Gree Inc

TSE:3632

Earnings Call Transcript 2023-Q1

[Toshiki Oya, executive]

Thank you for joining the FY 2023 first quarter financial results briefing of GREE, Inc. I'm Toshiki Oya.

Please refer to the executive summary on Page 2.

Net sales was JPY 16.6 billion. Operating income was JPY 1.6 billion and EBITDA was JPY 1.7 billion. The Internet and Entertainment business surpassed our forecast on strong performance from Heaven Burns Red.

Going to the business overview. The game and anime business continued strong performance from Heaven Burns Red. As I will explain later, it maintained strong performance by expanding main story line. In the metaverse business, we continues to develop REALITY. As you saw in the recent press release, its global downloads topped 10 million. We will continue to expand content and communication functions to make it even bigger.

Regarding the outlook for FY '23, we will continue aggressive investment, especially in the metaverse business. We expect stable income but a decline in profit year-on-year following strong performance from hit titles in FY '22. For the second quarter, we expect operating income in the Internet and Entertainment business of between roughly JPY 1.0 billion and JPY 1.5 billion.

Please go to Page 5, the overview of the first quarter financial results. Net sales and operating income will be covered later. Ordinary income picked up largely because of the revaluation of funds and investments denominated in foreign currencies on the back of the weakening yen.

Page 6 illustrates the trends in net sales and operating income. The Internet and Entertainment business grew significantly in FY '22, thanks to hit titles. The momentum continues, but the sales and profit declined compared to the fourth quarter following strong performance from released titles and anniversary events, but we will continue to operate Heaven Burns Red and other existing titles successfully.

On the right side is the Investment and Incubation business. The first quarter saw a loss of JPY 0.19 billion. This was a quarter with very few exits due to the recent sluggish stock market. We expect this environment to continue for the short term, but we believe, in the medium to long term, this business will be able to make a stable contribution to profit. I will show you more details on our existing portfolio later.

Page 7 is the operating income analysis. Compared to the fourth quarter, as I mentioned earlier, the sales in the Internet and Entertainment business declined significantly following strong performance from titles released in FY '22 and anniversary events. Variable costs decreased accordingly. That is the main reason why we landed at JPY 1.58 billion for the first quarter of FY '23.

Page 8 shows the cost structure. In the variable costs, commission fees, et cetera decreased. Fixed costs did not change significantly. Total costs decreased by JPY 2.0 billion quarter-on-quarter to JPY 15.0 billion.

Now let me move on to the operational overview.

Page 10. This is the overall summary. Based on the long-term business plan, we have been strengthening the 3 earnings pillars and continues to do so in the first quarter. From Page 11, let me explain the status of the game and anime business. I would like to reiterate that Heaven Burns Red has been performing very strong and maintained stable high sales ranking. We have recently added content, beginning to distribute part 1 of chapter 4 of the main story. We also conducted a half year anniversary campaign at 6 months past since the release. By constantly creating excitement, we have successfully maintained strong performance.

Page 12 is also about Heaven Burns Red. Aiming to develop and strengthen it as an IP over the long term, we have implemented various measures. We held an in-person event to energize the fan community and developed merchandise in collaboration with a major convenience store chain in order to grow the potential of VIP.

Page 13 shows the pipeline. We leverage know-how gained from producing hit titles in FY '22 to plan and develop strong titles. We are planning and developing multiple new titles based on first-party and third-party IPs, aiming for release in the next fiscal year and beyond. We will also continue to aggressively distribute existing titles in overseas market to further enhance earnings potential and the user base.

That's all for the game and anime business. From Page 14, let us look at the metaverse business. REALITY is now distributed globally to 63 countries and territories, and the total global downloads topped 10 million just last month. This was a milestone, but our goal is to make it a communication platform used by hundreds of millions of people, so we will build on this and continue to work hard to reach even more users.

Page 15. We also continues to expand our content. We energized users by launching new games and collaborating with popular IP. After months of preparation since last fiscal year, we finally launched new fishing game.

Since the days of the GREE platform, the platform has been the centerpiece of our business. We expanded it successfully by leveraging games to energize communication on the platform. In the same manner, we will grow and expand our platform in the era of metaverse. Games will also be a new source of monetization. We will continue to update them, running [ a PDCA cycle ]. Our hopes are very high.

Page 16, continued expansion of communication functions. We have energized communication and improved convenience further through the reaction sticker function and chat GIFs. This is all about the metaverse business.

Page 17 is about the commerce and DX business. Focusing on the commerce side this time: This business is centered on aumo and integrates multiple media with SARS (sic) [ SaaS ]. In the first quarter, we continued to strengthen the media potential; and made progress in strengthening the functions of aumo My business, which is a SaaS business. Both the media users and clients of aumo My business increased steadily. We expect the commerce business to grow large as it accumulates users and clients year by year. That is the business model.

The final part is the Investment and Incubation business. Let me give you an overview of our portfolio. Page 18 shows our AUM, total assets under management. This is the amount we are involved in managing and includes investments from external LPs. It is close to JPY 80 billion. This quarter saw an increase of JPY 7.3 billion quarter-on-quarter, mainly on asset revaluation which was primarily driven by the increased financial value of the start-ups on our CVC portfolio. I think you can see that the portfolio has been growing steadily.

Next, Page 19. This slide is about the operational investment securities. On the left is the book value. It combines the amount invested and the valuation and translation adjustment for the listed stocks on our portfolio. As you can see, the amount invested increased as we continued investing, while the unrealized profit decreased over the sluggish stock market. The gray bars on the right show the valuation, including unlisted stocks, revaluated based on most recent financial procurement. As you can see, listed stocks decreased in value, but the overall valuation of investments increased, thanks to the rising value of unlisted stocks.

In the first quarter, we invested in 3 VC funds in Japan and the United States and in 14 start-ups via CVC.

Page 20, the last slide, the results of our FOF and CVC investments, which are investments in VC funds and start-ups, respectively. As usual, the performance is divided into investment phases. On the right is the IRR. Especially in the growth phase, we significantly outperformed the performance benchmarking of domestic VCs. Our portfolio is growing steadily, and we are confident of its stable contribution to profit over the medium to long term.

That concludes my explanation. Thank you very much.

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