Gree Inc

TSE:3632

Earnings Call Transcript 2022-Q2

[Toshiki Oya, executive]

I am Toshiki Oya. Thank you for joining the FY 2022 Second Quarter Financial Results Briefing of GREE, Inc.

Please refer to the executive summary on Page 2. Starting with the financial results overview. Net sales was JPY 19.5 billion, operating income was JPY 2.5 billion, and EBITDA was JPY 2.7 billion. The Internet and Entertainment business operating income was JPY 2.5 billion. It surpassed our forecast, thanks to the contribution from a new title.

Going to business overview. We started distribution of That Time I Got Reincarnated as a Slime: ISEKAI Memories on October 28. It got off to a strong start, driving a big sales and profit improvement. As for Metaverse business, we continue to expand the futures and content of the REALITY platform as well as the global development. In the Advertising and Media business, we newly launched aumo My Business, a marketing SaaS for physical stores, and we are enjoying a good result.

As for outlook, we continue to aim for growth both in sales and profit in FY '22 from the stable operations of games and new titles. In related to the third quarter, we expect its operating income in the Internet and Entertainment business of somewhere between roughly JPY 1.5 billion and just under JPY 2 billion as we expect contribution from new titles.

Next, Page 5. This shows the financial results overview for the second quarter FY '22. Net sales, operating income and ordinary income had a big growth, respectively, quarter-on-quarter. This was brought by the contribution from a new title.

Page 6 is a quarterly trends of net sales and operating income. The blue color is for the Internet and Entertainment business. Thanks to the new hit title, both net sales and operating income grew greatly quarter-on-quarter. As for operating margin for the Internet and Entertainment business, it grew firmly.

Please go to Page 7. Operating income analysis compared to the previous quarter. The Internet & Entertainment business sales went up sharply, thanks to the strong start from the new title. As for the Investment and Incubation business, we did not have a major exit in this quarter so the sales came down from the previous quarter. As for variable cost, with the increased sales of the Internet and Entertainment business, commission fees increased. Fixed costs also increased but operating income grew sharply quarter-on-quarter.

Next Page 8 on cost structure. Advertising cost was up about JPY 200 million quarter-on-quarter due to the increased advertisement cost for game apps. Commission fees went up sharply due to the increased sales. As for fixed costs, with the increased provision for bonuses due to the good business results, it went up about JPY 300 million. But in terms of the increase in fixed costs, it was about JPY 12 billion. Total costs became JPY 17 billion, up JPY 4.9 billion from the previous quarter.

Next, Page 9. Here, I will explain the stock repurchase and cancellation. We completed the stock repurchase of 35 million shares on December 10. The total issued shares before the cancellation was about a little less than 26%, but we completed its cancellation as of December 28.

I just went through the financial results overview. Next, I will explain the operational overview on Page 11 and onwards. First, the overall summary. As for the business plan, we continued our plan in this quarter, and we made progress based on our long-term strategy.

Next, moving on to Page 12. The highlight for the quarter, That Time I Got Reincarnated as a Slime: ISEKAI Memories. We started its distribution globally on October 28, 2021, and we are making smooth progress since then. We got off to a strong start and achieved high sales ranking, the 4th. We surpassed 2 million downloads in about 2 months since its distribution started. We are on the same course here aiming at long-term operation and contribution to profit.

Page 13 introduces the progress we are making in developing new titles. Here now I'd like to introduce to you 2 titles. The first is in Heaven Burns Red. This title is about to be released. We are developing addition title in cooperation with the Key, VISUAL ARTS, who has a track record of many hits. We are now planning to run TV commercials and other promotions in order to raise its awareness. Another is EXTASY VISUAL SHOCK. Pre-registration for this title started last year. This is going to be a very first in artist-approved music rhythm game featuring songs and live images from famous artists.

Page 14 shows our pipeline. We are still planning to release 2 to 3 titles per year. Besides the titles I have already introduced, we are now developing Echoes of Mana scheduled to be released in 2022. We are currently planning and developing several other titles.

Page 15 shows the existing titles. And as you see here, we are planning to expand and energize the fan communities in collaboration with popular IPs. We had a collaboration with Chrono Cross, and towards the end of the last year for Another Eden and it turned out to being quite popular. As for SINoALICE, we are now collaborating with a Black Butler.

I just went through our games. Next, going to Page 16, I will explain the Metaverse business. We are continuously advancing this platform. We released a feature that allows up to 8 people to simultaneously interact with each other via avatars. So far, the language is supported on Japanese and English, but now we have added 10 more languages. So now we do support up to 12 languages.

For REALITY, we believe it is quite important to use it as a daily communication tool. So further feature expansion with this point in mind is the way we go.

Next, Page 17. This is about the Advertising and Media business. Here now would like to expand on aumo initiatives. We are now collaborating with Kamakura City Tourist Association and Ryukyu Asteeda for promoting further expansion of the contents. Here, we are also making our contributions to the regional revitalization.

Page 18. This explains our efforts to expand into SaaS as a new service by leveraging the media power of aumo. This is going to be our marketing service business for physical stores. This should provide a one-stop marketing functions for physical stores. As you see here going forward, we would like to have more engagement into SaaS type services in collaboration with the media.

Page 19 explains about the Investment and Incubation business. Total AUM has become flat. Main investments are GREE LP Fund for LP investment into venture capitals, both at home and abroad. Second, CVC or Corporate Venture Capital. Here now we have GREE Ventures, GFR Fund and STRIVE. Those 3 companies are making investment into about 1,500 companies through the 50 VC funds.

Now Page 20. This page shows GREE Group's direct investment balance. In the second quarter, LP Fund and CVC respectively invested into several funds and start-ups. As for investment balance, the left shows the book value in the balance sheet. The dark blue color shows the amount invested. Valuation and translation adjustments is the unrealized profit and loss. Due to the recent flattish stock market, the value shows a decline.

The right shows valuation of investments. It includes unlisted stocks. This is for your reference. The numbers are converted based upon the most recent financing procurement. As you see here, it is growing steadily. It means our capital assets are growing.

Next, Page 21. This shows the status of GREE LP Fund and the CVC Investment results. This looks into the actual performance of the investments. Here, we are observing the investment we made through 3 phases. Investment phase is the investment after about 3 years. Growth phase is from 4 to 7 years. And exit phase is 8 years or longer.

Now let us look at the actual performance in each phase. It is quite natural that for the investment phase, it is about the power of the book value. But as time goes on, the portfolio grows and value goes up. IRR for each is described on the right-hand side. 2% for investment phase, 17% for growth phase and 22% for exit phase.

We are looking at the performance benchmark of the domestic VCs. We believe now we are making a rather good investment at 14% and 20%. The bottom bars are indicating net multiples, 1% for investment phase, 1.8% for growth phase and 3.8% for exit phase. Our performance is above the benchmark 2.7%.

This concludes my presentation. Thank you for your kind attention.