Gree Inc

TSE:3632

Earnings Call Transcript 2019-Q2

[Yoshikazu Tanaka, executive]

This is Tanaka speaking. Good afternoon, everyone. Now we'd like to get started with the financial results for the second quarter of FY 2019.

So let me go to the first page. Here's the executive summary.

Financial results overview. Net sales were JPY 17.7 billion, operating income was JPY 1 billion and EBITDA was JPY 1.2 billion. Both net sales and operating income were almost in line with our forecasts.

Business overview. So we have been emphasizing on overseas deployment. So far in the Q2, the end of last year, we have made progress in preparation for overseas development. DanMachi was already launched in North America, and now we expanded into Asian markets, such as Hong Kong and Taiwan. That is the first topic.

Second, SINoALICE to go overseas as well. So we started to launch in Hong Kong and Taiwan. And the next title, the launch is scheduled for January. We have prepared for global launch of Another Eden in Q2. Also another launch is on multi-platform expansion that was appreciated in Q2, the Fishing Star for Nintendo Switch was launched.

In live entertainment business, so we have launched an app for VTubers, called REALITY Avatar, to allow them to be the avatars to live-stream themselves.

Net sales to be in the range of JPY 16.5 billion to JPY 17.5 billion. Operating income to be JPY 0.3 billion to JPY 0.8 billion. And we have contribution from overseas development, and we are making investment into new titles, which are all factored in these numbers.

I want to hand over to Oya for financial results overview.

[Toshiki Oya, executive]

Good afternoon, everyone. Let me go over the Q2 financial results overview. Net sales were JPY 17.7 billion, operating income was JPY 1 billion and EBITDA was JPY 1.2 billion.

Net sales. So we expected to have the overseas deployment of DanMachi, which progressed stronger than expected, and that allowed us to be in the range of the net sales that was expected. Operating income was JPY 970 million; that is slightly below the lower limit of the guidance. Let me elaborate more on this. Please return to the first bullet at the bottom.

Certain variable cost transactions conducted in Q1 of FY '19 and earlier have been revised in revising in the posting of JPY 160 million in cost in Q2. So there was a mistake in accounting, and so we booked this as JPY 160 million as an expense in Q2. So if we exclude this, the Q2 operating income ended up to be JPY 1.13 billion, which was almost in line with our forecast.

Next, net sales, operating income and EBITDA trends. In this quarter, we continued to operate existing titles while we expanded into overseas market with DanMachi and other titles. And we also implemented full-scale development investment for new titles that resulted us to be 5.4% operating margin.

And next is operating income analysis. As I just mentioned, now we are into full-scale development investment, and we also -- so the impact of revised variable cost. So operating income came out to be JPY 1 billion.

And let me give you little details on the cost trend, on Page 8. The variable cost became JPY 7.27 billion. It's down by JPY 250 million.

For advertising spending, we were able to make an efficient investment into advertising. So we saw a decrease by about JPY 400 million Q-on-Q in the advertising spending. As for commission fees, basically it is on declining trend along with the sales drop, and it was also affected by the variable cost revision, but it came out to be almost flat. So in total, here is the total variable cost number.

Next is on fixed cost. Please take a look at the other. So this increased by JPY 430 million Q-on-Q, and that is due to the increased outsourcing by the full-fledged development investment. In total, the cost was JPY 16.76 billion.

The Q3 earnings forecast. Net sales to be in the range of JPY 1.65 billion to JPY 1.75 billion. Operating income to be in the range of JPY 300 million to JPY 800 million. We will continue to operate the existing titles to generate more profits.

But let me go over some of the items that could affect the sales and operating income, at the bottom. The first point, overseas deployment of Another Eden. So we launched DanMachi into overseas market by self-distribution, which went successfully or much better than what we had expected. So now we are introducing first-party IP Another Eden by self-distribution into overseas markets. Looking at the capability of IP, we are expecting a certain contribution to net sales of Another Eden, but this will be the first-party IP and self-distribution into overseas market. So we have to build up the user base from scratch, and we also need to build user communities at various locations. So that will require us to make certain marketing investment, and we also need to launch media to support the user communities. So such long-term initiatives will be also needed. Therefore, the impact on profit in Q3 is not going to be that significant, but in the long run, this can be the business to be a turning point for the company. So this is the biggest topic for Q3.

Second point, our group company called funplex, who is [ borrowing ] the game titles from other companies and from us to operate them. So we reviewed their business progress in the first half, and we wanted to streamline to make their business to be leaner. So we decided to withdraw from unprofitable titles to improve the business portfolio, and this will be implemented in the second half. So this will result a few hundred millions of yen decrease in our net sales, but we will maintain the profitability, so we will end up being at flat. However, this will bring out the positive impact on the profit in the long run. And continuing from Q2, we will be investing into new titles in Q3. So that came out to be these earnings forecasts for Q3.

Last page for the financial results. So we are quite confident that we have a very solid financial base. When we look at the asset side, we have investment securities held, and now we've added this slide to explain you the investment securities held. We never had a chance to explain this in detail, so we decided to add this slide to gain much better understanding by the market on the investment securities.

At the end of December, we have JPY 17 billion as fixed assets on the book value. So we have LP investment into venture capital, such as GREE Ventures and other funds in and outside of Japan. In addition, we are investing into companies that you see in the example box. In total, we have JPY 17 billion as a book value. So when we look at the market value, the fair value, this is the actually the more calculation, that we have incorporated unrealized gains and losses from the recent financial results for funds. For investment in shares, we have evaluated based on last finance value. So that came out to be JPY 25 billion, compared to JPY 17 billion on book value. So this is as far as we can share in terms of objective number. But some of the businesses from last finance are actually going well in the business still now. So they are not seen in the numbers, but there are some upside of their business performance. In reality, so there is actually a value more than JPY 25 billion considering such an upside.

And let me turn over to Tanaka for operational overview.

[Yoshikazu Tanaka, executive]

So let me go over the operational overview.

In Q2, we continued to focus on game, entertainment and advertising and media businesses, and our main focus was the overseas deployment that made a big progress. So we went abroad for DanMachi and SINoALICE.

In addition, we started to go abroad for Another Eden, which is the first-party IP. And Shoumetsu Toshi, the new title is going to be launched globally in the near term. So we are making big progress and preparation in Q2 and Q3.

Console business, we intend to expand distribution platform, and we have addressed the HTML5, but we also released the console version as well.

In live entertainment, we started to launch REALITY Avatar to allow you to be the avatar to live-stream.

Advertising and media. We strengthened media potential to monetize this business furthermore.

Development pipeline. Currently, we have 5 titles under development, which are all approved at this point of time. Through FY '19, we have one more first-party IP being developed, and this is going to be released by the end of the fiscal year. In FY '20 and beyond, we have 4 titles under development to be launched after July.

Game and entertainment businesses. On game side, current consumption has been trending pretty much flat. The nurturing first-party IP is being emphasized recently. This actually relates to the later explanation but we want to generate higher profitability out of gaming business for a long term, and first-party IP and self-distribution globally would be important factors. So we have to grow our own IPs, furthermore, in order to improve the profitability. Of course, we continue to launch the third-party IPs but the key is how much our first-party IP can grow in the future. So when it comes to first-party IPs, it will not be an easy business. Just like the other companies, it takes time to grow the IP. So we need to continue investing into these IPs.

So with Another Eden, we added main storyline and we launched a second version on December 25. Shoumetsu Toshi, we also added a new story, 0., and we launched this on November 25.

So we have shared a road map for Shoumetsu Toshi on this page. It was released 5 years ago. For the last 5 years, we have made a steady progress in operation, and we have gained a user base for the last 5 years. And utilizing them, we are now launching a new Shoumetsu Toshi, Afterlost, in April, and this will be launched globally.

At the same time, we will start broadcasting TV animation in April. So we will try to grow the Shoumetsu Toshi to be once the bigger title from this April. And once we increase the recognition of this IP in the global market, now we will launch all-new 3D version of Shoumetsu Toshi after that. This is currently under development. So this can be another huge step forward for us.

So we will try to grow the user base in a global market while increasing recognition of our IP. And -- so we want to grow these type of IPs furthermore for the future to grow the business more.

For expanding fan community, we have held SINoALICE concerts, and also had various collaboration events for DanMachi, and we also broadcasted in-game radio programs for Symphogear. So for In Love with NEWS, we held birthday event. We try to combine with the media and IP with various events to expand the fan communities.

Overseas development. So this will be a significant contribution to profit. Basically, we develop in Japan and we localize them in the other languages to be launched in other markets. So the development cost for overseas launch will be minimized. So this can be a quite high-margin business. With DanMachi, we expanded into South Korea, Taiwan and Hong Kong by self-distribution. So we conducted marketing by ourselves. Just like in North America, we operate these game globally out of Japan. So as a result, we saw a huge incremental from overseas activities in November. So we see the growth in our sales, but also, this helped to see improved margin. So improved profit structure.

And we are planning to expand into other titles, first with Another Eden. And there is a history of doing so, of course, to have first-party IP and self-distribution to be successful. Successful will be the ideal situation, but that's not going to be implemented that easily. So we decided to take several steps to implement this. First, started with third-party IP, and we also utilized the help of partners to distribute the games. So we have accumulated such experiences first. And based on the know-how that we gained through such efforts, then we now came to this phase to start distributing the first-party IP by ourselves. And Another Eden, going well so far, and for this new title, Shoumetsu Toshi, we also have high expectation.

And we have also expanded into overseas market for SINoALICE, and we distributed through partners. Into Hong Kong and Taiwan, we started on November 28. In North America and Europe, we plan to start in 2019.

And here is the list of all the overseas expansion. For the last few months, we saw the biggest progress in Asia-Pacific by releasing titles into Hong Kong and Taiwan. In North America, we are making progress, and we expect the SINoALICE to be launched.

In China, the Mainland China, distribution has been suspended at this point, but in the near future, we believe we can start distributing titles. So we are now preparing for that.

In addition, we are planning to go into also Europe. So we are preparing for self-distribution for European market.

So both first-party and third-party IPs. So whatever games that are developed in Japan to be launched in overseas market, and now we are starting to see the results.

Regarding market platform development, we have launched Fishing Star on January 31. It will not have a big contribution to our profit. About taking one IP, this is a first-party IP, but this is launched on HTML5, messenger platform, console and mobile. So we want to be a company to be able to offer an IP to multiple platforms.

The REALITY Avatar. So we had an app to see the live-streaming VTubers, but now we launched an app for anybody to be the VTuber to live-stream on October 22. So you can live-stream on your own, or you can also watch somebody else's live-streaming through this app.

Strengthen media potential. So aumo was awarded the Google Play Best of 2018. So we continue to see media potential being strengthened, and we also see the continuous expansion of number of clients and making progress in monetization.

This concludes my presentation.