Avex Inc. (7860) Earnings Call Transcript & Summary

Today, we will go over our full year financial results for the fiscal year ended March 2025 and our management policies for medium- to long-term growth. First, in our results for the year, operating profit ended up negative. We take this outcome seriously and recognize the need to work toward rapid improvement. Mr. Hatamoto will present the financial results in detail, and I will then cover our management policies.

My name is Seiichi Hatamoto, and I'm in charge of IR at Avex. I will present the company's financial results for fiscal 2024, the fiscal year ended March 31, 2025. First, a digest of our consolidated results. In fiscal 2024, net sales were JPY 131.6 billion. Operating profit was negative JPY 1.8 billion. Profit attributable to owners of parent was JPY 1.1 billion. In addition to a decrease in revenue from local operations in the Asia and Middle East regions, the gross profit margin decreased due to the conclusion of commissioned work in the video streaming business, which contributed to revenue in the previous fiscal year and general expenses increased. Overall, net sales were basically flat compared with the previous fiscal year. However, operating profit fell sharply from the previous fiscal year and ended up as a loss. Profit attributable to owners of parent was positive and increased from the previous fiscal year due to the gain on sales of shares of subsidiaries that was recorded as extraordinary income. Compared to the earnings forecast announced in February, operating profit was broadly as expected, but net profit was lower than forecast because extraordinary income was partially offset by the booking of an additional impairment loss. Next, let's look at consolidated net sales. While sales rose or fell depending on the segment, overall, consolidated net sales were near the level of the previous fiscal year. Continuing on to the consolidated statements of income. Looking at gross profit, in addition to the decrease in the number of major titles, which have relatively high profit margins, the end of high-margin commission work in the video streaming business and declining revenue in the Asia region contributed to a decline in the gross profit margin. In SG&A expenses, an increase in general expenses, partly due to the allocation of a provision for doubtful accounts led to a year-on-year decrease in operating profit. Next, an overview of results by segment. In the Music business, the gross profit margin declined due to the conclusion of commission work in the video streaming business, which had a high profit margin and a decrease in the number of major titles. The Music business posted a loss due to an increase in general expenses associated with the allocation of a provision for doubtful accounts, resulting in a substantial decline in operating profit. In the Anime & Visual Content business, sales were up from the previous year, driven by hit anime films and operating profit increased. In Other businesses, sales and operating profit decreased due to a lower revenue in the Asia and Middle East regions. Let me now go over the results in each segment, starting with the Music business. Sales of music packages declined from the previous year due to a decrease in major music package titles. Other sales also decreased due to the conclusion of commission work in the video streaming business, but sales from live concerts, merchandising, management and e-commerce expanded year-on-year. In live concert KPIs, while the number of arena concert performances increased, total audience numbers declined due to a decrease in hall and live house performances. On the other hand, average ticket prices were about the same as in the previous year. In music package KPIs, the number of albums released increased over the previous year, but overall music package sales decreased due to a decline in the number of single and video title units sold. Sales in the music business trended in a similar way to overall consolidated net sales and were basically unchanged from the previous year. In the anime and video business, there were hit titles among the anime films we released and increased box office revenue resulted in increases in both sales and operating profit. In Other businesses, sales and operating profit declined as anime events held in Saudi Arabia last year did not take place this year and revenue in the Asia region declined. That concludes my presentation for results for fiscal 2024. Next, the forecast of financial results for fiscal 2025, the fiscal year ending March 31, 2026. We are projecting full year operating profit of JPY 3.0 billion and profit attributable to owners of parent of JPY 1.2 billion. We plan to continue investments in IP creation during fiscal 2025. However, in the Asia region, where our business has been struggling, we have started reviewing operations at each operating site and by reducing fixed costs in part by formulating rules for execution of general expenses and other costs and improving monitoring, we are forecasting growth in both operating profit and profit attributable to owners of parent. With regard to the dividend forecast, we plan to keep the annual dividend at JPY 50 per share, the same as in fiscal 2024. That concludes our forecast of financial results and dividends for fiscal 2025. Now I will talk about capital allocation. In accordance with our dividend policy of maintaining a minimum annual dividend of JPY 50 per share, we set the dividend at JPY 50 per share and implemented a large stock buyback with a total value of JPY 4.3 billion in fiscal 2024. Going forward, we will aggressively invest in IP with global potential, focus on expanding business and make business investments that will lead to improvements in financial performance. As for plans to implement management that is conscious of the cost of capital and the stock price, there are no particular changes to the numbers we announced last year. But since ROE has been below the cost of capital for about 4 years, we will work toward a quick recovery of earnings to improve capital efficiency. That concludes my explanation of the financial results forecast for fiscal 2025.

Moving on, I will present our management policies for the medium and long term. First, an overview of our business model. Our business model is to discover and develop artists and creator talent and use various means to maximize the value of that talent. Our approach to maximizing value is to focus on nonrecurring revenue businesses such as live events and packages, along with recurring revenue businesses that accumulate titles and rights, such as music distribution, music publishing and subscription-based businesses. By using the revenue generated by these businesses to invest in new talent, we expand our IP, which enables us to achieve sustained revenue growth through the continued accumulation of those rights. Generating this cycle is the goal of our business model. To reinforce this business model, we have recently been focusing on the creation of global IP. With advances in digital technology, content value is increasingly borderless. So we believe that creating content that can win global support is more important than ever. In the global music market, strong growth is continuing worldwide, led by streaming services. The U.S.A. is the world's largest music market at approximately 4x the size of the Japanese market. Strong market growth is also continuing in Asia, especially China. We believe there is potential for Avex to achieve significant growth by tapping into the business opportunities, not just in Japan, but in overseas markets, they continue to show strong growth. To this end, we established Avex Youth for global-oriented IP creation and have been strengthening our discovery, training and development system. Avex Youth is steadily expanding its scale. For example, it has doubled the number of people approached and the number of artists trained in the last 2 years. Among projects led by top members, the XGALX project is growing strongly and is producing results outside Japan, while concrete progress is also being made in other projects. We are planning a number of debuts by artists with strong potential for success globally. In addition, we are making progress in building a global value chain to maximize the value of IP. For example, to strengthen creative and promotion work outside Japan, we are boosting collaboration with S10, a U.S. artist management company that recently became a subsidiary and are leveraging their network. In artist performances outside Japan, we are building a track record of achievements, including production by AEGX, a joint business with AEG Presents. Thus, we are steadily building a value chain outside Japan in ways that play to our unique strengths. As a result of these initiatives, our overseas business has expanded significantly over the last 5 years. Live performances grew by 4.7x and sales of merchandise and packaged products increased by 8.6x. We also achieved unprecedented results in use of rights, including growth of 2.2x in music streaming and 2.5x in music publishing. We have made steady progress in our overseas business in the last 5 years, and we will continue to strengthen our efforts for revenue expansion in each business. I will give you some concrete examples of artists. XG is steadily expanding its global activities. Their total number of followers on social media platforms has surpassed 12 million, 85% which are outside Japan. They went on their first world tour last year and drew a total audience of about 400,000 people in 35 cities worldwide. In April, they performed as the first Japanese artist to close a large stage at Coachella, one of America's biggest music festivals. And on May 14, they are scheduled to perform at Tokyo Dome. Other artists are also expanding their activities outside Japan. ONE OR EIGHT has more than 2 million followers on social media and is signed with a major overseas label with an eye on further expansion outside Japan. In addition, Ayumi Hamasaki went on her first Asia tour in 16 years in 2024, and her performance at the Mercedes-Benz Arena in Shanghai set a record for the largest crowd ever for an overseas artist performing in China. Kumi Koda is also expanding her popularity outside Japan and is scheduled to appear at major music festivals in Asia, including one of the largest outdoor music festivals in China. Performances by other affiliated artists are also increasing and are steadily achieving success outside Japan. In anime, the film Look Back has received global acclaim, attracting a total audience of 2.34 million viewers outside Japan, significantly more than its audience in Japan. For Gachiakuta, a series which will be broadcast on television starting in July 2025, we have signed a major distribution agreement with a video distribution service outside Japan and have decided to begin global distribution at the same time as the TV broadcast in Japan. We will continue investments and actions like these to create globally supported IPs in both music and anime. In addition, we are focusing on the growth of recurring revenue businesses through the creation of IP with an eye on the global market as well as ownership and expansion of rights. In recent years, the development of music streaming and video distribution services and social media have opened up new possibilities for revenue domestically and internationally that did not exist before. With these services, we are expected to grow further. Catalog titles are being played more than new songs. So we believe the value of the rights we own will increase even further in the future. Indeed, at Avex, revenue from music titles released in the past is increasing with the expansion of streaming services. That revenue has grown steadily in recent years and is 1.4x what it was 5 years ago. To continue to build up rights as a stable revenue source, we will sign contracts with global hit makers and plan to strategically acquire rights in Japan and globally, including through M&As. In the anime business, the video streaming service, Anime Times, has steadily grown its subscriber numbers in and outside Japan by expanding its catalog of new and older titles. It will work to enhance its content to capitalize on the growth of the anime market, especially outside Japan and plans to expand its services to various other regions besides India. These examples show our growth vision for the future. We will continue to focus on the development of IP with an eye on global expansion as a top priority. To maximize the value of the IP we create, we will quickly move to establish a value chain and expand sales channels in global markets in the live performance and label segments. In addition, we will build on our revenue maximization know-how to broaden our existing IP and business with partners. We regard the titles and rights created from these IPs and business functions as important assets that will lead to the establishment of a stable management foundation. And as such, we will further strengthen them while also considering other methods such as M&As. We want to refocus on investing resources in IP creation, value maximization and accumulation of rights. For this fiscal year, although core businesses such as labels and live performances posted solid performance, the allocation of a provision for doubtful accounts, a decline in other businesses and other factors led to an operating loss. Considering this outcome, we will invest in IP and carry out restructuring across the company to improve profitability. To sum up, IP creation with a global market in mind is producing unprecedented results and significant growth can be expected. We will effectively utilize the knowledge gained from these efforts as we continue to prioritize further global IP creation. Each business segment that helps to maximize the value of IP will focus on its core operations and allocate resources accordingly while also strengthening cooperation with partners in Japan and worldwide. In addition to the rights created from IP and businesses, we will strategically acquire rights externally with M&As as a possibility. Along with investments in IP, we will carry out company-wide restructuring to improve profitability. And by quickly executing these initiatives, we aim for early improvement and growth in our financial results. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]