Gree Inc

TSE:3632

Earnings Call Transcript 2019-Q1

[Yoshikazu Tanaka, executive]

Hi. I am Tanaka. And good afternoon, everyone.

Now I'd like to get started with the financial results briefing for fiscal 2019 first quarter.

Let me start with the executive summary.

Financial results overview. Net sales were JPY 18.2 billion. Operating income was JPY 1.6 billion, and EBITDA was JPY 1.9 billion. So operating income surpassed our forecast to finish the quarter.

Business overview. I have 3 points to share. First, we expanded overseas business and multi-platform distributions. After releasing DanMachi in North America, we expanded distribution to South Korea and Taiwan. We have prepared for that. And we also began distribution of LINE QUICK GAME platform. This is a messenger game for LINE. So we started to also provide our games to this platform.

Second point was we released a new title. We began distribution of Wild Arms: Million Memories. The third point, our focus on live entertainment business. So we launched REALITY, our live-streaming platform for VTubers.

Second quarter earnings forecast: net sales to be JPY 17 billion through JPY 18 billion, operating income to be JPY 1 billion to JPY 1.5 billion. So through operation of existing titles and newly developed overseas titles are being implemented. So that's what's factored in our forecasts.

I want to pass over to Oya-san for the financial results overview.

[Toshiki Oya, executive]

So I am Oya. I'm taking this position since October. And let me explain our financial results for the first quarter.

Net sales were JPY 18.2 billion. Operating income was JPY 1.6 billion, and EBITDA was JPY 1.9 billion.

Net sales saw a slight decline Q-on-Q, but as explained in Q4 results, the major native titles had anniversary events concentrated in Q4. Compared to the previous quarter, we saw some moderation in this quarter, but we basically proceeded in line with what we had expected internally. Operating income was almost flat to the previous quarter. Net income -- we had a sales gain of investment securities and was about JPY 1 billion. And in the previous quarter, we had impairment loss on the goodwill, so we saw a substantial growth on net income Q-on-Q. And this is what we have explained into the graph format.

On Page 7, we are showing a waterfall chart for the operating income and explain the change since the previous quarter operating income. So decrease in net sales was already explained. So we try to be more efficient in operation, including advertisement cost. We saw a huge improvement in the cost, but we saw a slight increase in fixed costs because we made investment for the future growth. The majority was driven by the increased fixed costs of acquired company ORATTA and also the increased labor cost on advertising media business.

Q1 cost structure. So this is what I just explained in -- by line items.

This is Q2 earnings forecasts. So now that I'm in-charge, I have reviewed how to show the forecast numbers, and now I'm showing the number in a range. Because of the game business characteristics, we expect to see certain fluctuation of the business that resulted in this ranged forecast.

So when we forecasted, first, we confirmed the recent trend of each business to see what's feasible, and that was all added together. And then we forecasted a certain range of the fluctuation to be incorporated into the forecast. For example, in this Q2, we started distribution of DanMachi overseas by self-distribution. This is a quite new activity for us, so we expect to see certain fluctuation of the business. And with the recent title, the Another Eden, we expect to see a drop in the paying transactions, so we will need to also consider certain fluctuations in the following trend. So that's what's factored in, in our forecast for showing the range in operating profit.

Now I want to pass back to President Tanaka for operational overview.

[Yoshikazu Tanaka, executive]

Let me go over the operational overview.

Here's a summary. Once again, we focused on the game business, live entertainment and advertising and media. As mentioned in the past, under the game business, based on our strategy of game engine, IP and global for the reinforcing areas, first of all, we began distribution of Wild Arms: Million Memories. And for SINoALICE, we started TV commercial for the first time. By repeating such activities, we intend to increase the user base. And regarding the global strategy, we started to distribute DanMachi overseas in South Korea and Taiwan, following the United States. For nonmobile areas such as console business, we try to expand the distribution platform, so we have been developing games for Nintendo Switch, as mentioned before. In addition, now we started distributing titles to LINE platform.

Live entertainment business. We try to expand our ecosystem. We think it's important to build our own platform, so we have been developing this platform called REALITY which was now fully launched.

Advertising and media. Our forecast is to strengthen media potential, and that's where we focused in the quarter.

And let me talk about the game business for mobile. For FY '19, we now have one title released for third-party IP. We have another title under development right now. This is first IP -- codeveloped IP title. For FY '20 and beyond, right now we are working on about 4 titles. As soon as they are approved, they will be added as a pipeline. Compared to the previous time, now we have one more third-party IP added.

And coin consumption on mobile business. In Q4, we celebrated the seventh anniversary. So we saw a drop because of a reaction from the Q4, but it is on an increasing trend. SINoALICE TV commercial was launched from July 20 through August 19, which performed strongly. And I have to implement such commercials for the future as well. And we released Wild Arms in September.

So September 26, we launched this game. So this is a 3D action role-playing game. So we wanted to reinforce this category, so we have been reinforcing, developing the game engine. So developing such a game engine, I guess we can gain more experience by working on this game.

Next is nurturing more IPs. Shoumetsu Toshi. In 2019, there will be a new TV animation program starting, so we are working on preparation for this TV program. Another Eden: We implemented collabo café events, and we created game guides. So we are trying to create more opportunities to contact with the users.

Fan community expansion. So SINoALICE, we had a TV commercial to capture new fan base. Shoumetsu Toshi, we held a collaboration event. And through the collaboration with Conan, we are capturing new fan base. Symphogear: We also had a new specials performance at Tokyo Game Show. So they have the fourth animation series starting, so we have been preparing for that. So working with Johnny & Associates, we have this title with the idol group NEWS, and they celebrated 15th anniversary. So we have prepared contents in line with these anniversary events.

Overseas development. On October 25, that was yesterday, we launched DanMachi in South Korea, Taiwan and Hong Kong. This is all through self-distribution. SINoALICE, we plan to launch in Hong Kong, Taiwan and Macau and to be launched by the end of the year within the coming 2 months. So we have been preparing for this launch, and we are working with a partner.

This is a list of all the titles. So we want to further promote distributing these titles into overseas markets either by working with partners or through self-distribution. So we have pretty much completed all the contracts and agreements with partners, so we just need to prepare to launch those titles. With DanMachi for South Korea and Taiwan, we have tried self-distribution. So if we can confirm the success of this self-distribution, then we -- since we expect to self-distribute Another Eden in the future, it will actually give us much higher margin if we can self-distribute the titles. So we want to improve our marketing capability in those local markets ourselves at the same time.

Multi-platform development. There are 2 titles for the multi-platform development. We have messenger version of Fishing Star called Fishing Star QUICK. And we have another messenger version of Driland, which is Brave Hunters. Those two were released. Not just LINE, the QUICK game, but the messenger game platform itself is expected to expand in the future. That's why we are thinking of what type of games to be built to be suitable for such a platform. That's why we are taking various actions to find the best solution.

And next is live entertainment business. So we have been producing virtual YouTubers, but in addition, we also started to offer a live-streaming platform since August 7. So on this platform, you can send gifts, the items to virtual YouTubers; and we expect to receive revenue through such transactions. And we also started to offer this function this month, which is to allow anybody to be a virtual YouTuber just by using a single smartphone. So that's how we try to grow this platform for virtual YouTubers.

And VTuber fund. We are working on this project to expand this platform and the VTuber projects. So first is related to the VTuber-related music project of the music business or for those artists, VTuber artists, on the platform. And we thought that it would be a huge potential for this area. Working with King Records, we helped build a company called RK music, focused on VTubers. So we will have more announcement when we are ready on this project.

Next project is the project with Idea Factory. We built a company called REALITY Factory and for the project of VTuber for younger women. And Idea Factory have their own facility, so working with them, we can help -- have the regular meet-and-greet VTuber events.

And lastly, advertising and media business. We will continue to strengthen media potential. LIMIA, we want to activate this as a community site now, so through various campaigns, we have been energizing communities for LIMIA site. On MINE, we have been reinforcing the contents furthermore. And through this activity, we intend to reinforce media potential.

This concludes my presentation.