Gree Inc

TSE:3632

Earnings Call Transcript 2018-Q4

[Unknown Attendee]

Hello, everyone. I am an official character, or you can call me as official VTuber for Wright Flyer Live Entertainment, which is a great subsidiary established for live entertainment business focused on VTuber business.

My name is [ Isona Manami ]. So I am an employee for Wright Flyer Live Entertainment. And I will be sharing information about the various services as a VTuber. So I hope you get to know me for this occasion. Okay, so Tanaka-san, since this is a good opportunity. Is it okay for me to go through the executive summary for this meeting?

[Yoshikazu Tanaka, executive]

Yes, please.

[Unknown Attendee]

Okay, thank you. So let me go through the executive summary. So first of all, FY '18 actual results for the full year net sales was JPY 77.9 billion, operating income was JPY 9.4 billion. We increased sales and income year-on-year. And we also strengthened operations of existing titles and successfully developed titles for overseas markets in the game business. We also steadily expanded user base in advertising and media businesses. We also entered live entertainment business to create a third earnings pillar.

In Q4, our net sales were JPY 19 billion, operating income was JPY 1.6 billion. We grew the sales Q-on-Q. We achieved sales growth by strengthening existing titles, developing overseas titles and launching new titles. And we also invested in advertising in growth businesses.

And let me go through the plans for FY '19. So we will aggressively invest in strengthening our 3 earnings pillars. Game business, so we will start going globally on a full-scale for the existing games. And we will invest in strengthening Game Engine, IP and global strategies. In advertising and media business, we will be investing in developing one of the largest vertical media portfolios in Japan. And lastly, on live entertainment business, we are investing in expanding the virtual YouTuber industry ecosystem. Okay, so that is all for the executive summary.

I believe this is the very first time in our world to have a VTuber for the financial results briefing of a listed company. So I think this is a good chance to have some photo shooting time for about 10 seconds. So the media people, I think this is your chance to take good pictures. Okay, let's start. 10, 9, 8, 7, 6, 5, 4, 3, 2, 1, finish. How did it go? Did you get good pictures?

So that was all from Isona Manami. Now this is going back to the regular financial briefing meetings. So please be assured. Okay, Akiyama-san, can you go through the financial results overview now? Okay, I hope to see you again.

[Jin Akiyama, executive]

Thank you very much, Manami-chan. So now I want to go through the financial results overview. And I don't think I can adjust my voice tone, like she did. But I will try my best.

So let me go through Page 5. Net sales -- so comparing to the Q4 written forecast that we had at the Q3 briefing on April 27. Comparing to that number, we increased the sales by a little less than JPY 500 million. Operating income -- I will give more details later on, but we made a vast investment. So we had spendings in this quarter. Therefore, we could not meet the plan, slightly. And we had an impairment losses for a -- to have effect on the net income that's why we had much lower income than expected.

Page 6. This is showing net sales and operating income trend. We increased the sales by JPY 1.1 billion as you can see on the table. And OP margin declined, but this was due to the vast investment that we made.

Page 7. Operating income analysis. Up until 2 years ago, we normally showed the decline in net sales and trying to reduce the expense a lot to show the increase in profit. That's what we used to do, but that changed a lot. So we start increasing the sales but we tried to spend more on the expenses. So on operating profit level, we saw the decline on Q-on-Q. So I will give you more details on spending, but we have been aggressively spending right now.

Page 8. This is a cost structure. Let me touch on 3 points. First, advertising. Compared to the previous quarter, there was an increase of JPY 800 million. And I'm repeating that, we are investing into the growth businesses. Also, still this percentage of advertising within the sales was about 8%. So we have been successfully controlling that level. Second point, commission fees. There was the product mix change, also the sales growth. Those were the reasons for the increase of JPY 800 million. Third point on other, it has increased due to increased outsourcing. So in various businesses such as game, live entertainment and video, and we have been expanding the businesses aggressively to see the increase in this other cost.

Page 9. Dividend. We plan to pay dividend of JPY 14 per share. So we based on the 20% payout ratio, we provide regular dividend of JPY 4 per share. And we have celebrated 10 years' anniversary of the company. So we provide a commemorative dividend of JPY 10 per share in total JPY 14, which is an increase of JPY 3 compared to the previous year.

Page 10. Comparing to the forecast on April 27. Here's the difference between the actuals and forecast, and there are 3 points. On sales, we have reinforced the operations of existing titles to increase the basis. And that actually saw a bigger contribution than expected. Of course, we had 1-year anniversary but we saw the bigger growth than expected and that actually helped to see the increase in base. Second point on the cost. And again repeating this, but we have made a vast investment into the game development and media development. And that increased the spending. Also, when you see the gap into the other income and net income, this is mainly driven by the impairment losses on the goodwill, which will be explained in the following page.

On Page 11, this is about the impairment loss on goodwill. In 2017, in February, we invested into 3Minute. So they have been growing the business on the steady basis. But the time of the acquisition, in February of last year, we made a plan. And that actually included a much faster pace of growth of the business. So the business is growing but compared to what we had forecasted in February of 2017 at a pace of the growth isn't as fast as expected. That's why we had to post these impairment losses on accounting basis. However, that business will continue, and we will further continue to invest into this business for expansion.

So Page 12. This is showing the Q1 earnings forecast that we are in right now. As you already been informed, our main existing titles have started in June quarters of 2017, which are going strong right now. And we had the 1-year commemoration in Q4 for those games. So now we started to see moderation of the impact of the events. But we have reinforced operations, and we have bottomed up in the baseline for the game that is affecting and contributing to the business. Although we see a slight decline, but that is sustained at this level. And continuing to Q4, we plan to spend aggressively into advertising. And so we expect to have a continued spending. So we will have a slight decline in the profit. But we have not changed the way we made the forecast. So hope you understand how we have forecasted. So I want to pass the floor back to presenter Tanaka for operational overview.

[Yoshikazu Tanaka, executive]

And let me go through operational overview. Well, since this company was listed to the market, it's been 10 years. And this is the very first time for me for not going through the executive summary on my own. I'm really amazed to see the advancement of the technology. So the operational overview. And let me go through Q4. So first, domestic coin consumption was JPY 11.4 billion. In Q4, we had successfully strengthened operations of Another Eden and SINoALICE. And we released Danmachi, in overseas that contributed to the business. In March, we released In Love with News and that also contributed to the business. And let me go through more details. SINoALICE. About a year ago, this game was released to the market. And we have been gradually increasing the size of operation team. So we can run in a much more streamlined manner to develop on a larger scale. And we have been reinforcing there's features and functions of the same theme at the same time. So now for very long period, we have been accumulating sales. Also, recently, we saw a big growth in this game. Another Eden in Q4, we had the 1-year anniversary. And we added main story. Due to its characteristics, when you have an addition of main story, you can expect big growth of the game. So that worked out pretty good. Danmachi, we added new contents. And they also had a 1-year anniversary, and this game is growing strong as well. SINoALICE, as mentioned before, it also had a 1-year anniversary with various measures in place. And SYMPHOGEAR, also had a 1-year anniversary, and this is also growing steadily.

And based on what happened in Q4. Let me go through a summary of FY '18 for the past 12 months. So where it says business plan is what we have defined and indicated a year ago. So based on this plan, we have been progressing our business, and we have come to the results, which are explained in the review section. So a year ago, we have set out to be aggressively investing into mobile games. So mobile game contributed a lot to allow us to grow sales and also profit for the first time in 6 years. And we decided to focus on specific areas, which are the mobile game, advertisement and media, and live entertainment. So those are the 3 areas we decided to focus more on.

Mobile game, based on this engine, IP, global strategies, we have released first games into the market and that also contributed to the result. And we went out to the overseas market, and we were able to reinforce the operation. So based on this engine IP global strategies, we were able to grow the business.

Console game, based on Game Engine IP global strategies. So from engine perspective, we wanted to expand into non-mobile platform areas, VR, Facebook, online platforms and console games. So we have expanded our games into those other platforms for the past year. And so platform operation business is for the web business. And for the last year, we were able to have a stable business to ensure profits.

And game operation business, we have started the operation of native games to bring out the growth of the business. Live entertainment business, we decided to enter into this live entertainment business, and we had an investment of JPY 10 billion. We started VTuber fund investment business. Advertising and media for the last year, we were able to have a big growth of the user base and that was the result of the past year. Let me also give you more details. So this is what we have done for the last 12 months.

While looking back in FY '15 and '16, we have shifted our development resources other way to native games, that's what we did. And then into FY '17 in the latter half, we had a rush of all the new game releases. And then FY '18, we spent time to reinforce operation and roll them out into the overseas market for those games released in the previous year, and that actually worked out pretty good to show the growth in both sales and income.

And here is the scenario for growing the mobile games. And I'm repeating this explanation once again using the same chart. Once we release the game and of course, we expect to see the initial strong performance to see the expansion of the user base and then we reinforced the operations at various actions to grow that sales for the amount. Then we go out to the overseas market to have another growth in the sales. And those games released in FY '17, and we are currently reinforcing the operations and launching them into the overseas market. And those games released in FY '18, we will be looking into reinforcing operations and going global. And this is the result of reinforcing operations, both Another Eden and SINoALICE, you can see the result. The 7-day player retention rate have grown and improved a lot for the past year. And I believe this was improved because of the improved quality of the development. And the user base further expanded also driven by the 1-year anniversary. So while reinforcing the operations like this, we have been successfully growing the game for a longer period. Overseas development for the last year first Danmachi, we have released this game to the overseas market working with the partners. So we were able to grow the game by 1.5x to 2x more by releasing this North American version. In other regions, we plan to launch this game as well. So we released new games there, In Love with News and Puchiguru Love Live! And we are getting pretty good user reviews right now. And so we will further expand these games as well.

Live entertainment business, we entered in this business, and we established a new subsidiary in April focused on this business. And we have been working on fund activities. And today, there was a news release, that we are conducting further investment activities. Advertising and media business. We have been steadily growing the media page views, and we were awarded with the App of the Year. And so our service of app have been well appreciated by the market too. So we are reviewing the midterm policies on the next page to go through what we are planning for the midterm.

So again, those are the 3 businesses that we have focused on recently. And the game business will be utilized as the foundation for the company business and it continuously growing. And then we grow the advertisement and media business furthermore. Then we will have additional growth of live entertainment business on top of that. And based on these midterm policies, we have set out our business policies for FY '17 to define how to grow the business. As you can see in the business plan and overall, in order to strengthen 3 earnings pillars, we will be aggressively making investment for this coming year. In mobile games, based on this engine IP global strategies, we will be further improving existing engines and developing new engines. So we will be reinforcing our own existing -- our own IP's. And we will be increasing earnings through full-scale overseas development and so by improving our distribution capabilities. On console games, we are now starting the service online platform so we will be launching our service on various platforms. In live entertainment business, and this is about exactly expansion of this specific platform that will be the main focus on the coming year.

Advertising and media. We will continue to reinforce the media potential so we can build the largest vertical media portfolio in Japan. Yes, this is about the game business. So currently, we already have 5 titles approved for developments and currently under development. Then we will be launching the games into overseas market one after another. For FY '20 and beyond, we plan to release on the average of 4 to 5 titles per year. So this is about the development of Game Engine's. So it's not that simple but this is kind of showing the conceptual image of our engines that we offer. So of course making use of existing engines, we are introducing new titles. And this is what we're working on in the coming years. So in addition to RPG games or GvG games, we are also working on new engine areas to launch the games on those engines. And there is a plan to come around FY '20.

IP investment. So we will be working on expanding IP for Everything in its Right Place project. So first, we are working on TV anime production. We have already decided to create animation. And we plan to release all-new 3D title, the new Everything in its Right Place project, so we can further grow the key value. And we are planning to develop idol group as well. So we are taking such multifaceted measures to grow the IP.

Expansion of fan community. So from 20th of July, we have started new TV advertisement for SINoALICE, and we are working on various events along with the TV commercials. So we are expanding fan community to grow the IP of SINoALICE.

Overseas development. As you can see with Danmachi, it is already released in Japan and North America and Europe, and we plan to launch them into East Asia and China as the next step. For Another Eden, we plan to launch them into North America, Europe, East Asia and China. So we have already concluded agreement with distribution partners in China. So those Chinese partners will prepare for the development and releasing of these games.

In multiplatform development. So Fishing Star is now installed -- introduced to the instant games for Facebook in April and also LINE new platform. And Nintendo Switch platform are also planned for the coming releases. Including unannounced titles, we plan to develop 4 titles.

Live Entertainment business. So those are the 3 pillars in production, distribution and IP development for this Live Entertainment business. Next week, on August 7, we plan to have a major announcement on future policies and plans for Live Entertainment business. So I will give you more details then.

Advertising and media business. These are the 4 business areas where we are investing a lot, and we are trying to grow each category to be a big media.

This concludes my presentation.