Gree Inc

TSE:3632

Earnings Call Transcript 2021-Q4

[Yoshikazu Tanaka, executive]

Thank you for joining the fiscal Year 2021 fourth quarter financial results briefing of GREE, Inc. I'm Yoshikazu Tanaka. Please refer to the executive summary on Page 2. Starting with the full year results. Net sales was JPY 56.8 billion. Operating income was JPY 5.4 billion, and EBITDA was JPY 6.2 billion. We achieved year-on-year growth in operating income. In the game business, we strengthened our global operation systems and increased sales while developing new titles. We continue to invest in and grow the live entertainment business and the advertising and media business.

For the fourth quarter, net sales was JPY 13.9 billion. Operating income was JPY 1.5 billion, and EBITDA was JPY 1.7 billion. Operating income surpassed our forecast. This is our plan for FY '22. We will continue to focus on the 3 business pillars. In the game business, we will continue to pursue our game engine, IP and global strategies and release multiple new titles, which we have been working on since last year. The Metaverse business has been renamed from the live entertainment business from this fiscal year. We will pursue growth in this domain as Metaverse.

The third is the advertising and media business. We will continue to invest to expand our vertical media portfolio. Now Mr. Toshiki Oya will give you an overview of our consolidated financial results.

[Toshiki Oya, executive]

Please turn to Page 5. Again, FY '21 net sales was JPY 56.8 billion. Operating income was JPY 5.4 billion, and EBITDA was JPY 6.2 billion. Net income was JPY 13.5 billion. Both operating income and net income achieved growth year-on-year. For the full year, net sales increased while operating income decreased. The main factors behind the sales decline were the transfer of the Fashion commerce business in the advertising and media business and the weak performance of part of the media business due to COVID 19.

On the other hand, operating income increased as a result of restructuring efforts and improvements in the structure of each business. Ordinary income and net income increased significantly on the profit from investment fund operations business and the gain on the sale of investment securities.

As for the fourth quarter, net sales and operating income are as explained earlier. In terms of ordinary income and net income, net income was JPY 4.2 billion, thanks to the gain on the sale of investment securities with the IPO of one of the companies we had invested and some additional deferred tax assets booked based on better recoverability. Next, Page 6 shows you the trends in the net sales, EBITDA and operating income. We enjoyed firm net sales and operating income.

Page 7 shows the analysis of operating income compared to the previous quarter. First, net sales had positive and negative factors. With another Eden and some other major titles celebrating anniversary during the quarter, anniversary rated sales stayed strong. In the meantime, Assault Lily hit a low after its launch in the third quarter. Overall, the total sales increased slightly. Among variable costs, advertising costs increased a little for anniversary events. As for fixed costs, the provision for bonuses, et cetera, increased, as it was the end of the fiscal year. With all that, operating income for the fourth quarter was JPY 1.5 billion.

Page 8 shows the cost structure for the fourth quarter. As I said, variable costs increased from the previous quarter due to app game anniversary events. On the other hand, in commission fees, et cetera, royalties decreased along with the improvement of product mix, thanks to the growth of another Eden and other first-party IPS. As for fixed costs, the provision for bonuses increased. As a result, total costs were JPY 12.4 billion.

Page 9 is about stock repurchase. Stock repurchase has been underway. And as of the end of July 2021, approximately 17 million shares or roughly JPY 10 billion have been repurchased. The progress is proportionate to the period past.

Page 10 shows the year end dividend. The dividend per share will be $12.5. Our dividend distribution plan is to maintain DOE at around 2% with consolidated payout ratio of 20% or higher. With the upswing of the fourth quarter net income, we'd like to raise the dividend to EUR 12.5 per share from the may forecast of JPY 11 per share, which means an increase of $2.5 from the FY '20 actual.

Page 11, please. Let me share FY '22 outlook with a focus on trends. In FY '21, we achieved operating income growth and reached a turning point in earnings. For FY '22, we are aiming for growth in both sales and profit based on stable game operation and new titles. While the actual level of operating income will depend on upfront investments in reality promotions and others, which will be explained later. Let me look at each business in more detail. For the game business, game operations are expected to remain stable. We are also planning to release multiple new titles. As with any game, they may or may not be successful as planned, but our aim is to create new income sources and achieve stable growth.

Next is the Metaverse business where we plan to make upfront investments to grow reality further. Global distribution outside of Japan is underway in order to expand the user base. Although we will keep an eye on ROI, we may implement promotions of about JPY 2 billion to JPY 3 billion per year. Financially, such investments will not directly result in decreased profit but will be recovered over a certain period of time. FY '22 could, as a single year, see a negative impact of several hundred million yen, but we may decide to do it in order to accelerate our business growth in FY '23 and beyond.

Next is the advertising and media business. In FY '21, we achieved a profit for the full year, which has been our goal, as I mentioned in the past. From FY '22 onward, we will reinvest the profit to make the growth sustainable, aiming for stable growth, both financially and operationally. Next is the investment and incubation business. From FY '22, we have reframed our existing venture capital investments and start-up investments as a business. In line with this change, we will change the classification of the profit and loss from nonoperating to operating as net sales and operating income. We expect this business to consistently contribute to profit over the medium to long-term and target a return of over 10%. And as you all know, investments are quite volatile, and results can fluctuate from quarter-to-quarter or year-to-year. It can better be considered as potential. That was about FY '22 overall.

Looking at the first 3 months of FY '22, the investment in-game development is at a very high level. In addition, as I mentioned earlier, we expect to conduct promotions for the Metaverse business. With all that, we could post an operating loss of several hundred million JPY.

Lastly, our mid- to long-term financial plan. We will continuously target ROE of 10% or higher. Based on profit growth through business growth with some add-ons from the investment and incubation as well as improvement of capital efficiency, we will continue to improve our ROE.

From the next page, I would like to give the microphone back to Mr. Tanaka to cover the operational side.

[Yoshikazu Tanaka, executive]

Thank you. Let me review operational results in FY '21. In FY '21, we continue to invest in the 3 earnings pillars of our business. As for games, another strategies of game engine, IP and global, we released new titles after a strong start. Development of other new titles has been making progress. We also focused on global operations to improve the earnings potential of our first-party IP titles. Next, the live entertainment business. Our strategy is to develop the platform, and we have been working to strengthen the functionality of reality and expand its content. In the last fiscal year, we began global distribution, now delivering content to 63 countries and territories around the world. For the advertising and media business, our strategy is to expand content to strengthen media potential. While working on it, we also restructured and strengthened the business successfully, improving its earnings.

Please go to Page 14. The game business in more details. We released Assault Lily: Last Bullet after a strong start. One of the new titles in development is Echoes of Mana, a collaborative title with Square Enix.

Page 15, please. In FY '21, another agent's coin consumption reached a record high in its fifth year of operation, which is very important as growing first IP titles is getting commercial for us. This title is now distributed in 72 countries and territories around the world. We added more regions and released the Steam Version in an effort to expand the platform further. Our marketing initiatives, including collaborations with various popular IPs help to expand the user base.

Page 16 is about the expansion of overseas game distribution. The chart shows going consumption outside Japan. We raised the global version of SINoALICE on July 1, 2020, and strengthened the global operations of another Eden. We will leverage our know-how of global operations to distribute upcoming new titles around the world.

Page 17 is the live entertainment business, while strengthening functionality and expanding content portfolio, we also began global distribution during the last fiscal year, delivering content to 63 countries and territories around the world.

Page 18 is the advertising and media business. We continue to strengthen our media potential while driving our business to better meet the users' needs amid the COVID-19 crisis.

Now I'd like to talk about our medium-term plan on Page 19. The game business will continue to be the foundation of our earnings, while we pursue the growth of the advertising and media business and the Metaverse business.

Page 20 is our business strategy for FY '22. We will continue to focus on and grow the 3 earnings pillars. In the game business, under the game engine, IP and global strategies, we will be releasing multiple new titles, which have been developed since last year to create new income sources. We have and will continue to strengthen our global operations system in order to enhance our earnings potential. We will also work to grow our IPs further by operating with a long-term view. The Metaverse business has been renamed from the live entertainment business from FY '22, and we aim to grow it further as Metaverse. Promotions will be boosted worldwide to establish a larger user base. That is our theme for this year.

In the advertising and media business, strengthening media potential continues to be our focus. Lastly, the investment and incubation business. This business has 2 parts: investment in venture capital and investment in start-ups, and we will strengthen both.

Please go to Page 21. The game business. Multiple titles, which we have been developing since last year are scheduled for release this year. You see some of them on the slide. As for the Metaverse business, the first thing we are going to do is to strengthen functionalities and expand content, a new function for enhanced communication between avatars in virtual spaces will be released soon. We have also been working on global promotion in a scale that actually made reality, a fifth ranking app in the U.S. as of July '19 in the free installation social network category.

In FY '22, we will strengthen our promotion in the U.S. and around the world to establish our user base. In the advertising and media business, we will continue to focus on strengthening the media potential. Our investment in incubation business is divided into 2 parts. One is what we call GREE, LP Fund, which invests in venture capital, such as DCM, incubate fund and B Dash Ventures. The other part is CVC investment in start-ups. We have 3 visit teams within the GREE Group, and we will invest in start-ups through them. We have been operating both businesses for almost 10 years and are starting to have some positive cumulative profits, which we believe amounts to about JPY 13 billion. Since we have been investing continuously over the last decade, the return phases are also staggered, which means the profits are not onetime but will continue in the future.

Lastly, Mr. Araki will explain about the Metaverse business in more detail.

[Hideshi Araki, executive]

I'm H. Araki, Senior Vice President of GREE, Inc. Please look at the appendix on Page 27. This time, we have renamed the live entertainment business to metaverse business. The metaverse is a virtual world, a kind of cyber space where users inhabit Avatars and can interact with each other, play games or create something to earn money, just like the cyber space you see in movies and Anima. In the past year or so. We have seen major investments and businesses launches in this area, more than ever, including Fortnite of Epic Games, Roblox, which recently had a major IPO. And last week, Facebook announced that Facebook will become a metaverse company. Those concepts are now given names as the next Internet platform. For the past 3 years, on reality, we have been creating elements of what people now call the metaverse, one at a time, such as real-time communication through avatars and the ability to earn money by performing. Now that we have a name that is simple to understand. We decided to redefine our business as the metaverse business, and we'll continue to invest to realize this world. With this name change, there will be no change in our business policy or organization. However, as mentioned earlier, we are going to invest more aggressively in its development and promotion as we are getting more and more users on a global scale.

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