DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2018-Q4

[Isao Moriyasu, executive]

I would now like to start DeNA's earnings presentation for the full year fiscal year 2017. On Slide 2, we have the financial results summary. As is on the slide, for the full fiscal year 2017, revenue was JPY 139.4 billion, IFRS operating profit was JPY 27.5 billion, and non-GAAP operating profit was JPY 18.1 billion. The slide also shows the fiscal year 2016 numbers for comparison.

In the Game Business, virtual currency consumption and app profit grew. But the Game Business operating profit was impacted by higher costs associated with proactive initiatives during the fiscal year. I'll talk about this in more detail later in the presentation.

The Sports Business saw growth in both revenue and operating profit. This business has grown as a profit-generating business. We are also making progress with initial investments and evaluating opportunities in New Businesses. Investment here was about the same level year-on-year.

Slide 3 shows our full year financial results on a per quarter basis. Slide 4 shows our financial results by segment, and you can make a quarter-on-quarter comparison.

The Game Business revenue and operating profit increased quarter-over-quarter. From Q2 to Q3, Game Business operating profit declined. But in Q4, operating profit returned to the Q2 level.

The Sports Business revenue was down, and the operating loss increased quarter-over-quarter, which is expected given that baseball is in the off-season.

For New Businesses and Others, we have been proactively investing mainly in automotive, resulting in a JPY 1.8 billion loss in Q4.

Next is our cost and expense breakdown. There have been no significant changes to discuss.

Please turn to Slide 6 for the Game Business. For the Game Business, see the graphs for our quarterly virtual currency consumption and operating profit. Virtual currency consumption increased quarter-over-quarter. In previous quarters, operating profit had been declining, but operating profit for Q4 returned to the level of Q2.

Please turn to Slide 7 for our view of the performance of the Game Business for the full fiscal year. Virtual currency consumption was up on a year-on-year basis. Up to this point, we had discussed how we would offset the decline in browser with apps and grow overall. This is exactly what happened in fiscal year 2017. We saw good growth in overall virtual currency consumption.

This fiscal year, we saw an increase in the app and browser profit change on a net basis, equaling JPY 1.5 billion. However, we saw year-on-year increases in our fixed costs and other costs related to proactive initiatives in apps, which was higher than the increase in profit on a net basis, resulting in a year-on-year decrease in our operating profit for the Game Business.

Next is our E-commerce business on Slide 8. Processing settlement continues to see transaction volume growth. Travel gross transaction value is about the same level as the same quarter of the previous fiscal year, but changes in the product mix and its impact on our commissions have resulted in a slight decline in revenue on a year-on-year basis. The auction and other segment saw steady contribution.

Please turn to Slide 10 for the Sports Business. In fiscal year 2017, we saw good growth. I'd like to talk about our plans for fiscal year 2018 onwards. Currently, our stadium attendance is already reaching capacity at 96.2%, so it is unrealistic to try and grow it further in our current situation. Therefore, in fiscal year 2018, to maximize our business, we will focus on initiatives like our flex pricing system, possibilities in improving our food and beverage options and increasing sponsorship revenue.

A longer-term initiative we are engaging in is the second one listed here, the expansion of Yokohama Stadium. Some of the seats will be available in fiscal year 2019 while the rest will be available in fiscal year 2020. We plan to expand capacity by 6,000 seats from the current 29,000, a 20% increase, giving us potential to further increase ticket revenue.

The final initiative I'd like to touch on today is the Smart Venue concept, which we are pursuing under the vision, delighting people and the community through sports. This fiscal year, we will create a detailed business plan for this initiative. Since this is a long-term initiative, we expect to see contribution beyond fiscal year 2020. We aim to not simply be a baseball team. Instead, we aim to have broader initiatives.

I'd like to now discuss our strategy progress and outlook. Last year in July, we held our business strategy briefing where we discussed our mid- to long-term strategy. I'd like to touch on some points from that presentation. At the time, we discussed our mission and vision as a company, and we defined them.

Our mission ended up being the same as before, delight and impact the world. Delight can mean delighting your users or providing a service that is helpful or other kinds of delight. We aim to provide a variety of delight and by doing so, to impact the world in a major way. As long as DeNA exists, this will be our unchanging mission. We will continue to delight and impact the world.

Our vision, which is our long-term management approach, covers the next 10- to 20-year time frame and is more specific. Up to this point, DeNA has been an Internet company and use Internet technology to provide a variety of services and businesses. Going forward, we plan to add AI to our Internet core competency. We will be an IT company. We will use IT to provide delight to the world through our services.

On Slide 12, we have our business portfolio, which includes a variety of businesses. Internet and AI technology is at the core of our businesses. Games and entertainment are our core business, and sports is growing. E-commerce was our founding business, and we also have new Internet services. Our New Businesses' focus is on industries where the adoption of Internet technology and the realization of its benefits have been slow, specifically automotive and health care.

This slide, strengthening business portfolio and view for mid- to long-term growth, is the same as the one we shared in our business strategy briefing held in July 2017. There has been no change here. We will continue to strengthen the core Game Business. That's the first major point.

Secondly, over the long term, which I view as being roughly fiscal year 2025, we will create multiple new business pillars, which will have major contribution. Fiscal year 2020 will be used as a checkpoint to confirm our progress towards achieving our long-term goals. We will want to show you that we are making progress in growing our businesses not just internally but also to all of you. We will also proactively utilize M&A opportunities, not just organic growth, to strengthen our portfolio.

Now I'd like to discuss our FY 2018 approach, which is on Slide 14. There are 2 main initiatives I'd like to discuss today. The first is to ensure healthy profitability in the core Game Business. Recently, operating profit in the Game Business has been in a declining trend, and we intend to cut off that trend and ensure healthy profitability. The second is to create new business pillars by the mid-2020s. We are pursuing various possibilities. And now we will pursue proactive investment in TaxiBell, insurance integrated with wellness programs and social live streaming. We are seeing progress with those services and aim to focus on them. These are our 2 main initiatives.

On Slide 15, I'd first like to talk about ensuring healthy profitability in the core Game Business. We will use our learnings from fiscal year 2017 and carefully manage costs in accordance with top line growth to maintain profit at least at the level of fiscal year 2017. We are also developing new titles, utilizing globally popular IP and aim to create future hits. We've already talked about Mario Kart Tour, and there is another title with major global IP we're currently working on. We aim to create future hits from these titles, so we will maintain profit and create new titles and aim to have fiscal year 2018 be flat and secure a return to growth year-on-year in fiscal year 2019 for the Game Business.

Starting in fiscal year 2018, I am also serving as the Head of the Game & Entertainment Business Unit, so I will make this area my priority.

Next is our view for the structure of the Game Business. Our guidance for virtual currency consumption for fiscal year 2018 is approximately JPY 200 billion. This is growth year-over-year. At the same time, we will optimize ordinary fixed costs such as infrastructure and QA costs. This cost block will be a focus. We will also manage per title costs such as marketing costs, outsourcing expenses and other investment for future performance in accordance with top line growth. This way, we will pursue growth while also managing costs. Our main priority will not be to achieve the JPY 200 billion in virtual currency consumption, rather it will be to manage costs appropriately and keep fixed costs at the appropriate level. Managing costs appropriately is key for us this fiscal year.

Now I'd like to discuss update in the Game Business. First, I'd like to talk about our partnership with Nintendo, starting with Super Mario Run. Despite the fact that Super Mario Run was released over a year ago now, it has steadily received new users and is maintaining a base of approximately 20 million monthly active users. And this title is enjoyed by a wide variety of users globally.

Next, I'd like to talk about Fire Emblem Heroes. The 1 year anniversary was in February 2018. The number of active users is being maintained and grown, and we're also seeing good business performance. The share of overseas sales is steadily growing. Previously, the Japan share was high. But now the overseas share is growing, showing that more overseas users are playing the game, contributing to sales. Going forward, we will be focusing on a variety of initiatives to excite users such as adding new events and doing marketing.

Next, I'd like to touch on Animal Crossing: Pocket Camp. This app was released during Q3 fiscal year 2017. Many users are enjoying this game, and female players make up a high percentage of the user base. We added game content and other continuous updates and held in-game events. We aim to create a service that consumers can play daily and that simultaneously contributes financially.

Now I'd like to discuss fiscal year 2018 and beyond. In the Nintendo partnership, 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 fiscal year 2018. We will announce further details at a later date.

Now I'd like to talk about our Game Business, excluding Nintendo, which is on Slide 19. On this slide, we highlight some existing titles such as FINAL FANTASY: Record Keeper and Gyakuten Othellonia, which we will be continuing to strengthen. Last fiscal year, we released Megido 72, which we intend to strengthen going forward. For fiscal year 2018, we have already announced 2 new titles. For the fiscal year in total, we plan to release 5 titles and have both additional IP titles and original titles in our pipeline.

Now I'd like to talk about our second major initiative in fiscal year 2018, our proactive investments. First, about the amount. In fiscal year 2017, the investment was JPY 5.5 billion. And for fiscal year 2018, we expect to expand that to about JPY 8 billion. We also shared the breakdown here. Automotive is a particular focus among our New Businesses, in particular, TaxiBell. So we will invest proactively in TaxiBell, insurance integrated with wellness programs and social live streaming, and aim to increase their chance of success. Today, we have the head of the automotive business here to explain our strategy in the automotive business in more detail.

[Hiroshi Nakajima, executive]

My name is Hiroshi Nakajima, and I am the executive officer in charge of the automotive business unit. I'd like to share with you about our automotive business. It's been 100 years since the automobile first entered the world, but there are still many issues related to automobiles and transportation around the world. We aim to use new Internet and AI technologies to solve these problems through our businesses. The vision for the automotive business is Anything, Anywhere. And we aim to create a world where people and things get where they need to go in safety and comfort. We have been engaged in this business from 2015. Since the start in 2015, we have pursued service possibilities in a variety of areas, including logistics and car sharing. In fiscal year 2017, one significant development was the start of TaxiBell and another was the field test of the robo-vehicle service, Easy Ride, in partnership with Nissan. These were significant first steps.

Now in fiscal year 2018, we will proactively invest primarily in TaxiBell with a view to mid- to long-term success. For the mid- to long term, we aim to pursue business growth for services that combine existing manned services and Internet and AI, for example, TaxiBell, that add value in that way. We will also establish competitiveness and engage in initiatives aiming towards next-generation unmanned services. This is all under our vision, Anything, Anywhere.

Now I'd like to touch on some specifics about TaxiBell. Last year, in fall, we held a field test with approximately 150 vehicles in cooperation with the Kanagawa Taxi Association to determine the potential of this business in Japan. Through that test, we determined that there was good business potential and decided to move forward with the service. The official launch was last month, and the service is now active in Yokohama and Kawasaki. In the summer, we will expand to cover all of Kanagawa Prefecture. About half of the operators who are Kanagawa Taxi Association members are available for dispatch now. There is some difference depending on the area. But in general, about 1 in 2 taxis in Kanagawa can be summoned by TaxiBell.

In our fall field test, we saw good business potential. And in the few weeks since the launch, we have gotten off to a good start with downloads, dispatch volume, usage to date and other metrics. This is as we expected, and we think this is a promising service. This service, of course, relies on cooperation and contribution to our partner operators. Using Internet and AI technology, in particular the latter, we will do demand forecasting an individual route recommendations to increase the productivity of each taxi and grow revenue. These are planned for this fiscal year.

By engaging in these initiatives, we expect to be able to increase each individual taxi's revenue and, by extension, contribute to the profit of the taxi companies. This will contribute to DeNA's business.

Fiscal year 2018 and fiscal year 2019 are investment years. We aim to increase user usage and operator adoption. From fiscal year 2019, we will aim for sales to grow to a good level and aim for meaningful financial contribution starting from fiscal year 2020.

This ends my presentation about the automotive business. I'll hand it back over to Isao Moriyasu for the rest of the presentation.

[Isao Moriyasu, executive]

Now I'd like to touch on insurance integrated with wellness programs. In the healthcare business, our mission is to extend healthy lifespans. Up to this point, through the Game Business, Sports Business and other businesses, we have built up engagement science know-how. This is our core competence in increasing user activity in a service. We have used this strength in the health field to change user lifestyle behaviors through our initiatives. Specifically, in KenCoM, we held an event where over 1 month, 70,000 people participated in a walking event. Another example is Aruite Otoku, which is a service that has a monthly subscription that also has an extremely high return rate. These are examples of how our core competency in engagement science is applicable in the health field.

Some might wonder if these lifestyle behavior changes result in better health. We can gather information from KenCoM, such as life logs, which, for example, track how much people have walked and analyze the impact on medical checkups for overall health and on insurance claims to see if the amount spent has decreased. This type of analysis is now possible. We will use this strength to bring about innovation in the insurance area. In Japan, insurance is a massive market at JPY 40 trillion. Traditional insurance will only pay benefits if you happen to get sick or pass away. Those are the only financial benefits provided. But with insurance integrated with wellness programs, the aim would be to provide health services to improve your health and encourage healthy behavior changes. As a result, users will not only receive benefits if they get sick but also receive services that keep them healthy for longer. This is a major benefit for customers. Keeping people healthier for longer will also reduce costs for insurance providers, creating a win-win situation for the customers, the insurance providers and for DeNA.

For milestones, we plan to use the data in designing and approval for the development of this type of insurance in fiscal year 2018, then launch an insurance product in fiscal year 2019 and grow our offerings afterwards to achieve mid- to long-term growth.

Finally, I'd like to discuss our third area of focus, social live streaming. As I'm sure you know, in China, this market is now flourishing as shown in the graph on the bottom left. And we are seeing similar trends in countries throughout Asia, including Japan. This graph is from a research company, and they defined live streaming somewhat broader than DeNA's services. But the graph does show that this market is expected to grow significantly. For 2018, they expect the market in China will exceed JPY 1 trillion, and it will keep going from there. So this is a high-growth market in China.

Showroom was started several years ago and is now the market leader in Japan. We work with many agencies, and there are many female stars who perform on Showroom. This is a major characteristic of Showroom. In addition to these female stars, we aim to expand our offerings into more types of stars such as voice actors, comedians, boy bands and other stars. This is part of our existing strategy to enhance our offerings of appealing content, which we will continue.

This fiscal year, in addition to the strategy I just mentioned, we plan to focus on our VTuber lineup. In the past 6 months, VTubers rapidly gained popularity. There are a few performing on Showroom now. VTubers are a great fit with Showroom, and I think that users are enjoying a new experience through these VTubers. For Showroom, performers and users communicate with one another, for example, sending comments or gifting. With VTubers, they can pick up thrown gifts and interact with them. I think this is a fun and new experience for users that they are enjoying. There is the possibility that this service will grow dramatically this fiscal year, so we will continue enhancing our lineup of talented stars and also work on these VTuber initiatives.

For social live streaming services, in addition to Showroom, we are also focusing on Pococha. This service is optimized for smartphones. So compared to Showroom, the UI is ideal for smartphones. It allows anyone to broadcast and tune in to live streams easily, so it targets amateurs, mainly C2C communication. The target audience and usage is a little different from Showroom in that regard. We aim to grow both of these services in this area going forward.

Finally, I'd like to talk about our full fiscal year 2018 guidance. As I mentioned earlier, we expect to have Game Business operating profit at least at the level of fiscal year 2017, and we have announced our expected proactive investment in the New Businesses. Starting this fiscal year, we have decided to shift from quarterly to full year financial guidance. We expect revenue to increase year-on-year, mainly from the Game Business, sports and New Businesses. Since we had approximately JPY 10.7 billion in profit recognized from the cumulative amount of the exchange differences related to the overseas subsidiaries recorded in fiscal year 2017, and this is a onetime item, we expect IFRS operating profit to decrease year-on-year.

For non-GAAP operating profit, we expect the Game Business to be about flat and the New Businesses and Others loss to increase. So we will expect this will decrease year-on-year. This concludes my presentation. Thank you.