Gree Inc

TSE:3632

Earnings Call Transcript 2023-Q2

[Toshiki Oya, executive]

Thank you for joining the FY 2023 Second Quarter Financial Results Briefing of GREE Inc. I'm Toshiki Oya. Please refer to the executive summary on Page 2, financial results overview. Net sales was JPY 16.6 billion. Operating income was JPY 1.7 billion, and EBITDA was JPY 1.8 billion. The Internet and entertainment business operating income of JPY 1.5 billion surpassed our forecast due to the continued strong performance from Heaven Burns Red. Two business topics are highlighted here. First is the continued strong performance from Heaven Burns Red. We made progress toward release of Korean and traditional Chinese versions scheduled for February 10, Friday this week. It also made Google Place list of best games of 2022. I have more details on a later slide. Regarding the development of REALITY, it has always been intended to be a global service and enjoyed a high percentage of overseas users. We made even more progress on global distribution and achieved steady growth in overseas sales. We also continue to expand content communication functions. The outlook for FY '23 has not changed. We made aggressive investment, especially in the metaverse business.

We expect stable income, but a decline in profit following strong performance from hit titles in FY '22. Regarding the outlook for the third quarter, Heaven Burns Red, our main state title will mark 1-year anniversary. The release of global versions in Asia will also contribute. But we also plan aggressive advertising investment, targeting growth in IP over the long term. Based on this, we expect third quarter operating income in the Internet and Entertainment business of between roughly JPY 1.0 billion and JPY 1.5 billion. There could be an upside if global distribution exceeds the expectations. Please go to Page 5. Net sales and operating income will be covered later. Ordinary income declined quarter-on-quarter due to posting of foreign exchange losses. It is related to the assets denominated in foreign currencies. For the past year or so, we enjoyed foreign exchange gains on the back of the weakening yen, but it swung to the loss side in this quarter. Net income declined to a net loss of JPY 0.9 billion on posting a valuation loss on investment securities. Page 6 illustrates the trends in net sales and operating income. Compared to the previous quarter, sales and income slightly went down in the Internet and Entertainment business, as the impact from half year anniversary events of Heaven Burns Red in the first quarter wound down in the second quarter, but we aim to build momentum in the third quarter with the upcoming anniversary and global distribution.

On the right is the investment and incubation business. We had a loss in the first quarter, but in the second quarter, the business went into the black, thanks to distribution from investees. Page 7 is the operating income analysis. Despite a slight decline in sales of the Internet and Entertainment business, operating income increased quarter-on-quarter to JPY 1.7 billion, on growth in sales in the Investment and Incubation business. Page 8 shows the cost structure. Total cost decreased by JPY 0.2 billion quarter-on-quarter to JPY 14.8 billion. There were no notable changes. Now let me move on to the operational overview on Page 10. This is the overall summary. Overall business plan has not changed, and we continue to strengthen the 3 earnings pillars. More details follow on later pages. From Page 11, let me look at the game and anime business. We made progress on the global distribution of Heaven Burns Red. The release of Korean and traditional Chinese versions is scheduled for February [ 10 ]. Preregistration has already started with good response. Although we have been working on global distribution in the past, for this release, we conducted aggressive promotions, including real-world promotions, so that Heaven Burns Red, our mainstay IP can get more recognition and reach even more users.

This is an initiative that we are paying very close mention to. Page 12 is also about Heaven Burns Red. It made Google Place list of best games of 2022. We are very grateful as it was only possible, thanks to the support of so many users. We will continue to further develop and strengthen the IP. As you see on the right, we conducted multifaceted distribution of IP for the long-term growth, including collaboration with popular trading card game. Page 13 is about another mainstay title. That Time I Got Reincarnated as a Slime, which won the story category in Google Play's best games of 2022. It marked the 1-year anniversary with additional content and user participation campaign. Page 14 is about the existing titles. Another Eden and SINoALICE are long operated titles and continues to energize the fan community by expanding content and holding global events. Another Eden began distribution of main story Part 3 in November. SINoALICE held its second global event, World Gran Colosseum. Page 15 shows the pipeline. There are no major updates here. we are planning and developing multiple new titles based on know-how gained from our hit titles in FY '22. This is a year of preparation for the next year and beyond.

We also plan aggressive global distribution of Heaven Burns Red and other titles. Page 16 introduces some initiatives in the anime business. From this fiscal year, this segment has been renamed the game and anime business. So far, we have participated in over 20 anime production committees and build up a store of know-how on IP creation and development. Under the new unified leadership of the business, we will drive it even stronger. That is all for the game and anime business. From Page 17, let us look at the metaverse business. As I mentioned in the beginning, we made progress on global distribution. Overseas sales of REALITY approximately doubled between June and December 2022. The number of users has always been higher overseas but the monetization overseas is also gradually increasing. We also helped broadcast events for overseas users and energize the overseas user fan base. Page 18 is about expansion of content. To expand content, we leverage the REALITY's World functions, which allow user avatars to communicate with each other in metaverse. As collaboration with corporate partner, we held Tokyo Dome World for a limited time in cooperation with Mitsui Fudosan Realty Group. As IP collaboration, we held a world event for a limited time in collaboration with Code Gears, both were welcomed by users. Page 19 is about expanded communication functions.

Two initiatives are highlighted here. On the left is Avatar Shop. Avatar have previously been obtained for free or through gacha, and now we have added Avatar Shop, where users can purchase average items. We believe this function will further energize users and also provide another monetization point from a business perspective. On the right is [indiscernible] stickers. We launched this function, which allows users to collaborate with their friends, avatars to make and share stickers as you can see on the slide. That is all for the metaverse business. Page 20 is about the commerce and DX business. In the commerce business, we continue to expand content and strengthen media potential. On the left, you see 1 example from aumo. We expanded content through collaboration with a basketball team, also contributing to regional revitalization. On the right is the DX business. To strengthen the social commerce domain, we established Quant Inc., which assists influencer marketing as a way of supporting DX of our corporate clients. From Page 21, let us look at the investment and incubation business. On the left is the total assets under management. There was no major change during this quarter. Page 22 shows the trend in operational investment securities investment valuation. Again, there was no major change, but the recent market environment has led to a slight decline in the valuation.

In the meantime, we continue investing, making new investments in 6 VC funds as well as in 11 startups via CVC. Page 23 shows the status of our investment results. As usual, the performance is divided into investment phases. There was no major change. And in the growth phase, we continue to significantly outperform the performance benchmarking for domestic visits. We are confident of 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.]