Gree Inc

TSE:3632

Earnings Call Transcript 2022-Q3

[Toshiki Oya, executive]

Thank you for joining the FY 2022 Third Quarter Financial Results Briefing of GREE, Inc. Let me explain following the slides.

Please refer to the executive summary on Page 2. Net sales was JPY 20.8 billion, operating income was JPY 3.6 billion, and EBITDA was JPY 3.8 billion. For this quarter, the operating income of the Internet and entertainment business reached JPY 3.1 billion. A new title, Heaven Burns Red, has become a hit. Although we made large additional investments in advertising with the aim of contributing to earnings growth over the medium to long term, the results surpassed our forecast. The operating income of the investment and incubation business was JPY 0.4 billion, making a stable contribution to profit.

Going to business overview. We released Heaven Burns Red on February 10, off to a strong start. It has become a big hit and achieved the #1 sales ranking multiple times. In order to maximize profits over the medium to long term, we ran aggressive promotions and made other upfront investments. In the Metaverse business, we made further progress with reality, adding features, expanding content and moving forward with global distribution.

As for outlook, we expect growth in both sales and operating income for the Internet and entertainment business in FY '22. Specifically about the fourth quarter, while we expect initial very strong sales of Heaven Burns Red to settle down, we think they will remain strong. We therefore expect fourth quarter operating income in the Internet and entertainment business of somewhere between roughly JPY 2.5 billion and just under JPY 3.0 billion. However, this could change depending on trends related to new titles.

Page 5 is the overview of the third quarter financial results. Net sales and operating income are as reviewed earlier. Ordinary income and net income also stayed strong.

Page 6 shows quarterly trends of net sales and operating income. On the left is the Internet and entertainment business. This business grew significantly in the second quarter, thanks to the strong start of That Time I Got Reincarnated as a Slime. In the third quarter, Heaven Burns Red contributed to gross sales and profit further, resulting in quarter-on-quarter growth in both sales and operating income. The investment and incubation business made a stable contribution to profit despite some ups and downs.

Please go to Page 7. Operating income analysis. The strong start of the new title led to sales growth in the Internet and entertainment business. Variable costs decreased despite the sales growth primarily due to less royalties owing to improved sales mix. Fixed costs increased slightly in part due to onetime expenses for office relocation. As a result, operating income was JPY 3.6 billion, a significant increase from the previous quarter.

Page 8 shows the cost structure, which reflects various points I mentioned so far. Advertising costs increased approximately JPY 900 million from the previous quarter, almost doubling due to aggressive advertising. On the other hand, commission fees, et cetera, decreased, thanks to improved sales mix. Other fixed costs included temporary costs due to office relocation.

Page 9 shows the dividend forecast. The dividend will be JPY 11 per share, in line with our dividend distribution policy. Our policy is to maintain a dividend on DOE of around 2% while keeping consolidated dividend payout ratio of about 20% or higher, continuously distributing stable dividends to our shareholders.

Let me move on to the operational side. Page 11 is the summary of the third quarter. We continue to run each business based on our medium- to long-term strategy. For more details, let me turn to other slides.

From Page 12, let us look at the game business. One of the highlights of the quarter was the strong start of Heaven Burns Red. Since its release, we have added content one after another, aiming for a long-term operation and profit contribution. It also achieved #1 sales ranking. We are on aggressive promotions, including mass advertising, such as TV commercials and outdoor advertisements, to acquire user base.

On Page 13, as a title released in the fourth quarter, the distribution of Echoes of Mana started on April 27, 2022, off to a solid start. We are working hard to make it a long-term operation.

Page 14 is the pipeline of games. Most of the titles on this slide have been released already. We plan to continue to constantly release 2 to 3 new in-house-developed titles per year, aiming to generate hits.

Page 15 is about the existing titles. Regarding our core titles, That Time I Got Reincarnated as a Slime and Another Eden, we energized users by adding more content and conducting anniversary events. That is all about the game business.

Page 16 looks at the Metaverse business, where we further developed our platform through reality, adding features, expanding content and moving forward with global distribution. What we show here for you is the World function, which energizes avatar communication in the virtual space. We conducted events using this function. To energize overseas users, we conducted events specifically for them.

Page 17 is about the advertising and media business. We continue to strengthen our media potential. Our aumo My business, the SaaS offering that I explained last time, has steadily increased the number of participating stores. Collaboration with sports teams is underway to expand content further.

Page 18 explains about the investment and incubation business. The total AUM has shown a steady increase, reaching JPY 71.4 billion, including the amount invested by LPs.

Page 19 shows changes in GREE Group's direct investment balance. On the left is the balance of operational investment securities and investment securities on our balance sheet. The amount invested has increased, but the valuation and translation adjustments have been weak as the prices of the listed shares fell on the recent sluggish stock market. As a result, the total book value is flat.

On the right is the valuation of investments. Here, unlisted shares are revalued based upon the most recent financial procurement. The valuation and translation adjustments, including unlisted shares, are generally unchanged. Overall, the valuation of investments is flat from the previous quarter.

Page 20 shows the status of GREE LP Fund and CVC investment results, meaning performance. We started to share this information since the last quarter. It shows our portfolio across the investment phase, growth phase and exit phase. IRR for each phase has been either above or on the par with the benchmark.

This concludes my presentation. Thank you very much for your attention.

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