Avex Inc. (7860) Earnings Call Transcript & Summary

I am Seiichi Hatamoto. We are streaming today as a measure to prevent the spread of COVID-19. Here are our financial results for fiscal 2019, the year ended March 31, 2020. I will start with the financial highlights. Net sales decreased JPY 24.6 billion year-on-year to JPY 135.4 billion due to a decrease in Music Package sales in the Music business. Operating income decreased JPY 3 billion to JPY 4 billion due to the decrease in sales. Net loss attributable to owners of parent was JPY 1.1 billion due to lower operating income and extraordinary losses compared to net income of JPY 2.3 billion for the previous year. Next is the breakdown of net sales by segment. As you can see, sales in the Music business segment fell substantially compared to the previous year. The decrease in Music Package sales in the Music business was the main factor. Next is operating income by segment. Operating income in the Music business segment decreased substantially because of the decrease in sales. Here is net loss attributable to owners of parent, which was JPY 1.1 billion compared to net income of JPY 2.3 billion for the previous year. Key factors included lower operating income and expenses associated with COVID-19. We recognized expenses in the Live and Merchandising subsegments that were associated with the suspension of live performances from March 2020 as extraordinary losses. We also included impairment losses associated with COVID-19 in extraordinary losses. Moving to consolidated results. The following slides show the consolidated income statement, balance sheet and cash flow statement. Next, I would like to cover results by segment, starting with the Music business. Here are the Music business highlights. Segment sales and operating income decreased due to lower Music Package unit sales and the reduced number of live performances. Lower sales caused segment operating income to decrease year-on-year despite lower SG&A expenses. Looking at results by subsegment. Music Package sales decreased the most, dropping to JPY 25.8 billion from JPY 41.6 billion in the previous year. I will discuss this later, but DVD and Blu-ray sales decreased sharply, absent the live DVD release by Namie Amuro of the previous year. Live sales also decreased because of the decrease in live concerts and attendance, which in turn brought down Merchandising sales. E-commerce sales followed the drop in Music Package and Merchandising sales. Here are the figures for Live Concert. The number of live concerts dropped year-on-year to 780, bringing a reduction in audience numbers. This slide presents main live events, and here, we have Music Package figures. As I mentioned earlier, the sharp decrease in DVD and Blu-ray units sold brought down Music Package sales. This slide details major package releases. Next, I will cover the Anime & Visual Content business. Segment sales increased about 5% year-on-year to JPY 14.2 billion, and operating income increased substantially to JPY 800 million. The gross profit margin increased by 5 percentage points because of higher segment sales. By subsegment, both Anime Non-Package and Anime Package sales increased. Main contributors were event and visual content package sales. DVD and Blu-ray sales reflected higher unit prices. This slide details major titles. Moving on to the Digital business. Sales decreased due to a decrease in subscribers to digital video subscription services. However, segment operating income increased by just over 20% as the result of a higher gross profit margin and decreased sales promotion and advertising expenses. Finally, Other businesses. Sales increased because of higher sales overseas. Segment operating loss narrowed on the back of increased sales and reduced expenses from scaling back our U.S. subsidiary. Next are highlights from fiscal 2019 and the first quarter of fiscal 2020, the year ending March 31, 2021. Here are live highlights. Here are package highlights. Here is a list of major press releases. And here are highlights for the first quarter of fiscal 2020. Due to the measures adopted to prevent the spread of COVID-19, there are no highlights to report as we are not holding any live concerts right now and still determining the timing to restart them again. On the other hand, package releases continued through April with highlights here. I would like to comment on the consolidated performance forecast for fiscal 2020. We are not providing a consolidated performance forecast at this time because we cannot reasonably quantify the impact of COVID-19. Currently, the group is refraining from holding live events to help prevent the spread of COVID-19, and there is no timetable for restarting them, and that may further impact results. We will promptly announce a performance forecast as soon as we can. We also have no forecast for dividends. We will promptly announce a dividend forecast as soon as we can. While we have set a basic dividend policy, our results and financial condition may prevent us from being able to follow it. While not discussed in the presentation materials, we are currently negotiating credit line increases with financial institutions to secure additional funding, which we will use to strengthen our financial position. Next, we are changing our segment presentation in fiscal 2020. This slide shows the changes and the new segment added in April 2020. First, we intend to strengthen intellectual property creation by making our Management business, which is a key business, a stand-alone segment. We have also created the Digital Platform business segment by grouping E-commerce, Fan Club and ticketing, which were part of the Music business with the Digital business. Our goals are to maximize group synergies and to improve user convenience. Finally, I would like to discuss measures to strengthen corporate governance. We plan to transition from being a company with a Board of Auditors to a company with an Audit and Supervisory Committee. This will take effect upon final approval from shareholders at the Ordinary General Meeting of Shareholders in June 2020. Under this model, as a matter of policy, 1/3 of the Board of Directors will be independent outside directors. This concludes my comments.

I am Katsumi Kuroiwa. Thank you for watching today's financial results presentation. First of all, the spread of COVID-19 has made these times exceptionally difficult for everyone. I hope that the outbreak will end as soon as possible, and the day will come when artists and those in the entertainment industry can join with shareholders, hardworking medical professionals and everyone else who is currently doing their part to confidently start enjoying entertainment again. I would like to talk about the effects of COVID-19 in fiscal 2020 and our outlook. First of all, we are currently quantifying the impact that COVID-19 will have on our performance in fiscal 2020, so we are sorry that we cannot provide a forecast today and ask for your understanding on this matter. Obviously, however, we expect the impact to be extremely severe. First off, the largest impact will be on our live event business. We put on 780 performances in fiscal 2019, but in line with the declaration of a state of emergency in Japan, we have canceled or postponed all performances through May and have been unable to hold a single performance since the start of fiscal 2020. While the duration of the state of emergency has a bearing, it is clear that physical distancing will continue with regard to live concerts and other events where large numbers of people gather even if the economy starts to open up. Our inability to hold live concerts will significantly affect sales of merchandise and live DVD packages. Naturally, the loss of all these sales will have a large negative impact on earnings in the Management business. Moreover, COVID-19 is not only impacting our Music business. We cannot shoot or record voices for anime and live-action content, so we will be obliged to postpone television programs and movies across the board. Obviously, this will have a major impact on future earnings from businesses, including package sales and distribution. Moreover, the Anime business will not be able to stage the events and live viewings that have been key over the past few years with a consequent drop in related merchandise sales and earnings in the non-package market. Furthermore, all artist academy facilities are closed for the safety of customers and employees, so earnings will likely deteriorate there, too. We are totally committed to dealing with all of this to turn our fiscal 2020 outlook around. But right now, we have no clear criteria for when we will finally be able to normalize operations, and so we cannot honestly say when we will be able to achieve a full recovery. However, we cannot afford to do nothing in the midst of this situation. Given that the impact of COVID-19 is expected to continue for some time, I would like to briefly discuss our initiatives for fiscal 2020. Video and music distribution are key to any forecast of the market environment during and after COVID-19. Distancing is increasingly on the minds of both entertainment providers and consumers. The need for digital distribution, which enables communication without distancing concerns, will certainly continue to grow. We are therefore focusing on this market during fiscal 2020. The following 4 initiatives are critical: One, we need to monetize live video distribution. For live events that we are forced to cancel, we will attempt to hold concerts without a physical audience. While there is a trend toward free distribution, fee-based distribution is also starting to appear. We are now studying fee-based video distribution for real-time live performances by artists. Fee payment entails the need to ensure video quality that meets the satisfaction of customers, so we are giving this careful thought and we'll launch as soon as we can. Furthermore, we will monetize live video distribution by going beyond simply delivering live video. We will leverage the advantages of digital to deliver value attuned to user lifestyles on a continuum from before to after delivery. One example is selling commemorative merchandise via e-commerce prior to delivery. Even if it is online, getting to meet artists is a fresh experience for users, and excitement for this is higher now, if anything. Delivering high-value products at this time will bring us commensurate rewards. We will also be able to monetize after live events. For example, in rebroadcasts, we intend to reenergize user interest by supplementing ordinary live video with fan engagement, such as artist commentary and unseen bonus footage. Of course, this will require the cooperation of artists, but we intend to aggressively take on the challenge of monetizing live video by delivering high-value content to fans eager for contact with artists. Two, we need to make better use of our existing distribution platforms. This includes making full use of our YouTube channel. The Avex Channel currently has 5.2 million subscribers, which makes it the leading corporate YouTube channel in Japan. We will more actively upload our content to our YouTube channel so as to attract even more users. For example, in response to the COVID-19 crisis, we recently posted about 100 free live videos on the Avex Channel, which brought 200,000 new subscribers to the channel. We need to be even more strategic in creating a virtuous cycle in which we deliver exactly what users want to attract large numbers of people and thus generate revenue that we can then pass on to artists. We also want to use various other digital platforms besides YouTube to distribute the work of many creators. Viewing the online content creator space as a business opportunity, we have been investing aggressively since last year, and we think it has great potential post COVID-19. One reason is that sales in this market has increased 50% year-on-year, and we believe this market has the potential to expand five or tenfold over the next several years. Our BIG UP! music distribution platform is also growing steadily despite COVID-19. This self-driven monetization platform provides a welcome distribution opportunity for young artists and creators whose activities are limited by COVID-19. Right now, we are supporting the musical endeavors of artists pressured by COVID-19 by offering paid services free of charge for a limited period. We will get through these difficult times together, and following COVID-19, use BIG UP! to form cooperative partnerships with artists through which we can expect to generate new content, hits and monetization. Three, we must enhance our content library for initiatives 1 and 2 to succeed. We must adopt a new approach for identifying and producing the kind of videos customers will want to watch. For example, in the current environment, solo artists' live performances from home are being very warmly received by users. Recently, Avex artist, SKY-HI, gave a performance from his home. We simultaneously broadcast the event on our YouTube channel, Twitter and Instagram, and part of it was also featured live on J-WAVE's (Don't Stop The Music) STAY HOME FESTIVAL. It reached a concurrent audience of more than 20,000 and was the top trending topic on Twitter in Japan. We continue to receive much positive feedback after the performance. Moving beyond any single form of media, this kind of cross-media approach to planning and producing digital content is really going to be key. We are also planning online festivals with extensive artist lineups. We usually hold a-nation every year, but yesterday, we announced that we have unfortunately had to cancel this summer's event. However, we will explore and implement ways of holding a-nation as an online festival. We intend to invite both Avex and other artists to join us in delivering a new form of festival to home audiences. Furthermore, as I discussed last year, we are developing AniCast Maker, a tool that creates a virtual studio that makes it easy for anyone to create animations. Many anime studios have stopped production because of COVID-19, with reruns as their only resort. With AniCast Maker, all remote anime production processes are possible, including drawing and voice recording. In June, we plan to release Japan's first anime produced entirely remotely, clocking in at about 6 minutes long. Please look forward to it. Four, new forms of communication and fan engagement will be crucial. Digital relationships with fans will evolve steadily post COVID-19. There will be a need for more interactive fan engagement rather than conventional, one-directional fan clubs. Online salons or membership-only communities are one example. Crowdfunding is another part of this trend. We are taking new approaches to fan clubs as we create more points of contact with artists and celebrity talent and enhance our ability to monetize online through new forms of communication. There is certainly plenty for us to do. So first, we are deciding on which directions to pursue and devising specific initiatives. We will move to execution in stages, so please look forward to our next move. To implement these initiatives with greater speed, it is essential that we strengthen our existing businesses and collaboration with new businesses and technologies. That is why we structured our segments and organization at the beginning of fiscal 2020. First, we are aggressively going digital in our label business. We will put together a production, advertising and distribution team that is in tune with the digital environment and establish a system for rapidly delivering digital content. Second, we are creating digital platform markets. We will consolidate our B2C platform businesses, video and music distribution, e-commerce, fan clubs and ticketing to develop even better services. Third, with the goal of making the online content creator market a core business, we will make the new business, Promotion division, a subsidiary, Avex Business Development, which will help us create a variety of cutting-edge entertainment. The fact is that these innovations were not conceived in response to the COVID-19 situation. We were already implementing organizational reforms in preparation for the evolving environment and are fortunate enough that these innovations should prove highly effective given the circumstances created by the virus. So that is our outlook for fiscal 2020. But honestly, I cannot say whether our initiatives will fully offset the impact of COVID-19. For example, our online business is behind the curve relative to the global entertainment market, and we do not know if it will generate significant sales right away. On the other hand, we, of course, expect demand for real-world entertainment to drive a rebound if the recovery from COVID-19 is swift. Therefore, we want to operate successfully in both the digital and real-world markets. Last but not least, right now we must continue to produce and deliver entertainment despite COVID-19. The worst-case scenario is a contracting post COVID-19 entertainment market. We are working to prevent that scenario by constantly creating an environment that keeps artists, creators and consumers happy and entertained even in the current situation. That is our mission right now. We believe that new, more evolved forms of entertainment will emerge once COVID-19 passes. At any rate, we are keeping careful track of the situation and responding to it as quickly as possible. We will work effectively together as one united team to overcome this unprecedented crisis, and I look forward to your continued support.

As I mentioned before, it has long been my desire to withdraw from company management to concentrate on creative work. As CEO, the last 16 years have often seen days of hardship, where I could barely recognize myself, though I think it has been a good life lesson. I realized that technology and production methods have evolved during my 16-year absence from producing music. This year, I turn 56, and I feel there is perhaps 10 to 15 years of creativity left in me. Not wanting to miss out on that, I am stepping down from the position of CEO and devoting myself only to music and new technology as Chairman of the Board. I have always insisted that I was not cut out to be a CEO, and I still feel that way. Ultimately, I hope to continue to be creative in an environment with as few limitations as possible. Initially, I wanted to give up my representative rights and focus only on creative endeavors. But considering my role as Founder, I listened to the officers of the company and their wish that I remain a representative director and have therefore decided to stay on as Chairman. Listed companies can have a hard time innovating, especially given recent trends toward enhanced compliance and governance. My goal is to return to Avex's heyday through the formation of a new subsidiary that spurs innovation. From day 1 at Avex, my motto has been to turn industry convention on its head. So as to continue to evolve that spirit, I've entrusted all management responsibilities to CEO and President, Katsumi Kuroiwa. I would like to devote myself to the development of art and technology more than ever before, to make it my life's work, if you will, for the rest of my time. My intention is to work and grow as a creator for the next 10 to 15 years. After that, if Avex still has a need for me, then I would be willing to return as CEO or in whatever other role the company sees fit. But right now, it is my belief that this will be the last opportunity for me to indulge my creativity. While I could stay put and peacefully live out the rest of my life, that is certainly not something I want. My life has always been a roller coaster, and I've never been one to think conventionally. From now on, I would like to stand shoulder to shoulder with consumers so that I can create consumer-oriented art and services, just as Avex originally set out to do. Simply put, I intend to get back in touch with my old self, the one you can see in the televised drama of our early days. Thank you for your time and ongoing support.