Gree Inc

TSE:3632

Earnings Call Transcript 2018-Q2

[Yoshikazu Tanaka, executive]

This is Tanaka speaking. So I like to start the financial results briefing for fiscal 2018 second quarter.

Executive summary. Starting with the financial results overview. Net sales were JPY 19.5 billion, operating income was JPY 2.3 billion, EBITDA was JPY 2.7 billion. So we surpassed our targets for both sales and income.

So business overview. Explaining what we did. So we focused on growing the mobile games first. So we implemented the measures to regrow our existing titles. In January, we successfully released a new game called Library Cross Infinite. So it came out in January. We also have a total of 5 games approved for the development.

And today, we made an announcement about our entry into console game business, and we have been developing a game for this game. The first game would be the Fishing Star for Nintendo Switch, and we are developing a global version and we are preparing for the distribution.

Q3 earnings forecast. Our net sales will be JPY 19.5 billion, operating income as JPY 2.5 billion, EBITDA will be JPY 2.8 billion. So we try to grow the net sales in Q3.

So now I like to ask my colleague, Akiyama, to go over financial results overview.

[Jin Akiyama, executive]

And let me go through the financial results.

Page 5. So this past Q2 was a quarter of moderation. So that's what we mentioned before. But looking at the year-on-year results, we saw growth in sales and profit. But in Q-on-Q, results saw some moderation, so we saw a drop in the net sales. Between the operating income, ordinary income, these numbers were affected by the dividend received from overseas investments.

Page 6. This is showing net trend of net sales in operating income. Despite a drop in the sales, we maintained 12% OP margin.

Page 7. Although we saw a drop in the net sales by about 10 percentage point, I will give more detailed explanation on our cost on the next page, but we had the advertisement and settlement commissions and royalty fee decreases. Therefore, we minimized the amount of drop in the profit.

On Page 8, cost structure. Let me go over 4 key points. Number one, advertising. In Q1, we had a series of new title releases. So we had a mass promotions on those new games, so we were aggressive in advertisement. The Q2 saw some moderation in game business, whereas we continued to be aggressive in spending in advertising and media business. But we saw reaction rate drop in mass promotions for the game business, so we saw a drop of JPY 900 million.

Number two, commission fees. So there was a decrease due to sales decline. Please refer to the note at the very bottom of the page. So now we have a breakdown on commission fees and royalties. So we are disclosing these numbers from this quarter. While you were able to tell this information when you compare this page versus in the appendix cost structure, but it was a bit cumbersome to check both pages to figure out, so we decided to disclose in this method from this quarter.

Number three, labor cost. There was a decrease. So in July of 2017, we announced closures of overseas operations. Actual closure operations and payroll booking timing caused this huge drop in this quarter. On the other hand, we have been wrestling to developing business in Japan. So overall headcounts didn't decline that much.

Number four, other. We saw a huge increase in outsourcing costs in the number, but there is a reason for this. Those games operated by the overseas operations. By closing these operations, the labor cost was now reclassified to the outsourcing and subcontracting costs. That's why we seem to have a big increase in this other.

On Page 9, Q3 earnings forecast. Compared to Q2, the net sales will be flat. But when you look at year-to-date for Q3, we are forecasting JPY 60.6 billion. So our intention is to stay flat compared to Q2 or to have a slight increase. So Q2, we saw a temporary moderation of the business, but we will try to reinforce existing titles and we will have overseas business being developed furthermore, that way we can sustain the growth of overall business to reach this number, and we'll continue to control the cost.

I will hand the floor back to our CEO, Tanaka, for operational overview.

[Yoshikazu Tanaka, executive]

Let me go over the operational overview. In Q2, we continue to be aggressive in growing the business. With the mobile games, we implemented various measures to regrow the business. In addition, as a new business area, we have worked on going into console game business. The mobile game business, according to this policy of engine IP global, we have been continuing to focus on these areas. So we added new scenarios. Also continued to work on the collaborations and that way we can -- we could grow our net sales through these efforts. From global perspective, we have been selecting partners to develop business for overseas, and we are making progress on this point. And to create a new IP, we worked with Otomate to release a new title called Library Cross Infinite.

Console business, nonmobile game area, including VR. So we developed the game for Nintendo Switch. Platform web operation business, we continued to see a stable operation. Advertising and media business, we have been making steady growth in the number of page views for the media business, and we have seen increased amount of advertisement coming from our clients.

Let me give you more details. First of all, this is how we are thinking about entry into console game market. So as defined in our engine IP global strategy, first, we built the engine for the mobile games. Using this engine, we introduced games using third-party IPs or our first-party IPs or even with codeveloped IPs. That's how we have released various titles and games.

And last year, we came to a certain stage in this strategy, so we decided to expand this further in addition to the mobile game engine. So we moved to the next stage at the end of last year. As announced, now we are entering into the console game business. So we built the engine for this. And the Fishing Star original IP will be released first. So we will be making the games utilizing this engine, including third-party IP games. And we have many ideas and plans so far. So this first title, Fishing Star global version will be one idea. And we work to move on to develop the second and third titles. So in this mobile area, with the focus on engine IP global, we made a success. And now we want to recreate the same success in other area. That's our strategy.

Now mobile game business. So Q2 was a temporary low. So we made a coin consumption of JPY 10.4 billion. We added new scenarios. We made various collaborations. So we reinforced operations and we released the new title. As I have mentioned before, once we release a game, we tend to see a certain spike in the business. But then after that, we reinforce the operations and we go overseas to further grow the net sales. And this is what we are doing right now.

Here is our pipeline. So we have already 2 been released, and we have a total of 5 titles being developed, of them 3 will be released this fiscal year and 2 are being developed for next year beyond. And we are also working on other titles for '19 but also beyond. As soon as they are approved, we will be adding them into this table.

Let me give you more specifics on the games. Another Eden, we added new scenarios. So it started with Chapter 1 followed by 1.1 and 1.2. So now we have introduced this 1.5 right in the middle to continue into Chapter 2 that was released recently. So by releasing that those new scenarios or new maps, we can expand the game itself. So basically, this game is making progress as we had planned.

Danmachi, we added new story lines. So by opening up more story lines, we believe there is a potential for further growth. So now we are ready where we added new story lines and making steady progress.

Next game, SINoALICE and SYMPHOGEAR. So now SINoALICE went into the Reality Arc getting out of the existing fantasy series, and this has been well accepted by the users so far. SYMPHOGEAR, we have been focused on making the original stories. As part of the IP strategy, we also have an idea to work with an author of the game to create original story for specific to the games. So that is one of the major pillars. So this game is one example. We will try to create original contents which is available only on this game.

On January 25, we released Library Cross Infinite. So we worked with Otomate and their characters which are quite popular utilized in the game. So this game was just released. We will reinforce this game in February and March.

Next game is Puchiguru Love Live! So we developed a puzzle game for Love Live! We started preregistration and this game is getting in the height of development right now.

Nonmobile game area. So the consoles and others. We have VR business. I just mentioned about Nintendo Switch version, but we also released Daydream version of Fishing Star. So now we have Fishing Star available on VR, console, mobile and native game. On those various platforms, Fishing Star is available now. At the same time, we have been providing other VR games as you see on this page.

Lastly, advertising and media business. So basically, the most important priority is to grow the size of media, and it is making steady progress compared to Q1 into Q2. And we have been working on sales activities and seen an increased amount of advertisement from various clients and making steady progress on the net sales.

This concludes my presentation.