DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2019-Q3

[Isao Moriyasu, executive]

I would now like to start DeNA's Earnings Presentation for the Third Quarter of Fiscal Year 2018.

First, I'd like to present our financial results summary for the third quarter. For the third quarter, we had JPY 26.4 billion in revenue and a JPY 2.1 billion IFRS operating loss.

Our non-GAAP operating loss was JPY 1.5 billion. If you exclude the performance of our Sports Business, which has seasonality, as you can see in our reference section below, we had non-GAAP operating profit of JPY 0.9 billion.

We underperformed in the third quarter and the breakdown per segment is on Slide 2.

In the core Game Business, we saw a quarter-over-quarter decline in revenue, which was a major factor in our overall underperformance. I will discuss the details more later. But we also had a nonrecurring accounting adjustment, and combined, this led to a further decline in operating profit so both revenue and operating profit were down quarter-over-quarter.

Another major factor was the Sports Business. On a full fiscal year basis, we are seeing good performance such as year-on-year growth in stadium attendance.

Year-on-year Q3 performance was impacted by the match schedule. In fiscal year 2017, we had some regular season home games in Q3. But this fiscal year, our regular season ended in Q2.

Last fiscal year, we also had direct and indirect impact from making the climax series and Japan series in the post-season. So on a year-on-year basis, our Q3 performance looks poor, but this business is doing well and is in line with our initial forecasts for full fiscal year performance, despite the large seeming loss in Q3.

For New Businesses, we're continuing our investment, and the actual investment amounts are in line with our initial plan.

For our cost and expense breakdown please turn to Slide 3. There are no notable changes in either cost of sales or SG&A. We are seeing increased investment in the New Businesses segment, but otherwise, we are improving our cost structure.

Next, please turn to Slide 4. Recently, we announced a revision to our full year guidance. First, the underperformance of the Game Business had the most significant impact on our revenue, accounting for a JPY 17 billion revision.

Additionally, other factors such as the sale of DeNA Travel and underperformance of some New Businesses also contributed to the revenue revision, accounting for about JPY 7 billion.

For operating profit, we incorporated the impact of the profit change in the Game Business, which was an approximately JPY 7 billion decrease and the expected impact from the sale of Paygent and other factors, which we expect will account for a gain of about JPY 5 billion.

Now I'd like to discuss our core Game Business in more detail. This slide shows the difference between our initial forecast and our revised forecast for the full fiscal year. Originally, we were targeting virtual currency consumption of JPY 200 billion. But we revised this forecast down by JPY 30 billion. In relation to this underperformance, our operating profit was also impacted. We saw a profit change decline about JPY 13.4 billion, and while we have been proceeding with our initial plan to optimize costs in accordance with top line performance to the amount of JPY 7.3 billion, that was not enough to compensate for the divergence with the profit change. Altogether, this resulted in a net decrease of about JPY 6.9 billion.

Next on Slide 7 is our quarterly virtual currency consumption and segment operating profit.

Virtual currency consumption was down quarter-over-quarter in Q3, which impacted our operating profit.

In addition, we recognized a JPY 0.8 billion nonrecurring accounting adjustment, which was a significant amount for the quarter. This was due to expenses that were not properly recognized and have now been corrected. We expect this will be nonrecurring and only impact Q3.

On Slide 8, we have more detail about Q2-to-Q3 performance and expected Q4 performance. Quarter-over-quarter, we saw a decrease in top line for Q3. With the profit change decrease and nonrecurring accounting adjustments, we also saw an operating profit decline quarter-over-quarter.

Looking ahead to Q4. Typically, we have a strong event schedule for New Year's. And we just had a good January. Also, some of our key titles will have their anniversary events in the February and March time frame. We will have to see how we do in February and March, but as Q4 is typically a strong quarter, given these factors, we expect to see performance pick up in Q4.

Looking to next fiscal year, we will continue our cost-control measures, but there are limits to what we can achieve. So we will need to continue our efforts to create a sizable hit in order to grow top line.

We have an exciting pipeline ahead of us including the globally popular IP title. We'll do our best to create a hit.

Now I'd like to provide an update on individual games, starting with Nintendo. Super Mario Run and Fire Emblem Heroes are our longest running Nintendo titles. And we are using events, major updates, expanding to other regions and other methods to ensure that users continue to enjoy them over the long term.

On Slide 10, we have an update that was shared earlier by Nintendo. Mario Kart Tour was originally planned for release this fiscal year. But we recently announced the delay of this title in order to enhance the quality and expand service contents, such as in-game events after its release. We are now targeting summer 2019, which is next fiscal year.

Now I'd like to talk about the new title. This fiscal year, we had talked about the rise of various international titles, especially for Chinese developers in the Japanese smartphone market. We view this as an opportunity for collaboration, rather than a threat.

We have recently announced the second title in our initiative to bring popular international titles to Japan. This is the game called Forever 7 Days, which is developed by NetEase and available in China, Hong Kong, Macau, Taiwan and South Korea. We plan to launch the Japanese version, called [ Towa no Nanoka ], in spring this year. DeNA will be the publisher, and we'll use our experience in game operations to take on the typical publishing roles such as game operations, marketing, customer support and others.

Now I'd like to talk about a new collaboration. The game market in Japan is maturing. And this has reaffirmed the increasing importance of IP titles. We recently announced the decision to establish a joint venture with Shueisha. We plan to jointly work on IP games, and also look at opportunities outside of games in the broader entertainment genre. We will start with initial planning and continue exploring possibilities.

Now I'd like to touch on our new business pillars. This fiscal year, we are focusing on 3 key areas: MOV, which was formerly called TaxiBell; insurance integrated with wellness programs; and social live streaming services.

In terms of recent updates, we just announced our agreement to partner with MetLife Insurance to work together on insurance integrated with wellness programs. This partnership will be our first initiative to realize insurance integrated with wellness programs.

I would now like to give more detailed information about our various updates for MOV. We launched this service first in Kanagawa in April 2018, and in that area, we now have 5,500 vehicles connected to our service. We have been steadily expanding our vehicle base in Kanagawa, validating the service. And in December, we launched in Tokyo, where we have an -- about 4,000 vehicle base.

For the launch, we engaged in various PR initiatives, such as ours 0-Yen-Taxi initiative. And December being a busy period for taxis, this led to a dramatic growth in usage.

This coming spring, we plan to expand into the Kyoto, Osaka and Kobe region. We're in talks with many taxi companies now, and we are on track to have a similar starting vehicle base, as when we launched in Kanagawa and Tokyo, so we're working on that now.

In addition to encouraging users to make use of the taxi-dispatch function of our service, we, also, are looking to build added value for the taxi operators through MOV. For this purpose, we are building a business model with multiple parts. For each dispatch, we will collect a dispatch fee. In addition to that, we will also charge a monthly fee for using the app dispatch service. But we will also provide services involving connecting payment devices, the radio, and otherwise, working in partnership with the taxi companies and other players to put devices into more vehicles and provide more convenience. Also, we have started to show ads via a tablet in the backseat. We started this backseat ad service in Q3. And we have seen an enthusiastic response from clients. So this service is off to a great start.

Finally, we have AI support. MOV is a dispatch app, but in Tokyo, roadside pickups are still much more common. So we are working on field tests to predict the demand from people wanting to be picked up on the roadside and pick them up more efficiently.

At first, we used a 500-meter mesh to identify high- and low-demand areas. But now we know that's not accurate enough to really raise productivity, so we went one step further and developed a method to ascertain demand in real time on a per-road basis. We also provide navigation functionality to tell the taxi where to go, all in real time.

In a computer simulation, we saw good results. So in Q3, we did a test with a few dozen taxis in an area of Kanagawa to see the degree of productivity gained. Our initial results were encouraging. It is said that there is a twofold difference in productivity between seasoned taxi drivers and beginners who are trying to get road-side pickups. But beginners using our navigation system were able to improve their productivity at least 2 average levels.

We will continue to improve this offering going forward and make it able to handle many types of environments more efficiently. We plan to continue these R&D activities.

Next, I'd like to talk about the e-commerce business. We recently announced the sale of Paygent. Revenue had been growing slightly. But the payments base is undergoing structural changes, with tougher competition from major players for share. We felt that if things stayed the way they were, Paygent would not be able to continue growing. After careful consideration, we decided that the new alliance with NTT Data is the best option to enable Paygent to succeed in this new environment, so we went ahead with that decision regarding Paygent.

Next, I'd like to touch on our dividend forecast. For fiscal year 2018, we have a regular dividend of JPY 20 per share as per our dividend policy. And we have a JPY 20 onetime special dividend to mark the occasion of our 20th anniversary, making for a total expected dividend of JPY 40 per share.

This concludes my presentation.