Gree Inc

TSE:3632

Earnings Call Analysis

Earnings on Track; Positive Growth

The company's earnings forecast for Q3 FY2024 reflects expected growth in sales and income, bolstered by 2-year anniversary celebrations for the game Heaven Burns Red. The full-year earnings projection remains unchanged, indicating confidence in achieving the initial forecasts and demonstrating a steady advancement towards these goals. Despite some negative impacts from platform anniversary events, certain business segments, like the metaverse and commerce businesses, are anticipated to either roughly breakeven or grow by offsetting investments with other profitable endeavors. Specifically, the commerce business is forecasted to achieve annual sales of JPY 1.5 billion and an operating income of JPY 0.1 billion, with medium-term aspirations to raise annual operating income to JPY 0.4 billion.

Financial Summary for FY 2024 Q2

GREE, Inc. reported Q2 FY 2024 results with net sales of JPY 14.2 billion and operating income of JPY 0.8 billion. Despite quarter-on-quarter declines in the game and anime business and metaverse business due to post-anniversary slowdowns, the DX and commerce businesses saw q-on-q growth. The investment business experienced a modest loss with no significant distributions.

Performance by Business Segment

Q2 results outperformed the segment forecasts from Q1 FY 2024 for all business segments, despite headwinds particularly in the game and anime business due to decreasing sales. Meanwhile, advertising costs increased linked to promotions for the title 'Heaven Burns Red'. Overall, the company is on track to meet its full FY 2024 operating income forecast of JPY 5 billion.

Game and Anime Business Analysis

Seasonal title closures and a lull following anniversary events resulted in Q-on-Q declines in sales and operating income. However, the pipeline is robust with strong starts to collaborative projects and positive overseas reception of 'Heaven Burns Red' in China.

Metaverse Business Outlook

The metaverse business shows a long-term positive sales trend despite near-term volatility. The platform and VTuber businesses are poised for growth, with the aim for the VTuber business to turn profitable by FY 2026 and the broader metaverse business anticipated to generate approximately JPY 2.0 billion in operating income.

DX Business Momentum

The DX business, after a Y-on-Y downtrend, has shown positive Q-on-Q growth. The third-quarter forecasts aim to build on the project backlog. Challenges include securing new operational DX support projects and transforming the business model to achieve steady growth.

Commerce Business Growth Trajectory

Following a restructuring, the commerce business, particularly aumo, Inc., is on an uptrend. GREE forecasts a third consecutive quarter of rising sales and income and full-year sales of JPY 1.5 billion with operating income of JPY 0.1 billion. This growth is expected to balance investments in the HR business 'jobda' and the profitable scale-up of aumo.

Earnings Call Transcript 2024-Q2

[Toshiki Oya, executive]

Thank you for joining the FY 2024 Second Quarter Financial Results Briefing of GREE, Inc. I am Toshiki Oya.

Looking at the executive summary on Page 2, we posted quarterly net sales of JPY 14.2 billion, operating income of JPY 0.8 billion and EBITDA of JPY 0.9 billion, in line with expectations. We will provide detailed summaries of each business segment later, but I'd first like to provide a quick summary.

In the game and anime business, sales and income declined Q-on-Q on title closures and the winding down of the impact of anniversary events held in first quarter. In the metaverse business, sales and income declined Q-on-Q on a reactive decline in sales in the platform business following an anniversary campaign in first quarter. In the DX business and the commerce business, sales and income rose Q-on-Q. The investment business posted a small loss at the operating level as no large-scale distributions were received.

On Page 5, we provide an overview of financial results for second quarter FY 2024. Net sales and operating income declined Q-on-Q. Page 6 shows trends in net sales and operating income. On Page 7, we have an analysis of sales and operating income by segment. Second quarter results in all segments came in higher than the segment forecasts provided at our first quarter FY 2024 results briefing.

On Page 8, we present an analysis of operating income in the second quarter. There was a sizable impact from declining sales, especially in the game and anime business. On Page 9, we break down our cost structure for the second quarter. Variable costs declined due to declining sales, but advertising costs rose as we strengthened promotions for mainstay title, Heaven Burns Red. Fixed costs also declined Q-on-Q mainly due to receipt of payments for game development collaboration.

Page 11 shows our earnings estimates and forecasts. Our third quarter FY 2024 segment forecasts are as shown here. Excluding the investment business, we forecast company-wide operating income of roughly JPY 1.5 billion in the third quarter. Our full year FY 2024 forecast remains unchanged from our forecast announced at our FY 2023 results briefing held in August 2023. Excluding contribution from the investment business, we forecast company-wide FY 2024 operating income of JPY 5 billion, Moving on to Page 12. Here, we show progress toward our full year forecast. All segments are on course to reach our income forecasts.

Now let's hear from the heads of each of our businesses. Yuta Maeda will cover the game and anime business.

[Yuta Maeda, executive]

First, Page 14 shows sales and operating income in the game and anime business. Segment sales and income declined owing to seasonal factors as the anniversary of Heaven Burns Red falls in third quarter FY 2024, and we saw a reactive decline from the 1.5-year anniversary event for Heaven Burns Red in first quarter FY 2024. Another factor behind the decline was the closing of SINoALICE.

Page 15 shows an overview of the game and anime business as a whole. Work on new titles shifted into high gear, and we also prepared for upcoming anniversary events for Heaven Burns Red. We also received a license to distribute the simplified Chinese version of Heaven Burns Red ahead of the launch in China. In addition, we recently began advanced registration on the Bilibili Inc. platform, distribution licensee for Bilibili Inc., and this has gotten off to a very strong start.

On Page 16, we have WFS, Inc. Sales and income declined slightly, owing to a reactive decline from 1.5-year anniversary events for Heaven Burns Red held last quarter and because 2-year anniversary events for Heaven Burn Red fall in third quarter. These 2-year anniversary events and the collaboration between Heaven Burns Red and Angel Beats!, both of which began in third quarter have gotten off to a very strong start, and we expect them to be very successful.

On Page 17, we have Pokelabo, Inc. Income from in-game purchases halted as we closed SINoALICE in October, resulting in a sharp decline in sales. We are currently focused on preparing for the launch of new titles.

Page 18 covers GREE Entertainment, Inc., where earnings have been firm owing to strong performance in licensing and outsourced development projects. On January 18, we collaborated with WANDA CINEMAS GAMES to release Saint Seiya: Legend of Justice. We have been making strong progress on collaborative projects such as this one. The anime production business is also performing well and contributing to growth in operating income.

Page 19 shows our pipeline. As we explained earlier, the launch of Heaven Burns Red in China has added a new title to our overseas portfolio. Page 20 shows our third quarter FY 2024 earnings forecast. We expect growth in sales and income owing to 2-year anniversary events for Heaven Burns Red.

Page 21 shows our full year earnings forecast. This is unchanged from our original forecast. We are making smooth progress and we expect to reach our initial forecasts. On Page 22, we present our medium-term targets. These are also unchanged from our original forecast. Earnings contribution from new titles in our development pipeline are factored in conservatively.

Thank you for your kind attention. Next, Eiji Araki will explain the metaverse business.

[荒木 英士, executive]

First, Page 24 shows the long-term earnings trend for the metaverse business over the past 5 years. As you can see, while there has been some near-term volatility, sales remain on a long-term growth trend. Also, while we recorded losses at the operating level, starting in FY 2022, when we were investing in future growth, we had built an earnings structure capable of generating positive income.

Page 25 shows earnings in the metaverse business as a whole. In second quarter, sales and income declined following the impact from anniversary events held by the platform business in first quarter FY 2024. However, the loss posted by the metaverse business was smaller than initially expected due to progress made on efforts to improve cost efficiency.

Starting on Page 26, we show results at our subsidiaries. First is our platform business. While there was a sizable reactive decline from anniversary events held in the previous quarter, we continue to build an earnings structure capable of generating positive income.

Page 27 covers the VTuber business. The VTuber business continues to achieve solid sales growth. The larger loss was in line with our forecast, and we are moving steadily forward with aggressive investments in this business.

On Page 28, we provide our third quarter FY 2024 earnings estimates. Starting in third quarter FY 2024, we moved the B2B metaverse business from the metaverse business to the DX business segment. We expect this to result in a decline in metaverse business sales. We still plan to keep the platform business in the black and use income generated by this business to invest in accelerating growth in the VTuber business. We expect to continue generating positive income in the Metaverse business as a whole.

Page 29 shows our FY 2024 full year earnings forecast. In line with the previously mentioned plan, we expect to roughly breakeven at the operating level in FY 2024. On Slide 30, we present our medium-term targets. We target continued growth, mainly in the platform business and the VTuber business and expect the VTuber business to reach the black in FY 2026, with the metaverse business as a whole, generating approximately JPY 2.0 billion in operating income.

Thank you for your attention. Next, Kazuhisa Adachi explains the DX business.

[足立 和久, executive]

Page 32 shows sales and operating income trends in the DX business. Second quarter sales were JPY 1.35 billion and operating income was JPY 0.22 billion. On Page 33, we present an overview of the DX business. Earnings trended down Y-on-Y, but up Q-on-Q. We aim to maintain positive Q-on-Q growth by accumulating a backlog of projects. On Page 34, we have the marketing DX business. Sales and operating income increased on growth in demand from marketing initiatives leading up to the year-end.

Page 35 shows the operational DX business. In this business, we are focused on existing projects and earnings are trending sideways. We view securing new support projects in the operational DX business as an important challenge faced by the DX business.

On Page 36, we provide our third quarter FY 2024 earnings estimates. We aim to continue accumulating a backlog of projects. Page 37 shows our full year FY 2024 forecast. We expect earnings to trend in line with our initial earnings forecast.

On Page 38, we present our medium-term targets. The current structure of the DX business is such that we are focused on securing and accumulating projects from customers and performance, therefore, inevitably fluctuates in waves. We view improving our earnings structure by increasing the ratio of recurring revenue and thereby transforming our business into one that is capable of generating steady growth as an important challenge. Over the medium term, we will work toward this goal.

That's all from the DX business. Next, Yosuke Nakamura will explain the commerce business.

[中村 陽祐, executive]

The commerce business operates a number of online media businesses. Page 40 shows trends over the past few years. In FY 2023, we completed a restructuring of our businesses and sales and income have entered an uptrend.

On Page 41, we isolate aumo from the rest of the commerce business and show trends over the past few years. aumo has entered a strong growth trend, and we expect continued growth from third quarter FY 2024 onward.

On Page 42, we present an overview of the commerce business. In FY 2023, we completed our business restructuring, and this enabled us to enter an uptrend in sales and income. We offset the impact of investment in jobda, our HR business, with growth in the aumo business and were thereby able to increase sales and profit for 2 consecutive quarters.

Page 43 covers aumo, Inc. aumo is on an uptrend in both sales and income. aumo has leveraged its media capabilities to develop a SaaS business targeting restaurants and hotels, and firm growth in this business has resulted in rising sales and income.

On Page 44, we provide our third quarter FY 2024 earnings estimates for the commerce business. We expect sales and income to rise for a third consecutive quarter. Sales have risen to their highest level in the past 4 years, and we aim to maintain this growth trend.

Page 45 shows our full year FY 2024 forecast. We forecast annual sales of JPY 1.5 billion and operating income of JPY 0.1 billion. We will achieve this growth by offsetting investment in jobda with growth at aumo.

On Page 46, we present our medium-term targets. Over the medium term, we intend to continue to offset investment in jobda with growth in the aumo business and generate annual operating income of JPY 0.4 billion. In FY 2026, we expect jobda to still be in the investment phase.

Thank you for your attention. Finally, Toshiki Oya explains the investment business.

[Toshiki Oya, executive]

Page 48 shows sales and operating income trends. Owing to the nature of the business, sales and income can be volatile. And in second quarter FY 2024, as in first quarter, we received no large-scale distributions from investment funds and the business, therefore, posted an operating loss of JPY 0.1 billion. However, we continue to make steady investments and accumulate investment assets.

Page 49 shows an overview of assets under management. AUM trended sideways, showing no major change Q-on-Q. On Page 50, we provide a breakdown of our operational investment securities. This also trended basically flat Q-on-Q. In second quarter FY 2024, we invested in one investment fund and 12 startups.

Finally, on Page 51, we show the status of our investment results. At each phase, we compare net multiples and IRR with benchmarks. And based on this, we believe we have achieved favorable performance. Thank you for your attention.

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