Gree Inc

TSE:3632

Earnings Call Transcript 2023-Q4

[Toshiki Oya, executive]

[Interpreted] Thank you for joining the FY 2023 Fourth Quarter Financial Results Briefing of GREE, Inc. I'm Toshiki Oya. Please refer to the executive summary on Page 2.

For the FY '23 full year, net sales was JPY 75.4 billion. Operating income was JPY 12.5 billion, and EBITDA was JPY 12.8 billion. We achieved year-on-year growth in sales and income.

In the Game and Anime business, we developed IP and made progress with global distribution with a focus on the main state title Heaven Burns Red. We continue to invest in the growth of the Metaverse, DX and Commerce businesses. In the Investment business, we saw fluctuations on a quarterly basis, but achieved steady contribution to earnings on a full year basis.

For the fourth quarter of FY '23, net sales was JPY 20.1 billion. Operating income was JPY 5.0 billion, and EBITDA was JPY 5.1 billion. The Investment business contributed to the increase in operating income, while all other businesses performed generally in line with our expectations. We will strengthen efforts to steadily improve business portfolio profitability over the medium term.

Going to Page 3. The structure of this material has changed significantly this time, and let me explain the changes to the reportable segments. Previously, we explained our business in 2 segments: the Internet and Entertainment business and the Investment and Incubation business. In order to improve understanding of the GREE group's expanding business domains, the 4 businesses previously included in the Internet and Entertainment business segment have been reclassified as separate reportable segments, as you see on the right.

For each reportable segment, the person in charge of the business will later explain directly to you the latest situation, performance results, earnings forecast and trends in the midterm plan.

The overview of consolidated financial results as shown on Page 6. Page 7 illustrates the trends in net sales and operating income. The fourth quarter results in the Game and Anime business were somewhat weak on the reactionary decline from anniversary events held in the third quarter for Heaven Burns Red, but consolidated results remained strong due to earnings contribution from the investment business.

Page 8 is a new disclosure, sales and operating income by segment. This will be explained later in detail by the persons in charge of each business.

Page 9 is the operating income analysis. As I said, despite a reactionary decline in sales from anniversary events held for Heaven Burns Red, we posted operating income of roughly JPY 5.0 billion, on the decline in expenses such as advertising costs and contribution from the investment business.

Page 10 shows the cost structure of the fourth quarter. As I have just said, variable costs, especially advertising costs decreased, while fixed costs remained almost flat. Total cost declined by JPY 2.8 billion to JPY 15.2 billion.

Page 11 is the year-end dividend. Our dividend distribution policy has not changed and aims at DOE of 2.0% and consolidated dividend ratio of 20% or higher, in line with the policy, we plan a dividend of JPY 11 per share.

Now let us move on to the operational overview. Page 13 shows the plan of medium and long-term growth based on the 4 pillars you are familiar with.

Next, is our business plan for FY '24. This page shows the summary and the persons in charge of each business will give more details later.

Page 15 shows the earnings forecast by segment. Forecasts are not disclosed for the investment business, which is highly uncertain or for the overall consolidated results. Instead, I will provide guidance verbally at the end of this presentation.

Now let us move on to the business part. Mr. Yuta Maeda will cover the Game and Anime business.

[Yuta Maeda, executive]

[Interpreted] Page 17 shows FY '23 sales and operating income. The fourth quarter was comparatively weak on the reactive decline following the 1-year anniversary promotions of Heaven Burns Red in the third quarter. However, on a full year basis, we managed to control the impact following the hits in FY '22, achieving solid performance. In the fourth quarter, we successfully conducted the 6-year anniversary promotions of Another Eden and SINoALICE.

Next, Page 18 shows the FY '23 topics, which supported the solid performance. In particular, the anniversary events and overseas releases of Heaven Burns Red were very well received. We believe that those measures are the reasons why we have been able to maintain our sales, instead of depending solely on initial momentum after release.

From Page 19, let me explain our future business plan, while putting primary focus on the smartphone games, we will also actively work on console games and anime to create and develop IPs in order to extend and maximize profitability over a long period of time.

Page 20 is about overseas development. We will work to distribute all of our future titles overseas by leveraging the know-how and resources we obtained through the distribution of Heaven Burns Red.

Page 21, please. As a new direction, we will actively pursue multilayered new development, which means to promote not only in-house development in its narrow sense, but also a joint development with other companies. Development via licensing as well as outsourcing agreements to rebuild our pipeline into something that fully leverages development know-how and resources we have accumulated through past projects that will allow us to hedge against volatilities while strengthening our earnings foundation, as you see on the left. On the right, you see a past example of this nature. One Punch Man jointly developed with Ourpalm Co. Ltd.

Page 22 has more recent and future examples. On the left is a licensing example. World Dai Star is an IP based on which TV anime was broadcasted this spring and was licensed to other companies to develop game. On the right is ONE PUNCH MAN:WORLD jointly developed with Perfect World Co., Ltd. Now we are actively working to build a multilayered pipeline, including those we cannot disclose here yet.

Page 23 shows titles already in development, thanks to those efforts. Of course, we are working on our original titles that can capitalize on the success of Heaven Burns Red, and very large IPs. Some are in earlier phases and not ready to be included here, but we are actively rebuilding our pipeline.

Next, Page 24 shows FY '24 earnings forecast. We forecast quarter-on-quarter declines in sales and income in the first quarter on a reactive decline following anniversary promotions. On a full year basis, we forecast our sales in the range of JPY 41.0 billion to JPY 45.0 billion, and operating income in the range of JPY 5.0 billion to JPY 6.0 billion as we factor in no contribution from new titles.

Page 25 shows the outlook for FY '26, 3 years from now. Again, we factor in conservative sales estimates from new titles while cost outlook is realistic numbers. Sales is forecasted at JPY 53.8 billion and operating income at JPY 4.7 billion. We feel the new titles we are preparing are the most promising ever and help them to blow some larger than those base numbers.

Next, Eiji Araki will explain the Metaverse business.

[荒木 英士, executive]

[Interpreted] Page 27 shows our performance in the past 12 months. During this period, we invested in global marketing for reality, a smartphone app in the platform business which I will explain later, and made stronger investments in the VTuber business. Therefore, we had operating loss in the last 2 quarters despite strong sales growth.

On Page 28, we have major topics from FY '23. Currently, the Metaverse business consists of 4 sub businesses operated by 4 subsidiaries. The Metaverse platform business, which operates the smartphone app reality is run by reality. The VTuber business is run by REALITY Studios. The B2B Metaverse business is run by REALITY XR Cloud and the Web3 business is run by BLRD. As I said, in FY '23, we invested in the global expansion of the platform business and aggressively invested to reinforce the VTuber business.

From Page 29, let me cover the future business plan of each sub business. Page 29 is about the platform business. Currently, over 80% of our active user base is overseas. They represent only 25% of the total sales, but the growth rate is high. We see the largest growth opportunity here and aims at an overseas sales ratio of 50% by FY '26. To realize it, we are implementing a number of initiatives to boost sales in North America. We hired a former Twitch executive to head our livestreaming business in the region, and introduce more diversity to avatars to grow sales.

Page 30 is about the B2B Metaverse business. Based on our own platform reality, we provide sponsored corporate promotions and customer attraction support, leveraging our industry-leading user base. Going forward, we aim to generate stable profit by enhancing products that can be OEMed in addition to our own platform and expand alliances with major brands.

Page 31 is about the VTuber business. We have been reinforcing our investment in this business since the second half of FY '23. We have established multiple VTuber agencies, each adding its unique characteristics to our portfolio, and we are increasing the number of talents. We aim to grow our overall business by increasing the number of attractive and influential VTubers expanding sales per VTuber through merchandise licensing live events and other monetizing means.

Page 32 shows the FY '24 earnings forecast. Currently, we have 4 sub businesses in the Metaverse business, as I mentioned earlier. The platform and the B2B Metaverse businesses generate steady earnings which in turn is invested in the VTuber and Web3 businesses. This portfolio structure allows us to expand overall business while remaining more or less breakeven.

For the full year of FY '24, we expect sales to grow by JPY 1.4 billion year-on-year to JPY 8.1 billion, while operating income hovers around minus JPY 0.2 billion, as we will continue to invest.

Lastly, Page 33 shows the medium-term targets. Toward FY '26, the platform business and the B2B Metaverse business are expected to continue to generate steady profit, which will be invested in the VTuber business to grow overall sales by FY '26, all the 4 sub businesses will move into the black with operating income expected to reach approximately JPY 1.9 billion.

[Kazuhisa Adachi, executive]

Kazuhisa Adachi explains the DX business. Page 35, please. This is the sales and operating income trends. We have accumulated projects quarter-by-quarter, but sales and income declined from the previous quarter due to the completion of a large-scale project and the increase in cost from reorganization in at providing new functions for our clients.

Page 36 shows key topics from FY '23. We are integrating our group B2B businesses and other functions into the DX business to provide one-stop functions to external clients. In FY '23, we steadily accumulated such projects where we provide those functions to external clients, and managed to grow steadily.

Please turn to Page 37. We aim to grow the DX business based on 2 pillars. One is the marketing DX where we mainly provide advertising and marketing functions to support client sales and business expansion, and the other is the operational DX, which offers business protection functions such as risk management, monitoring and patrolling and quality assurance to support clients' business operations.

Please go to Page 38. In the Marketing DX business, currently, our primary focus is to assist DX clients in IT and entertainment, food and beauty industries, which we would like to expand to other industries. To expand our industry coverage in addition to strengthening sales capabilities, we will pursue alliances to be able to provide functions in a more meaningful manner.

Please turn to Page 39 for the Operational DX business. Conventionally, we only offered customer service functions but now we are preparing to provide more functions such as patrolling, inspection and quality assurance by realigning organizations across the GREE Group by providing business protection functions for growth industries, such as Metaverse and Web3, which have great growth potential with expanding online user communities, we will be able to grow substantially.

Page 40 shows FY '24 earnings forecast. Sales is expected to grow from JPY 5.4 billion to JPY 5.7 billion, but operating income is expected to remain at JPY 0.7 billion due to costs for preparing for new services, et cetera.

Page 41 shows the medium-term targets. We aim to increase both sales and income steadily to achieve sales of JPY 7.9 billion and operating income of JPY 1.2 billion in FY '26.

Yosuke Nakamura will explain the Commerce business.

[Yosuke Nakamura, executive]

[Interpreted] Please go to Page 43. Despite continued stable growth from aumo, Inc., which is positioned as the core of the commerce business. Overall sales declined for FY '23 full year, owing to the strategic pivot in other media, such as LIMIA and MINE. In addition, as we recently sent out a press release, we established jobda, inc., to enter into the HR business. Due to the increase in costs associated with its establishment, we recorded operating loss for the fourth quarter.

Page 44 shows FY '23 topics. The commerce business has pursued the media and SaaS strategies. Media achieved steady growth and almost monthly active users topped 17 million. aumo My business, our SaaS product, steadily increased the number of paid member stores. Most of our earnings successfully shifted to the SaaS-based subscription business model.

Page 45, please. The future business plan for the commerce business is to laterally deploy the media and SaaS strategies used for transforming and expanding aumo to the HR business to jump-start HR media.

Page 46, please. For aumo, our basic direction is to raise unique price by enhancing SaaS functions. We also target 30% CAGR growth in the number of paid member stores, expanding overall business.

Please go to Page 47. For jobda, our initial focus will be to start up the media. As I said, we aim to jump start it, leveraging the know-how and development resources we accumulated through aumo.

Page 48 shows earnings forecast. For the FY '24 full year, we expect sales of JPY 1.5 billion and operating income of JPY 0.1 billion due to steady growth from aumo and initial start-up investments in jobda.

Page 49. For FY '26, we expect sales of JPY 3.3 billion and operating income of JPY 0.4 billion based on stable growth of aumo and expected continued investment in jobda.

[Toshiki Oya, executive]

[Interpreted] Now Toshiki Oya explains the investment business. Page 51 shows sales and operating income of the investment business. Following the major distributions from fund investments in the third quarter, there were major distributions from start-up investments in the fourth quarter.

As you see under focus point, the distribution on the exit from COVER Corporation is approximately JPY 3.0 billion, and the contingency fee associated with the fund management is approximately JPY 0.9 billion.

Going to Page 52. The total assets under management topped JPY 80 billion. Revaluation of JPY 12.8 billion mainly comes from the unrealized gain on COVER Corporation's IPO. There was JPY 9.0 billion decrease by distributions as there were a lot of distributions during the quarter.

Page 53. During the fourth quarter, we invested in 15 VC funds and continues to invest in startups. The operational investment securities are approximately JPY 20 billion.

Page 54 is the status of investment results. We continue to show stable performance.

Page 55 is the future business plan. We will continue to invest in VC funds and start-ups in Japan and the United States. With the principle of long-term, stable and diversified investment, we aim at stable profit contribution over the medium to long term.

We covered all business topics. Before closing, let me add some comments about consolidated business outlook. Regarding the outlook for consolidated earnings in the first quarter of FY '24, we expect consolidated operating income of around JPY 1.0 billion on the reactive decline following income contribution from the investment business in the FY '23 fourth quarter and anniversary promotions in the games business.

As for the full year consolidated earnings in FY '24, we expect consolidated operating income of JPY 4.0 billion to JPY 5.0 billion, as we do not expect contribution from new titles in the Game and Anime business or large income contribution from the investment business.

Regarding the outlook for consolidated earnings in FY '26. Excluding the investment business, we expect operating income of JPY 4.0 billion to JPY 5.0 billion, as we conservatively factor in contribution from the Game and Anime business.

In the Investment business, we target returns of roughly 10% and expect to accumulate further gains. As Maeda mentioned, in the game business, in order to contribute to the overall profitability of the group, we will diversify our revenue with multilayered portfolio, and increase the overall profitability of our titles by leveraging our high level of game operation know-how to sustain profit over extended period of time.

In the Metaverse, DX and Commerce businesses, we will focus on profit growth while developing new businesses in each area. Over the medium term, we plan to aggressively pursue growth from sources other than games. And by FY '26, aim for roughly half of income not from the investment business to come from businesses other than the Game and Anime business.

In addition to adjusting our business portfolio to increase the ratio of earnings from stable sources, we aim to achieve further growth. In addition, we will work on our cost structure to be leaner, so that the entire group can grow further. That concludes our explanation. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]