CyberAgent Inc

TSE:4751

Earnings Call Transcript 2019-Q2

[Sonoko Miyakawa, executive]

We'd like to now begin the briefing session of CyberAgent Second Quarter Financial Results for FY 2019 ending in September. Thank you very much for coming to the office, which is a new one, Abema Towers, despite the fact that it is a bit far from Shibuya Station. And thank you, very much for coming to this briefing session.

I would like to first introduce the participants from CyberAgent: CEO, Mr. Susumu Fujita; Managing Director, Mr. Go Nakayama; and I am Miyakawa, in charge of IR, and I'll the MC for today.

Now I would like to have the CEO, Mr. Fujita, walk you through the financial overview.

[Susumu Fujita, executive]

Thank you very much for coming to Abema Towers located in Shibuya. So around the end of March, we started to relocate, and this is a brand-new office that you're in right now. And it was much easier for me to have this briefing session today in this office, but maybe next time, we can have it in the old venue. So this new building, we have named it as Abema Towers, and we rented out the entire building, so we're renting this office. And even our employees think that this is owned by CyberAgent, but I need to tell this to investors, this is not a company (sic) [ building ] that we own. This is owned by Sumitomo real estate, and then we're renting the entire building. And as the extra bonus of renting out the entire building, we had the luxury of naming this building Abema Towers. So there's -- it's actually Abema Towers, but there's only one building. And the reason why we decided to rent out this office is because I went to Aoyama University as a college student, and I used to be in this neighborhood as a student. And then Udagawa-cho and Sentagai are the areas that I was in most of the time. And then I would think of Amway because there is a big building that I used to always see, and it was a great building. I realized that it was a great company, so I decided to make a building in Shibuya, so youngsters will be able to see our building in Shibuya and know about us. And it's a bit far from the station, but that's the reason why we decided to rent this out. And our offices were in different places, but all in all, the overall cost has come down, thanks to the fact that we're now consolidated in one place. So I think it was a good relocation.

So let's now share with you the financial overview for the second quarter. So this is from January to March, so that will be the second quarter FY 2019 for us. And I actually posted an article in my blog, and I said I feel reassured. That was the title of the blog article. So it's not like I would post a blog article each time I have a briefing session like this, but I made the blog -- I wrote the blog article in the previous quarter, but I want it updated because I don't want the people to always see that article that was titled Downward Revision.

And then for the first quarter, we posted about JPY 5 billion. So it was tougher as in the first quarter. And based on that most recent sales, so we decided to come up with a downward revision quite quickly. But we entered into the second quarter, and we -- using the existing businesses, we have been able to recover back to the earnings level that we used to have. So you can't really fix it overnight because it is a big company after all. But as a matter of fact, we started to reduce costs sometime in November last year, so we started to put our hands on the cost reduction, and then we started to see the effect of this in January-to-March quarter, and we're now back on cruising speed again. And I'm going to talk about it more in detail here.

For AbemaTV, I believe that it is growing and -- steadily. And for Ad Business, we have marked the best-ever quarterly sales than ever gained. The earnings for the previous quarter wasn't all that great, but thanks to the titles that celebrated anniversaries, we have been able to make a recovery here as well.

And this is the evolution of the consolidated sales. We have been able to grow the top line, and we have been able to reach a record high for sales.

Moving on, this is the OP. For this quarter, we have generated JPY 8.6 billion in OP. And then we made upfront investment in AbemaTV, so that's negative JPY 5.1 billion. And then in total, it's JPY 8.6 billion OP. So what it means is that we have been paying for the upfront investment but, at the same time, generate OP.

And if you look at SG&A expenses, you can see that it has come down quite strongly, and then much of that is coming from the reduction of the ad spend. So we decided to revise what we can make a change in quickly. So cost reduction is something that we did together with a downward revision.

Aside from SG&A, we decided to review or revise the COGs. So it doesn't mean that we're trying to offset all of that with SG&A expenses.

And the number of employees, not much change to that. We mainly hire new graduates. Starting from this April, just like other years, we're going to have an increase in the number of headcount.

And for PL, this is how the P&L looks like. The balance sheet, not much change to the balance sheet either.

So let's now look at the business forecast. Once again, we have just finished half of the year. And last time, we made a downward revision 3 months ago to bring down the OP forecast from JPY 30 billion to JPY 20 billion. And in the second quarter, we have recovered to be back on the cruising or normal speed again. So the achievement rate of OP is already 70%. So what it means is that we're overshooting the revised target for OP. So I believe that we are on track compared to the number that was before the downward revision, but we would like to aim for upside potential after achieving the revised OP target.

So I would like to talk about the Advertisement, Media and Game. So for Internet ad, January to March is a demand quarter, so it's been growing quite steadily. We have been able to mark a record-high sales for this quarter.

And I believe that I got a question during the previous briefing session why the OP goes up in January to March. And then that is because a lot of the companies finish their financial year in March, so we are seeing a slight increase here. And we're also acquiring new clients that we call the national clients, and we're acquiring them. So for creatives and technologies, we are making upfront investment in those areas in this segment, so the OP level tends to go down a little bit.

So this indicates the increase and decrease percentage by different industries comparing to the previous year, and the previous year is set at 100%. So auto, manufacturing, cosmetics industries or sectors are growing, so this is where we're focusing on to acquire new clients. So these are oftentimes clients that used to focus on TV commercial, and now we get an invitation to their pitches. And we're now in the process of acquiring them and go for conquest.

And our strength is that we're strong in Internet ad, and we're oftentimes called in when they want to focus on Internet ads. So I believe that operating capability is indispensable if you want to do Internet ad. And we have long years of experience and know-how in this area. And for creative ability, we are working on it so that we can enhance it even further. And for AI, it's not really contributing much yet, but for ad technology, I believe that this also serves as our strength as well. So using these points as the prowess, we want to conquest those new clients.

Moving on to Game segment. I -- as I said in the summary, for this quarter, we had 3 titles that experienced anniversaries. And we have been able to have sales level which is close to a record high. When you think of Game, you must -- you may think that it's quite difficult to operate this segment when you don't have hits, but we will be able to have a good result by operation -- good operation. So we are aiming for new hits, but at the same time, we want to really exercise this prowess in operation.

And the OP of this business segment, we are stepping on the gas quite a lot, if you will, and we have been spending a lot in advertising. And we have reduced it, so that's why we have more OP.

And going forward, we have a title called Linqs Rings which is planned to be released. So we have the plan to launch 6 new titles this year and also in the beginning of the next year.

And next is the Media Business. For Media Business, during this fiscal year, we are planning on ending Ameba Pigg service. So the users were using Adobe Flash, so it is now quite difficult for us to continue to do -- to offer this service. So that had a negative impact, but we were able to have increasing sales despite that fact. But there was a slight decrease in OP because of this.

Moving on to AbemaTV. So AbemaTV has been drawing out a very pretty curve, which goes up towards the right. So we have exceeded 39 million downloads. And WAU of 10 million has been set as a target ever since we started, so it's a question of whether we can actualize this or not. And I believe that we are very close to that target. And the January-to-March quarter encompasses the demand for the beginning of the year. And then it hasn't shown that much drop after the beginning of the year, so I believe that it's going quite well.

For the programs that we have in the plan. So starting from the 28th of April, we're starting a new program. It's a drama. It's a 15-minute drama called Onzoshi Boys. So in one airing, we would air about 3 episodes, and then you will be able to watch it via on-demand play as well. And I have checked the contents, it's very entertaining, so I'm hoping that this will make a positive contribution.

And Get 10 million yen if you can beat Tenshin Nasukawa in the boxing match, so this project was announced, and we have a lot of entrants, and people are applying for this quite a lot. And on the 1st of May, we would have a tournament match to decide who will be fighting against Tenshin Nasukawa. And I haven't disclosed who these new entrants are, but there are many surprising names that we see on the list already.

And AbemaTV, as I have been saying from before, so we have a linear viewing, which is more like TV style, and then there is also on-demand, so this is a hybrid of linear and on-demand. So for linear viewing, approximately you have 5,500 episodes. And then all of that will go on to on-demand platforms, so that's why it says 18,000 episodes. So subscription-style on-demand model, there is Netflix and Amazon Prime Video, so the competition is quite fierce in this area. But what's important is for you to have your original programs. And just like what Disney did, if you have good original contents and programs, you will be able to stand on your own. And AbemaTV has a system in place that allows you to offer new programs consecutively. And we decided, focus on on-demand as well.

But the business model that we have in mind is not subscription type. Freemium is not a word that we oftentimes hear nowadays, but there is Yahoo!, YouTube, Facebook. Many net services are freemium. So most of the services can be used free of charge, but 5% to 10%, approximately, of the users would subscribe to it and pay for additional features. And we have exactly the same idea in mind. So AbemaTV in general can be watched free of charge. But if the user wants to use it in a more convenient way, you will be the member. So that's the business model that we have in mind for AbemaTV. And so video service, we have many more of them nowadays, and then users have more choice now.

And we oftentimes come -- have a discussion as to which one will survive. This is an outside tool used to do research. So the number of active users, so YouTube has a different type of services, so that's excluded from this bit. Aside from YouTube, AbemaTV is ranked as #1. And we have the initial target of teenagers and 20s, the youngsters. And as you can see here, we have the strength in that segment.

So from the very beginning, I have said we're aiming for 10 million WAUs, and we are an Internet ad company as well. And then if you're in this industry, you are in the know of this. So for many years, the national clients, it's been -- it was said that the national clients were shifting to Internet, but the total number of that didn't really increase significantly in a short period of time. And that is because it was difficult to protect the brands in the world of Internet, so there was not much guarantee of how you will be exposed as a brand on Internet platforms. So there's [ CGM ]. You don't exactly know what would go out. And then it's quite difficult to manage Internet. So one of the reasons why I decided to create AbemaTV was because we wanted to offer brand safety because we can check what would go on. So we wanted to create a place where national clients can go onto. And we oftentimes talk about how youngsters are not watching TV anymore, how they're not reading newspaper, so it was quite difficult to find vehicles or a medium that can attract them. So I wanted to create a medium that can reach out to the young generation and, at the same time, offer safety to the brands. And people skip commercials because they don't want to watch commercials so much. I believe that in terms of offering the ad, we have been able to create a good -- pretty good model as well in terms of the view-through rate.

And the number of AbemaPremium subscribers is growing steadily as well, so it's now exceeded 400,000. So AbemaTV can be enjoyed free of charge. But if you look at the comparison of services, I think it's quite self-explanatory, but -- so for a certain period, some of the programs are offered -- all of the programs are offered free of charge, but after a certain period, you may no longer be able to see -- watch those programs. And the characteristic of AbemaTV is that you get to do replay on demand. So you can watch whatever's on air right now and then do a replay on demand. And then there's also downloads of videos that you can use as a feature. And then you can also look at view comments in case you have missed the episodes. So these are the motivation points for people to subscribe to AbemaPremium.

And AbemaTV is now focusing on collaborations with players in different industries. So we have partnered with DAZN. And out of the J. League programs that they have received exclusively, we will be able to choose some of the programs for J. League. And DAZN is -- if they try to charge their service, then it will be a closed community. So collaboration with a free-of-charge player like AbemaTV is also good for them, so that's why they have decided to partner with us.

And then we also have partnership with niconico. As you know, niconico has a lot of PC users in their user base, and we have original programs, and we can show them to niconico users. So PC viewing was the -- one of the weaknesses that we had for AbemaTV, so we will be able to strengthen thanks to the partnership with niconico. And niconico is reducing the number of original programs, so I think it's also good for niconico as well that they are able to watch original contents from AbemaTV. And then they will also be able to post comments in niconico way.

And starting from June this year, AbemaTV button will be mounted on Toshiba REGZA. So now this AbemaTV button is mounted on all of the main 3 TV manufacturers. So among the new TVs that are shipped out right now, most of them will be equipped with this button.

And starting from last week or 2 weeks ago, now people can watch AbemaTV globally. If places like China shuts it out, then you can't watch it. But in other places, you can watch it for -- and you can only watch original programs and news programs right now, but we would like to be able to offer these programs to people who live overseas as well.

And we've also started Keirin channel, which is bike race channel. And we started to offer online betting service. And the -- we only have the web version -- the website version of this. We created a midnight program, and they would watch this program as they do the betting. And then we're off to a good start on this. And upon us launching the app, we're going to produce original programs. And we're having a short break now. But -- this original program is on a short break right now, but I believe that this program as well as the online betting service would have a positive contribution.

And this just started yesterday. This is the tipping function. We released it 2 days ago. And then yesterday, it started fully. And they will be able to sort of determine which one will be the best tipping functionality. So they are going through trials and errors. So [ Hujisota ] can -- is fighting with [ Takamiora ] for Japanese chess. And then for other programs, you actually get to tip to those fighters already. So we would like to create new programs where people can tip to the cast.

So there is business alliance that we have created with Dentsu and Hakuhodo. And the Ad Business is growing right now. So with a partnership and -- so we want to focus on further partnership. And we also want to focus on non-broadcast revenues so that we will be able to find new business models and new revenue streams.

So this is a phase where we reduced the costs. But we don't intend at all to reduce the necessary costs for AbemaTV, so we would like to make the investment as well as increase the sales.

That is it. Thank you very much.

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