Gree Inc

TSE:3632

Earnings Call Transcript 2022-Q1

[Toshiki Oya, executive]

Thank you for joining the FY 2022 First Quarter Financial Results Briefing of GREE, Inc. I'm Toshiki Oya. Please refer to the executive summary on Page 2.

Starting with the financial results overview. Net sales was JPY 13.7 billion. Operating income was JPY 1.6 billion. And EBITDA was JPY 1.6 billion.

From this fiscal year, we report our results in 2 segments. The Game, Metaverse and Advertising and Media businesses are now under the Internet and Entertainment business, while Investments are under the Investment and Incubation business. Operating income of the Internet and Entertainment business was JPY 0.5 billion and surpassed our forecast.

Going to business highlights. We made progress in developing new titles. That Time I Got Reincarnated as a Slime was released in October, and pre-registration has started for Heaven Burns Red.

In the Metaverse business, we continue to expand the content of the REALITY platform. Promotional activities for global distribution, which I mentioned in the previous briefing were executed as planned.

The FY '22 outlook has not changed since the last time. We aim for growth both in sales and profit based on stable game operations and new titles. On the other hand, operating income will depend on the level of upfront investments, such as promotions of the Metaverse.

Page 5 is the overview of the first quarter financial results. The investment in Incubation business sales is included in the operating category. Please be advised that the past figures of the business have also been adjusted retroactively.

Page 6 is quarterly trends of net sales and operating income. Blue is the Internet and Entertainment business and gray is the Investment and Incubation business. Compared to the previous quarter, sales and operating income decreased in the Internet and Entertainment business, while they increased in the Investment and Incubation business, securing a solid profit.

Please go to Page 7, operating income analysis compared to the previous quarter. In the Internet and Entertainment business, game sales fell after the anniversary events of 2 main state titles, Another Eden and SINoALICE. However, we still posted operating income of JPY 1.6 billion, thanks to the contribution from the Investment and Incubation business.

Page 8 shows the cost structure. Advertising cost increased by JPY 0.30 billion from the previous quarter due to the investment in the Metaverse business advertising and promotion. Other variable costs decreased due to lower sales.

Going to fixed costs. In the other category, outsourcing costs and new product development costs increased in the Game business. The total costs were JPY 12.1 billion, down by JPY 0.6 billion quarter-on-quarter.

Page 9 is about stock repurchase. We are conducting stock repurchase up to 35 million shares with up to JPY 35.0 billion to increase shareholder returns and implement a flexible capital policy.

Cumulative repurchases as of the end of the first month are shown on the slide. We believe that our business performance bottomed out in FY '21, putting us on the growth path for the medium term. We have decided to conduct stock repurchase as it is a highly effective measure to achieve our mid- to long-term financial goal of increasing ROE to 10% or more to utilize our cash on hand effectively and to improve capital efficiency.

Before ending the financial part, I'd like to verbally share an outlook for the second quarter. There are positive and negative factors. The contribution from the new product, That Time I Got Reincarnated as a Slime, launched on October 28 is positive. The subsequent increase in outsourcing costs for new projects is a downside. The increased advertising spending to grow REALITY is another downside. With all that, we expect operating income for the Internet and Entertainment business as a whole to be several hundred million yen. That was the financial overview.

Let me move on to the operational side. Page 11 is the summary. I will give more details later, but we continue to invest aggressively in the 3 earnings pillars to strengthen them.

From Page 12, I will talk about specific businesses. Let's start with the games, distribution and preregistration of new titles. The distribution of That Time I Got Reincarnated as a Slime started on October 28, 2021. And the pre-registration for Heaven Burns Red started on September 11. That Time I Got Reincarnated as a Slime has seen strong initial sales, reaching the top 10 in app sales ranking, and we will continue to focus on its operation to contribute to stable income.

Page 13 is the pipeline. We plan to continue to release 2 to 3 new in-house developed new titles per year, aiming to generate hits with this pipeline.

From Page 14, let me review the existing titles. We energized users by adding more original content and collaborating with popular IP. Another Eden has additional storyline now in distribution and SINoALICE had IP collaborations.

On Page 15, Assault Lily: Last Bullet marked 6 months since the release and celebrate its half anniversary with the campaign. DanMachi added a new storyline unique to the game for its fourth anniversary. That was about the games.

Page 16 looks at the Metaverse business, where we expanded content for REALITY and made progress on global distribution. In terms of content, we further expanded the lineup of avatar variations.

On the global distribution, the geographical distribution of users is shown here for your reference. Gray is domestic users and blue is overseas users, which represent a significant percentage. We believe this service has a global appeal and we'll aggressively promote and expand it around the globe.

Page 17 is about strengthening our media potential and the status of the Advertising and Media business. As you can see with the 2 examples, aumo and LIMIA, we continue to energize user communities through cross-media collaborations and campaigns.

From Page 18, let me talk about the newly added Investment and Incubation business. Here, you see the trends of net sales and operating income since FY '21. Despite some short-term volatility, overall, the business is making a stable long-term contribution to income.

Page 19 is the details of this business. Our investment activities are conducted in 3 categories: light gray is GREE LP Fund, which makes limited partnership investments in venture capital funds in and outside of Japan; medium gray is CVC. We have 3 CVCs, STRIVE, GFR Fund and GREE Ventures; dark gray represents securities we directly hold. STRIVE and GFR Fund at CVCs also accept investments from external limited partners and use those funds to invest.

This slide incorporates all of them to show the scale of our operations and the total assets under our management. The AUM in the first quarter of FY '22 was approximately JPY 43.0 billion. On the other hand, the valuation of investments was approximately JPY 67.0 billion shown on the right, just for your reference. It indicates what the number would look like if you reevaluated the invested start-ups based on their share price at the time of most recent capital raising.

Page 20, please. The value of direct investments is the balance of direct investments made by GREE as opposed to the investments we accept from other parties and manage, which we saw earlier on the balance sheet. The direct investments appear either in operating investment securities or investment securities, totaling JPY 31.1 billion. The amount invested is JPY 16.5 billion, while the valuation and translation adjustments is the valuation of shares of the listed companies held by GREE or by VC funds we invest in.

In other words, thanks to unrealized gain on those shares, the value of our investments is roughly double the amount invested at JPY 31.1 billion. The figures on the right, which should be taken as a reference shows what it would look like if you reevaluated the invested start-ups based on their share price at the time of most recent capital raising, that is JPY 45.0 billion.

As for investment status in the first quarter, GREE LP Fund invested in 9 VC funds, including East Ventures 4. In CVC, we invested in 7 start-ups through 3 CVCs. The direct investments are valued at approximately JPY 45.0 billion, based on the valuation of invested companies at the time of their most recent capital raising.

This concludes my presentation. Thank you very much for your attention.

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