19.7%. This concludes my presentation.