Avex Inc. (7860) Earnings Call Transcript & Summary

Today, we will report our business results for the fiscal year ended March 31, 2023, and the progress we have made with our medium-term management plan, Avex Vision 2027. Mr. Hatamoto will present the results for the year, and I will present the progress of the plan.

Hello, everyone. My name is Seiichi Hatamoto, and I'm in charge of IR. I will be presenting our business results for the year ended March 31, 2023. Firstly, an overview of consolidated results. Net sales were JPY 121.5 billion. Operating profit was JPY 3.3 billion and net profit attributable to owners of parent was JPY 2.7 billion. All of these results are increases compared to the previous fiscal year. Consolidated sales and operating profit both grew substantially, driven by the music business and particularly by Concerts in the Live subsegment due to the removal of restrictions on the number of attendees and the return of Live performances by Korean artists as the impact of COVID-19 decreased and business activities resumed. Net profit attributable to owners of parent increased due to gain on sale of investment securities and other factors in addition to the increase in operating profit. These results fell slightly short of the earnings forecast we announced in November 2022 due to factors including increased expenditures relating to investment in IP creation, but net sales have progressed in line with expectations. Consolidated net sales have increased for 2 years in a row since reaching a low point in the fiscal year ended March 31, 2021, when the COVID-19 outbreak hit. However, the current figures have not yet returned to their pre-COVID levels. So we believe there is still room for improvement going forward. Next, talking about the consolidated statements of income in more detail. The gross profit margin decreased compared to the previous fiscal year. This was due to a significant change in the sales mix of businesses with different profit ratios, resulting in an increased proportion of businesses with relatively low gross profit ratios in addition to a higher cost of sales from recording investment expenses for IP creation. As for selling, general and administrative expenses, although expenses related to the resumption of business activities, and to IP creation increased, they were offset by profits linked to sales growth, resulting in an increase in operating profit. Now for our results by segment. Sales in the Live subsegment and from Films and Other Productions contributed to increases in net sales in the Music business and the Anime & Visual Content business, among other segments. As for operating profit in each segment, although there was a year-on-year decrease in the Music business as a result of investing in IP creation and other factors, operating profit related to streaming in the digital business, anti-overseas net sales and other businesses led to year-on-year increases in those segments. In the Music business, although sales from Live Concerts and related merchandising increased, operating profit decreased year-on-year due to increased investment in creating popular IP as announced in the medium-term management plan. Regarding Live subsegment, KPIs, the number of both concerts and attendees increased substantially due to Live Concerts held in large stadiums and other venues with arena-style seating. The average ticket price also increased as many performances were held at large venues with high ticket prices. As for net sales trends in the Music business, earnings from Live Concerts increased substantially in the fiscal year ended March 31, 2023. However, looking at the past 5 years, we have not yet fully returned to the level of sales from 3 or 4 years ago. So we believe there is still room for improvement going forward. In the Anime & Visual Content business, although net sales reached a high level due to increased sales of Films and Other Productions, the impacts of the business and production sales mix included a decline in the gross profit margin and an increase in selling, general and administrative expenses, leading to a decrease in operating income from the previous fiscal year. Digital business net sales decreased year-on-year as a result of the sale of shares in a joint venture company that handles digital streaming and the company's exclusion from consolidation due to the shares having been sold during the fiscal year. However, overall operating profit for the digital business increased, thanks to a reduction in expenses related to digital streaming and a rise in operating profit from contracted streaming operations after the share transfer, among other factors. In Other businesses, the Anime event we produced and hosted in Saudi Arabia led to an increase in overseas sales and both net sales and operating profit increased year-on-year. That concludes our business results for the fiscal year ended March 31, 2023. Next, the forecast for the fiscal year ending March 31, 2024. We forecast JPY 2.0 billion in operating profit and JPY 1.1 billion in net income attributable to owners of the parent. We expect even stronger market recovery in the second half of the year to contribute to full year results. However, as our CEO, Katsumi Kuroiwa will explain later on. We also expect increased expenses from strengthening our investment in IP creation in order to successfully implement the medium-term management plan we announced last year. And therefore, we forecast year-on-year decreases in both operating profit and net income attributable to owners of parent. We plan to pay an annual dividend of JPY 50 per share, which is on par with last year. Here are the numerical targets in the medium-term management plan, which was announced last year and ends on March 31, 2027. We have completed the first year of the plan and made progress as initially envisioned. So there are no changes to these targets at present. There are also currently no changes in capital allocation, which we announced at the same time. That concludes my briefing on our business results for the fiscal year ended March 31, 2023, and our forecast for the fiscal year ending March 31, 2024. Thank you for listening.

Hello, everyone. My name is Katsumi Kuroiwa and I would like to update you on the progress of our medium-term management plan, Avex Vision 2027. The fiscal year ended March 31, 2023, was the first year of the plan, which we announced in May 2022. This is our corporate philosophy as explained at the time of the announcement. It clearly outlines what we aim to do and achieve when formulating a medium-term management plan. We are implementing both the overall strategy of our medium-term management plan and our long-term strategy going forward with this corporate philosophy in mind. Here is the overall strategy of the medium-term management plan with some wording changes and some additions to our overseas strategy. It has not changed as a strategy per se, but we have changed the time frame for artist development, which is one aspect of our key initiatives to better suit current conditions. In addition to the 4 key initiatives, we have also clarified our strategy for overseas markets. I will cover this in the second half of my presentation. Turning to the development of our original IP. I will begin with a look at the current status of the Girl Group, XG. Their third single was released in January 2023 to the same positive response as their second single. In roughly a year since the group's debut, the number of subscribers to their YouTube channel has reached approximately 2 million with cumulative views approaching 600 million. Both songs were co-written by the XG project team and the Avex USA creative team and more than 80% of the listener distribution on Spotify is outside Japan, with the vast majority of plays coming from the United States. In addition, the group is building up a track record as the first Japanese artists to make numerous achievements overseas on various media channels, radio charts and music streaming services, and the members are rapidly gaining recognition. XG is a project that we've been working on with a global audience in mind from the start and the positive response to each of their new activities and releases has been unprecedented. Underpinning these results are investments in various fields, one of which was our proactive investment in YouTube content during the previous fiscal year. We will continue to invest proactively in the XGALX project during the current fiscal year. In addition, we have established ALPHAZ, XG's official fan club, in order to actively promote the group's activities in Japan and around the world. In the short time since we started the fan club, registration of fans in Japan and overseas has steadily increased. ALPHAZ is a fan community service with various additional features beyond typical Fan Club Services. We believe that using this community to establish a strong fan base, otherwise known as fandom, is essential for driving the group's activities in Japan and around the world. And we will continue to invest in this initiative. Moving on, WARPs is another project related to development of our original IP. The WARPs project started in 2019. After being selected for the newly formed group, INTO1 as finalists in the Chinese Audition program, CHUANG 2021, Japanese members, Santa and Rikimaru completed their planned 2-year period of activities and graduated from the group in April 2023. A total of 20,000 people attended INTO1 farewell concerts in Shanghai. And Santa and Rikimaru were able to gain a large amount of global experience. They plan to continue performing globally, mainly in China, following INTO1 disbandment. In addition, the second generation of WARPs project members has already been selected to follow in the original members footsteps, and we are holding their skills in preparation for their debut with activities such as overseas training camps. We are also moving forward with training subsequent generations of members and developing artists IP rich in continuity as mentioned in the medium-term management plan. Next up is the progress of our initiatives for training and developing talent. For Avex Youth, which we launched in the previous fiscal year, we have been investing in intangible aspects such as the acquisition of internal and external trainers who have extensive experience and track records in developing global artists in addition to internal staff to establish a world-class training system. As an investment in intangible aspects, we plan to set up a dedicated in-house studio. Completion is scheduled for January 2024, and it will become an environment that provides comprehensive training for Avex Youth members who currently train at an external rented studio. We consider this facility to be essential to our aim of developing IP that can succeed on the global stage. We will continue making investments in this way. As explained on the previous slide, we now have various initiatives underway to develop our original IP. Based on these examples, I would like to once again explain the ecosystem we envisage for original IP development. As shown here, by gathering people with raw talent, giving them world-class training and turning them into active artists, even more people will aspire to join Avex. At the same time, we are using our accumulated expertise to create ancillary assets. We consider it essential for our long-term growth to have a system that can repeat such a cycle, one that allows us to create not just one-off IP, but IP that is rich in continuity. As a real-world example, XG is currently developing globally and the number of people who see XG and then participate in additions has increased beyond our expectations. Although we have only just begun this cycle, we will continue to aim for the success of this system and invest in it. Next is the progress of initiatives in the Music business centered on our Labels. Before moving on to specific topics, I would like to explain the current music market and our goals. The media use for artists and their music to reach fans have diversified along with the times to encompass CDs, downloads, streaming and YouTube. Going forward, we expect such media to expand globally and also into new media and digital content designed for Web3 such as non-fungible tokens and extended reality. Up to now, Avex has developed a wide variety of artists and produced hit singles in tune with these kinds of market changes. We believe that developing artists in line with market changes is crucial and consider reaching out with both artists and songs that excite the world to be the mission of our labels. In order to develop artists in line with the market, we believe it is important to collaborate with partners even outside the company. Based on this thinking, we have made progress on projects with various partners during the previous fiscal year. The artists shown here are scheduled to debut from this summer onward, but many large-scale projects are underway, including pipeline projects that have yet to be announced. We have many artists on our roster, and we've been able to build a pipeline for handling the debuts of promising new artists. We anticipate that their successful debuts and substantial growth will be one of the major drivers for achieving the goals of the medium-term management plan. The last slide in this section concerns our approach to the Music business as a whole. So far, I have covered the development of our original IP and the development of IP through a collaborative system with partners. However, aside from those initiatives, from a talent discovery perspective, we also consider it important to support individual creators through our original platforms, BIG UP! and muchoo. By doing so, we will develop diverse artists in line with market changes and deliver songs and excitement to the world. In addition, utilizing our 360-degree functionality will enable us to use the appeal of our artists to reach fans through various methods that are not limited to music. Furthermore, maximizing value in this way gives us a presence that convinces partners and people with raw talent to choose us, leading to further artist development and increasing the probability of producing hits. We believe that we should continue to enhance this cycle of IP development and our 360-degree functionality as they are unique Avex advantages that other companies lack. Next is the progress of our initiatives in the Live subsegment. First, we believe that the environment has definitely improved since the COVID-19 pandemic and that the market is recovering. When it became possible for overseas artists to travel to Japan in the previous fiscal year, we were able to acquire large-scale projects commissioned by overseas production companies. We are also working to schedule large-scale Live concerts by overseas artists in the current fiscal year and will continue using our Live performance capabilities to acquire artists. In regard to creating new event IP, we were able to hold various events, including the hip-hop festival, THE HOPE and the e-Sports event RAGE, which attracted one of the largest audiences ever. Going forward, we will continue working to implement the medium-term management plan and start on initiatives, including developing festivals with higher IP value and with participation for both domestic and overseas artists. Next is our progress in the Anime & Visual Content business. The overall structure is the same as that of our Music business cycling between 2 strategies that work together, IP development and acquisition and monetization and our value provision capabilities. It is important for us to strengthen the business in this way. During the previous fiscal year, Avex made its presence felt by utilizing IP to monetize the rollout of various content, including Live action and stage adaptations, musical film distribution and live viewing. In the current fiscal year, we will continue these efforts while keeping in mind the twin strategies of IP acquisition and IP utilization. In the field of Anime in the previous fiscal year, we participated in the development of numerous Anime and brought various productions to the world. These ongoing efforts are essential for creating future popular IP. And in the current fiscal year, we will continue working to balance this development as best we can taking the range of productions, their genres and other factors into account. On the right-hand side of this slide is our IP Paradox Live. We are one of the joint owners of the original work for this IP and the decision was made to produce an Anime adaptation in October 2023. Since Paradox Live launched in 2019, it has progressed in multiple formats, including music releases and stage performances, and we believe it has already built up a fixed fan base, including a Twitter follower account comparable to other popular Anime IP we have been involved with. We intend to build on this foundation and achieve results that further raise the value of our IP through Anime. Next is the visual content field. In the previous fiscal year, the live viewing and musical film distribution businesses expanded substantially. In the current fiscal year, we are aiming to make greater strides forward through involvement in even more projects with domestic and overseas artists. Following on from Osomatsu-san, Avex has been involved with numerous live action dramatization of Anime works, including Play It Cool, Guys and Do It Yourself. These successes are the result of our wide-ranging capabilities for utilizing IP, and they will serve as the core of our future efforts to acquire new IP. As -- one point that is not included in the presentation materials, we are also promoting measures such as ramping up cooperation with Korean IP holders and acquiring various IP, including overseas dramas. We will continue working on new IP acquisitions in the Visual Content field in areas other than Anime, Music and Film. The last topic in this section is our Anime Times, Amazon Prime video channel. The number of works distributed through the channel has nearly doubled in the space of a year, and the number of subscribers is also steadily increasing. Anime has a lower language barrier than Music and is more suited to global expansion. We have, therefore, begun considering the development of Anime Times for the overseas Anime market, which has grown to roughly the same size as Japan's. Moving on to the basic policy of our overseas strategy, I will begin with an explanation of our current situation. The left-hand side of this slide shows domestic and overseas figures for the Music and Anime market. As you are aware, overseas markets continue to grow substantially compared to the domestic market. However, so far, we have only demonstrated our capabilities in Japan. As a result, our overseas sales ratio is still relatively low compared to companies that handle Music IP and Anime IP globally. And we see those markets as holding considerable potential. In light of this situation, we have already spent several years laying the groundwork for overseas expansion. And we have more recently been able to announce a number of achievements outside of Japan. In particular, we believe that our track record of holding onetime large events such as Anime Village in cooperation with multiple domestic partners in regions where Japanese IP has not yet made inroads, gives us a significant advantage over other companies. In addition, the group INTO1, which I mentioned when discussing the WARPs project originated through Avex's base in China. In the U.S., we are making progress in acquiring creative talent and music and there have been cases such as with XG where we have offered songs written in the U.S. to Japanese or other Asian artists. Based on these achievements, we decided that the time has come to proceed to the next stage. So I will now explain the basic policy of our overseas strategy. On the left-hand side of this slide is a point I have covered many times, the value creation model that we have developed in Japan. It consists of a cycle of discovering, developing and acquiring IP in areas including music, artists, anime and visual content, then fully utilizing that IP. By making use of the valuable experience and strengths that we have developed through this domestic business model, we have achieved some results at our overseas basis. Based on the new knowledge gained through this process, the basic policy of our overseas strategy is to build similar value provision models to the one we use in Japan in line with each regional market. Next, building on this basic policy, these are the kind of initiatives we have in mind and the goals we are aiming for. First, in terms of our organizational structure, we will strengthen our use of external experts, IP development and the consolidation of our monetization capabilities. At the same time, we will proactively acquire human resources to develop our business globally, using our updated personnel system. Based on this organization and our human resources, we aim to build an IP-centric business model that is similar to the one we use in Japan, and we will work to accumulate achievements and knowledge from a variety of perspectives and to expand our network. We intend to further strengthen our business of sharing domestic partner IP overseas, as we did with Anime Village. We believe that this is an area where we currently clearly demonstrate our strengths in overseas expansion by making use of the domestic IP network we have cultivated and that it is a relatively easy area to work on. Through these events, we will build up a track record of monetization results and broaden our capabilities. We will also step up construction of networks in each region. Currently, Avex USA in North America is making great progress in this area, and we plan to continue extending this network with overseas creative and technology companies and work to expand our capabilities for utilizing IP and to acquire IP itself. Finally, as XG, STAR ISLAND and other projects are now starting to show signs of success. We will continue to invest in developing our own original IP that can compete globally. We will ultimately apply the capabilities we have established through construction of overseas networks to our own global IP, which will lead to overseas expansion on an even greater scale. As a result of these initiatives, our overseas operations currently account for roughly 5% of our total sales, but we aim to increase that ratio to 15% in the final year of the medium-term management plan. That concludes our overseas policy. I will close with a summary. Fundamentally, we are making steady progress in sowing the seeds for successfully implementing our medium-term management plan. Many of those seeds are gradually starting to sprout. We feel that we are heading in the right direction by investing in IP, so we intend to continue doing so. We have also updated our overseas strategy. Since I became CEO, I've been working on strengthening the system for our overseas expansion. It is gradually taking shape. And for it to provide an even more solid foundation going forward, I feel that we are at a stage where we need to step up investment even further. Building a business that will grow over the medium to long term is essential, and we are firmly committed to achieving operating profit of JPY 15 billion in the fiscal year ending March 31, 2027, the final year of our medium-term management plan. I hope you will continue to look forward to great things from Avex. Thank you for listening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]