Gree Inc

TSE:3632

Earnings Call Transcript 2018-Q3

[Yoshikazu Tanaka, executive]

So now I'd like to start. Fiscal year 2018 third quarter financial results briefing for Gree, Inc.

This is the executive summary. Financial results. Net sales were JPY 17.9 billion. Operating income was JPY 2.8 billion. EBITDA was JPY 3.2 billion. We failed to achieve the sales target, but we exceeded the operating profit target.

Business overview. So we have developed overseas markets and released new titles. For North America, we've released Danmachi, and we also released In Love with News and Puchiguru Love Live! for Japanese markets. And we continue to reinforce the operation for existing titles and starting to see the results of such efforts. Recently, we have announced to enter into live entertainment business as the third business pillar. So we plan to go global, not just in Japan in this business.

Q4 earnings forecast. Net sales is expected to be JPY 18.5 billion, operating income to be JPY 2.2 billion, EBITDA to be JPY 2.5 billion. We will continue to reinforce operation and develop overseas businesses while launching new titles at the same time. For the full year, we expect to see growth both in revenue and profit year-on-year.

So we have announced this live entertainment business entry. So right now, we have game business and advertising media business and this live entertainment business. Those are the 3 business areas that we had to grow to support the business.

In game business, like we've done so far, we continue to implement engine IP global strategies to grow the game business. Advertising and media business, we will try to create media in various verticals. In live entertainment business, we will be focused on VTuber business. So those 3 areas are to be expanded furthermore.

So I will hand over to Senior Vice President, Akiyama, to go over financial results overview.

[Jin Akiyama, executive]

Page 6. Let me go through the financial results overview.

So net sales failed to achieve the February forecast, and I will elaborate more on this later on. So this doesn't mean that the growth had stopped. It was more like a delay in the timing of posting net sales. The native games and mobile games, we reinforced operation so far, and we expected that would be a -- contributing to Q3 in our forecast, but some titles got delayed into Q4 or later. That was the 1 -- first element. And we have funplex business where we make purchases. We saw delays in making those purchases, and that also delayed a contribution to the net sales. And the third element, we withdrew the business in North America and -- but we still have some titles continue to be operating at this point, and they didn't reach the expected performance. And some titles did see some slowdown in the business, not just the delays but basically, overall, those expected businesses got delayed into Q4 to see the shortage to the target, but that is not driven by the business slowdown. And therefore, in Q4 forecast, we expect to see the increase in the net sales once again. And we have reduced the costs furthermore. So although we see the shortage to the sales target, but we have exceeded the profit target.

On page 7. We have seen our operating income trend. Despite the sales drop, we saw the increase profit, so we will be exceeding the margin of 15%.

On Page 8. Operating income analysis. This is showing the changes from Q2 into Q3 results from left to right. We had a decrease in net sales, about a little -- less than JPY 1.6 billion, but we also have reduction in commission fees and revenue share as well as advertising spending, which amounted to be almost same as the drop in net sales.

And we also had a decrease in fixed cost was about JPY 500 million. This whole fixed cost decrease will be contributing to the increase in operating profit.

On Page 9. Cost structure. Let me go through 3 points on this area. First, advertising spending. So newly released title came out towards the end of the quarter, and we tried to be more efficient in spending advertising, so we saw substantial decrease in the amount of advertising. Second, commission fees. This increased due to the sales decrease. And third point is under -- other at the very bottom. So we saw decrease in other due to the reduced outsourcing costs. Those are the 3 major items to see a reduction of JPY 2 billion in costs to end up being JPY 15 billion in total.

As I mentioned at the beginning, so Page 10, we have the forecast, earnings forecast. The top line is expected to have a slight increase compared to Q3 to be JPY 18.5 billion. So we made no changes in making those forecast numbers. So we factored in a trend line that we see on the existing titles for the overseas business. So we have done much here, which I will explain later on. We started to go in global right now, and we have factored in the current trend that we see for such overseas titles. The newly released titles -- well, some of them have been out only for a few days so far, but we have tried to capture the current trend as conservative as possible. So those are the 3 factors that we included into this forecast number of JPY 18.5 billion.

When it comes to the profit, we will be reasonably spending advertising this quarter. And also some of the delays from Q3 to reinforce operation will be implemented in Q4. In media business, we will be spending advertising more, so we expect to see some increase to have some impact on net profit. Despite the growth in the net sales, we expect to see slight drop in the profit.

I'll hand the floor back to President Tanaka for operational overview.

[Yoshikazu Tanaka, executive]

And let me go through operational overview. In Q3, we will continue to be aggressively growing the businesses with the conservation to focused business, and we decided to enter into live entertainment business. That's the third business pillar.

In mobile business, we continue to take engine, IP, global strategies. And we released the overseas version of some titles, and we also see strength of the domestic new releases. And I will touch more on this later on. On the existing titles, we will now see the success of growth to come. On the console business, we have VR contents business, but also we have announced the other day the Another Eden to be provided for the console version. And towards the end, we have advertising and media business. So we continue to see a steady growth in the media business in its size.

So let me give you more details on the mobile game business. We see a drop in Q3 number here. The -- those titles released are seeing a growth towards the end of the March, so it -- have start contributing to Q4.

Pipelines. As you can see, this is the list of pipelines. And right now, we have 6 titles being developed, which were all approved so far.

As we've mentioned in the past, this is the image for business growth. So at the time of the release, we intend to see a initial strong performance, like a surge, and then we continue to reinforce operation and roll out into overseas market to grow the sales. And this is the growth that we expect to see for each individual product.

And more details. One example is the Another Eden, which came out 12 month ago. So it was released in April, and we thought this could be a strong product. So we first increased the human resources to support this business, and we also restructured them suitable for this game. So we spent several months to do so, and we accelerate the speed of introducing the contents, such as events and the stories. So we have been building a structure to allow that to happen, and the periodical releases started from the beginning of this year, and this has resulted in the growth of the business. Of course, this is not always this simple, but by having more events or improving the volume and quality of contents as we had expected, we have good potential of growing the business and such a success pattern should be recreated on other contents. That's what we are trying right now.

A second example is the overseas growth. This is the example of Danmachi. So we launched in early April or rather, the end of March, the North American version. And recently, it's growing. Actually, exceeding that of Japanese business. So you know when you play this, but it was originally -- it's planned for the Japanese users, but we just translated them into the North American version, and that is well accepted as the game. So we only released a North American version this time. And we are looking at launching to Asian regions as well as the European markets. You see those wavy lines right there? So looking at the size of each market, following Japan and North America, Asia and Europe can be the incremental to the business. So that's how big those markets are. So this is what we are trying to achieve. So once we succeed in this type of a growing model -- so the titles, that when successful in Japan, can be sold in other markets with multiples of Japanese business. So we will continue to launch Danmachi in Asia and Europe, but also, we try to implement the same approach to go global for other contents.

And more details on each games. Another Eden. As I mentioned before, we have conducted updates on a periodical basis. Danmachi, we've conducted an update, so we upgraded the version. SINoALICE. In March, we held a collaboration event so that helped to see the strong performance of the game. And we had real-world events for SYMPHOGEAR, so this game has been also strong.

New titles. The first one was released on 27th of March called In Love with News. So we co-launched with Johnny&Associates. So this allows users to have simulated dating with the idol group of News members. So we see a quite positive numbers for user review and [ Gree, Inc.'s ] ranking is recently at 17. So -- well, you know when you play this game but by adding scenarios, the more scenario you see on -- to the game, of course, scenario has to be interesting in the first place, but users will continue to play the game, that's how it's been designed. So we just need to introduce the contents on a regular basis in order to sustain the [ growth things ] or the revenues at the higher level.

Our next game. This was released on 24th of April. A new Love Live! game called Puchiguru Love Live! in collaboration with Sunrise. And we also have a positive results for user reviews. And it just got started, but it's around [ 30th ] in the ranking already. And we believe this can be also a powerful product, so we will continue to reinforce the structure to support this game and increase events as well to grow the overall sales.

So we reinforced operations and tried to grow overseas for the mobile games. That was the equation we are trying to implement for different contents. In addition, we are trying to introduce console games for some of the existing titles. In the past, I talked about Fishing Star to launch a Nintendo Switch version, so now we are talking about Another Eden, so we plan to introduce console version. And we want to go global as early as possible on a large scale. So we are working on the final details on this.

VR business. We are working with AEON Fantasy to offer their facility to enjoy VR games. And this has been well appreciated by the users. Other than the game application, we also offer VR business for the use in hiring process.

Another major topic is the entry into live entertainment business. I'm sure many of you already know about the virtual YouTuber business. This is starting to spread through the market. So this is a new style of YouTuber. So we want to combine this virtual YouTuber with our live entertainment business and -- where we see a big business potential. So we decided to grow this business on a large scale. And there are 3 parts to this business. One is production business. So we try to develop or discover various VTuber talents or create programs of VTubers. And there are VTuber-related technologies, such as motion capture system or specialized studio. We will be engaged in this area of this business in using those VTubers as the characters to go into merchandising business or creating games. And that's another area we are looking at. So production, distribution, IP development are the 3 business areas in the live entertainment business to grow.

And there are various venture businesses related to VTubers, but this huge scale VTuber business can be implemented only by someone like us. And that is our strength. And there are reasons for that because in creating VTubers or operating VTubers, you will need technological engineering capabilities. So you need to have the 3D expression to be as attractive as possible, so we have a capability through the gaming business of VR business. And that can be utilized. And we have to be able to sustain operating those characters so we can utilize the know-how game through VR or game business to continue running, operating the service. So we have very high level of operating such capabilities. And third point is quite important. There are various strong IP holders existing related to VTubers, those who can create IPs, but the partnership opportunities are quite limited for them, so here we are. So we are able to support them to grow their businesses. And we have been working with various partners in the game business in the past, so we know we have know-hows, and we have strengths in that area as well. So we have such know-how already accumulated. On top of that, utilizing our current financing and earnings capabilities, we can run this live entertainment business on a large scale. That's what we believe.

Then lastly, media business. Of course, we have to first grow the media so we will continue to grow the size of media. And that is continuing. Even recently, we had this travel app called aumo. And on both platform, on iOS and Android, it's been ranked at close to #1 in travels category. So we are planning, and we are working on creating medias in various verticals.

And so when it comes to growing a number of clients as we see the growth of media size, the key is how we can gather more clients. And this is just a part of our client list. But now, we were able to expand the types of clients as well, and we have been successfully growing the number of clients.

This concludes my presentation.