Gree Inc

TSE:3632

Earnings Call Transcript 2025-Q1

[Toshiki Oya, executive]

Thank you for joining the fiscal year 2025 First Quarter Financial Results Briefing of GREE, Inc. I am Toshiki Oya.

Looking at the executive summary on Page 2. In the first quarter of fiscal year 2025, we posted net sales of JPY 12.9 billion, an operating loss of JPY 0.1 billion and negative EBITDA of JPY 0.1 billion. As we will discuss in more detail later, results were sluggish as we posted valuation losses in the Investment business. Results in the Game and Anime business, Metaverse business and DX business surpassed our forecasts for first quarter.

In the Game and Anime business, the Chinese version of Heaven Burns Red got off to a strong start. In the Metaverse business, we continued to achieve strong growth in the platform business and the VTuber business. In the DX business, we achieved solid profit even as we continued making investments. In the Investment business, we posted an operating loss of JPY 0.8 billion due to valuation losses on some holdings but maintained high overall unrealized value in our investment portfolio.

On Page 5, we provide an overview of financial results for the first quarter of fiscal year 2025. Sales and profit were as I just mentioned, but we also posted foreign exchange losses of approximately JPY 1.4 billion due to the impact of yen appreciation on our overseas assets resulting in Q-on-Q declines in ordinary profit and net profit.

On Page 6, we provide an analysis of quarterly operating profit. There was a strong impact on net sales from sales declines in the Game and Anime business and the Investment business. Variable costs rose on an increase in advertising costs and valuation losses posted in the Investment business. Fixed costs improved slightly, and we posted an operating loss of JPY 0.13 billion in first quarter of fiscal year 2025.

On Page 7, we break down our cost structure for first quarter. Variable costs rose slightly quarter-on-quarter and year-on-year on an increase in advertising costs allocated to strengthen promotion of Heaven Burns Red. Commission fees declined due to a decline in sales and other variable costs rose as we posted valuation losses on investments. Fixed costs showed little change and total costs were JPY 13.08 billion.

Now Sanku Shino will provide an explanation of the progress we have made toward achieving our management plan targets.

[Sanku Shino, executive]

Page 10 shows sales and operating profit. Sales declined slightly quarter-on-quarter and operating profit fell sharply on weak performance in the Investment business.

Page 11 shows our vision for long-term growth. We have positioned the Metaverse business and the DX business as continuous growth business and we target stable operating profit CAGR of 120% to 140% in these businesses. We have positioned the Game and Anime business as a long-term investment business, in which we target growth with a longer-term horizon.

Page 12 shows sales and operating profit of continuous growth business. Sales of the business is growing steadily.

Page 13 shows business conditions. First quarter profit surpassed expectations in the Game and Anime business, the Metaverse business and the DX business. However, due to valuation losses in the Investment business we posted a consolidated operating loss for the quarter.

Page 14 shows the outlook for earnings in second quarter FY 2025. In the Game and Anime business, we expect to achieve Q-on-Q growth in sales and profit on anniversary events, et cetera, for mainstay titles.

Page 15 shows our forecast and updated estimates for fiscal year 2025. Our estimates are in line with our full year fiscal year 2025 forecast, but we expect slightly lower sales in the Game and Anime business on slightly weaker performance from new titles and slightly higher overall operating profit.

On Page 16, we present our medium-term targets. We continue to target solid growth through steady growth in our continuous growth business.

Page 18 shows sales and operating income by segment. Earnings are trending above expectations in all businesses, except the Investment business.

Page 19 shows our second quarter FY 2025 estimates and full year FY 2025 forecast by segment.

Page 20 shows progress made in each business segment toward our full year forecast.

Yuta Maeda will cover the Game and Anime business.

[Yuta Maeda, executive]

Page 22 shows quarterly sales and operating profit in the Game and Anime business over the past 5 years.

On Page 23, we present an overview of the Game and Anime business. Earnings tend to weaken in the first quarter due to seasonal factors related to mainstay titles. Sales and profit declined quarter-on-quarter and year-on-year on a rise in costs as titles entered a critical stage of development.

Page 24 shows the live service game business, while the Chinese version of Heaven Burns Red got off to a strong start. Sales and profit declined Q-on-Q and Y-on-Y on weakness from some titles and investment in titles in our development pipeline. We continue to make progress on the development of major new titles.

Page 25 shows the licensed game business. Sales and profit rose Q-on-Q on strong performance from overseas licensed game titles and an increase in returns from investments in anime.

Page 26 shows our development pipeline. This slide shows only in-house development projects. We are also making steady progress on the development of titles other than the 4 shown here.

On Page 27, we show our earnings forecast for second quarter FY 2025. We expect Q-on-Q growth in sales and profit on events for mainstay titles in second quarter.

Page 28 shows our forecast and updated estimates for fiscal year 2025. We plan to release already announced new titles and the English version of Heaven Burns Red in cooperation with Yostar Games in fiscal year 2025. However, as in the past, we factor in earnings contribution from new titles conservatively.

On Page 29, we present our medium-term targets. We position the Game and Anime business as a long-term investment business, targeting long-term growth. We plan to continue to invest in the console games business, maintaining a balance between these investments and earnings.

Next, Eiji Araki will explain the Metaverse business.

[荒木 英士, executive]

Page 31 shows long-term sales and operating profit trends in the Metaverse business. Viewed Y-on-Y, sales were flat while operating profit rose in first quarter. However, first quarter FY 2024 sales included sales from the B2B Metaverse business which was transferred to another business segment in FY 2024. If we adjust for this by comparing sales in the platform business and the VTuber business only, sales rose by JPY 0.08 billion Y-on-Y.

On Page 32, we have an overview of the Metaverse business. Although we continue to make aggressive investments in the VTuber business, the Metaverse business still achieved Q-on-Q growth in sales and profit.

Page 33 shows the platform business. Over the past year, we have focused on live streaming and strengthening our alliances with live streaming talent agencies. These efforts have been successful and domestic live streaming business sales have been strong. We also launched a game live streaming feature and continue to further increase revenue through live streaming. We also made progress toward a major update for our avatar and room features.

Page 34 covers the VTuber business. We continue to invest aggressively. And compared with last quarter, expanded our talent pool by 12 VTubers. Sales increased by 71% year-on-year. Steady growth continues, and we plan to continue to invest aggressively.

Page 35 shows our outlook for second quarter FY 2025. We expect the platform business to drive sales growth in the second quarter but expect operating profit to decline owing to continued aggressive investment.

Page 36 shows our forecast and updated estimates for FY 2025. Earnings are trending in line with our initial forecast.

On Page 37, we show our medium-term targets. We plan to continue to invest profits generated in the platform business in the VTuber business and expect the VTuber business to enter the black in fiscal year 2026, with growth accelerating and sizable operating profit growth achieved in fiscal year 2027.

Next, Kazuhisa Adachi explains the DX business.

[足立 和久, executive]

Page 39 shows long-term sales and operating profit trends in the DX business.

On Page 40, we provide an overview of the DX business at JPY 1.75 billion and JPY 0.21 billion, first quarter sales and operating profit, both trended sideways in line with our forecast.

On Page 41, we have the Marketing DX business where sales and operating profit also held steady. We are building relationships with our outsourcing partners in order to achieve sales growth in the future.

Page 42 shows the Social DX business. In first quarter, the Social DX business began development of a new product with the goal of transforming into a continuous growth business. We aim to release this product in the third quarter of fiscal year 2025.

Page 43 shows the aumo business. The media business continued to face a challenging environment as sales declined, and the business remained in the red at the operating level. We are working to improve the aumo website and related services and strengthen the functions of our SaaS product in order to break out of the status quo.

On Page 44, we show our earnings outlook for second quarter FY 2025. We expect sales and operating profit to decline owing to the difficult conditions faced by the aumo business. We will continue to make investments aimed at transforming the DX business as a whole.

Page 45 shows our forecast and updated estimates for FY 2025. We expect results to be in line with our forecast.

On Page 46, we present our medium-term targets. In fiscal year 2025 and fiscal year 2026, we will make investments aimed at transforming our business in order to achieve growth from fiscal year 2027 onwards.

Finally, Toshiki Oya explains the Investment business.

[Toshiki Oya, executive]

Page 48 shows sales and operating profit in the Investment business. Earnings volatility in the Investment business is high .While the business made a positive contribution to consolidated operating profit when it received sizable dividend distributions in fiscal year 2021 and fiscal year 2023, it had a sizable negative impact at the operating level in first quarter fiscal year 2025.

On Page 49, a we provide an overview of the Investment business .Quarterly sales were JPY 0.24 billion, and we posted an operating loss of JPY 0.81 billion. Please allow me to explain the factors that contributed to this result.

First, JPY 0.2 billion of the JPY 0.8 billion operating loss was attributable to sales decline. Low dividend distributions resulted in a sharp decline in sales. For this reason, fixed costs and management fee costs outweighed sales which had a negative impact of approximately JPY 0.2 billion at the operating level.

The remaining JPY 0.6 billion of the JPY 0.8 billion in operating losses was attributable to valuation losses, write-downs and realized losses. This JPY 0.6 billion is attributable to 2 main factors.

The first factor behind the aforementioned JPY 0.6 billion in operating losses was a roughly JPY 0.2 billion valuation loss on crypto assets in first quarter. Investment in crypto assets is conducted mainly via our Investment business in the U.S. Under current accounting standards, valuation gains and losses are reflected on profit and loss statements. Therefore, valuation gains boost sales while valuation losses as we saw in first quarter boost costs. The Investment business does not proactively invest in crypto assets. However, when dividend distributions from investments are received in the form of crypto assets or when a fund in which we invest, invest in crypto assets, the value of these assets may fluctuate.

The second factor behind the aforementioned JPY 0.6 billion in operating losses was approximately JPY 0.4 billion in write-downs and realized losses. More specifically, we have made sizable investments in 3 investment funds that are nearing the end of their operation periods or have entered their settlement periods and we posted write-downs and realized losses on these investments. We posted approximately JPY 0.35 billion in write-downs in connection with these funds. As this situation is a fairly rare case, we see no structural factors that are likely to result in continued losses in the future. Also, as mentioned earlier, while we posted write-downs and realized losses on funds nearing the end of their operation periods, we also expect to receive dividend distributions from these funds.

While we posted an operating loss in first quarter, the Investment business as a whole has a track record of making sizable positive contributions to consolidated earnings and I ask you to keep in mind that we continue to hold high-quality assets in our portfolio.

On Page 50, we show the business structure of the Investment business and our basic plan. In view of the large impact the Investment business had on first quarter results, we would like to again provide an explanation of our business structure and basic plan. The Investment business consists of 2 main subsegments. GP investment and LP investment. The GP investment business uses a fund management business model, manages and operates investment funds and receives management fees and contingency fees. The LP investment business conducts proprietary investment.

Due to its structure, the LP investment business is highly volatile, but it follows the basic plan of making continuous, diversified investments. We believe that these continuous, diversified investments will limit volatility over the medium to long term. Currently, however, a portion of the funds in which we have made sizable investments are having a sizable impact on earnings resulting in high near-term volatility in the Investment business as a whole.

Page 51 shows our earnings structure. In the GP investment business, management fees offset operating expenses and contingency fees provide earnings upside. In general, this business model can be expected to avoid losses while contingency fees generate earnings upside. In the LP investment business, sales come from dividend distributions and gains from the sale of assets. As dividend distributions, et cetera, generally accrue upon exit from investments, this is a relatively high volatility business model.

Looking at the cost structure, payment management fees and other expenses, such as fund charges are incurred when investing in funds. So a certain level of fixed cost is to be expected. For this reason, if dividend distributions received upon exit from investments are too low to offset fixed costs, losses are incurred. In first quarter, dividend distributions were low and did not fully offset fixed costs. Valuation losses posted as costs were also high. These 2 factors resulted in the business posting a loss. Although the Investment business model includes volatile factors, including sales and valuation losses, we aim to achieve stable earnings over the medium to long term.

On Page 52, we provide another summary of the Investment business. As you can see here, we have achieved unrealized gains on operational investment securities held as proprietary investments in the LP investment business. We also made several investments in first quarter.

Page 53 shows the status of investment results. We show valuation of investments by investment period and provide comparisons with benchmarks. We have outperformed benchmarks and believe we are holding high-quality assets.

Page 54 shows the fund management business as the structure of this business model enables us to achieve stable sales and profit, quarterly results are stable.

On Page 55, we show total commitment on which our management fee income is based.

That's all for the Investment business. And this wraps up our presentation.

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