GREE Holdings, Inc. (3632) Earnings Call Transcript & Summary

I'm Yoshikazu Tanaka. Now we'd like to begin the FY 2020 fourth quarter financial results briefing of GREE, Inc. Please go to Page 2. Executive summary, FY 2020 actual results. The full year net sales was JPY 62.7 billion, operating income was JPY 3.2 billion, and EBITDA was JPY 3.9 billion. The game business strengthened operation system and expanded overseas distribution for further growth. The live entertainment business strengthened platform functionality and expanded contents. The advertising and media business focused on strengthening our media potential. In the 3 months of the fourth quarter, net sales was JPY 15.0 billion, operating income was minus JPY 0.1 billion, and EBITDA was plus JPY 0.1 billion. Operating income adjusted for onetime costs was JPY 0.8 billion and our profit generation base remains firm. Our plan for FY 2021 is to continue to invest aggressively in those 3 business pillars. The game business will pursue the engine, IP and global strategies, expanding overseas distribution and developing new titles. The live entertainment business will further grow the REALITY platform in FY 2021. For the advertising and media business, we plan to expand our media portfolio even more in FY 2021. Now I hand over to Toshiki Oya for the overview of consolidated financial results.

Hello. Thank you for joining us. On Page 5, we have the numbers and let me focus on the 3 months of the fourth quarter. Net sales was about JPY 15 billion. Operating income was minus JPY 0.07 billion, on which you will see more details on later slides. Ordinary income was minus JPY 0.14 billion, and net income was minus JPY 2.01 billion. In the fourth quarter, we posted extraordinary loss of JPY 0.76 billion owing to a valuation loss on investment securities and others. We also posted tax of JPY 1.13 billion, owing to the reversal of a portion of the deferred tax assets, et cetera, resulting in the net income, as you see on the slide. Page 6 shows you the trends in net sales, EBITDA and operating income. Please turn to Page 7. Here, we analyze the fourth quarter operating income against that of the previous quarter. Let me go one by one. Net sales slightly decreased. To give you further details, the game and live entertainment businesses remained solid. On the other hand, some parts of the media business suffered from the impact of COVID-19 with its net sales remaining weak. As a result, the total net sales decreased from the previous quarter. Fixed costs increased by JPY 0.91 billion, out of which JPY 0.83 billion were onetime costs for restructuring initiatives. Let me explain what those onetime costs were. To better focus on the 3 earnings pillars through selection and concentration, we discontinued some businesses. We also consolidated and relocated some offices, mainly in the media business, to streamline fixed costs. Those restructuring efforts added to the costs. On top of that, as COVID-19 impact was expected to stay for some time, we paid our employees additional benefits for working from home. Those onetime costs increased fixed costs, resulting in operating income of minus JPY 0.07 billion. Page 8 gives you the organic version of the operating income. Adjusted for onetime costs, operating income is about JPY 0.8 billion, and our profit generation base remains firm. Page 9 is the cost structure of the fourth quarter. Variable costs were JPY 6.15 billion, almost flat from the previous quarter. Fixed costs were JPY 8.91 billion, increasing by JPY 0.91 billion from the previous quarter, but most of the increase came from onetime factors. Page 10 is about shareholder returns. Stock repurchase is underway with the upper limit of 5 million shares or JPY 2.5 billion. As of the end of July, we have repurchased about 4.14 million shares or JPY 1.8 billion. The repurchase will be completed by September 23. Page 11 is about the fiscal year-end dividend. We plan to pay JPY 10 per share, maintaining DOE of 2.0% while achieving consolidated dividend payout ratio of 20% or higher. The last page of this section is the outlook for FY 2021. Let me go business by business. As for the game business, just like in FY 2020, global operations of existing titles are working well and stable performance is expected. Although we have to assume certain level of uncertainty, new game titles and overseas distribution, especially in China, may bring some upsize. For the live entertainment business, we will continue to invest aggressively to expand the user base. In the advertising and media business, the focus will be strengthening of media potential and restructuring. As I said earlier, we saw some decline in net sales in the fourth quarter, and we will be working to make this business leaner while reviewing our sales strategies considering the impact of COVID-19 on our clients. With those efforts, we expect this business to improve its financial performance and achieve profit within FY 2021. Overall, the baseline for our quarterly operating income will be somewhere in the mid- to high 100 million, with potential fluctuations depending on how the game titles perform and what event conditions may develop. As for this first quarter, the global version of SINoALICE was released on July 1 and is performing well. With that, we expect operating income to be over JPY 1 billion. Now Tanaka is going to walk you through the operational overview.

The review and summary of FY 2020 is on Page 14. Our business plan for FY 2020 was to invest in the 3 businesses: game, live entertainment and advertising and media. In the game business, with the strategy of engine, IP and global, we focused on operating gains from the long-term perspective to achieve growth; strengthening global distribution of titles to boost earnings potential; and preparing for distribution in China. In the live entertainment business, to further develop our platform, we strengthened functionality and expanded contents of REALITY. The advertising and media business continues to strengthen its media potential while also responding to the challenges of COVID-19. Please turn to Page 15. The game business enjoyed stable coin consumption while focusing on global operation based on a long-term perspective and expanding into new countries and territories. Page 16 is about pursuing growth through long-term operation of titles. Another Eden and Symphogear are the examples of titles we nurture over a long period of time. About overseas distribution, our overseas sales grew steadily. Measures taken included global simultaneous release and expansion of game distribution to new countries and territories. We are willing to try various approaches to grow globally. The overseas sales of Another Eden also grew from the first half to the second half. Page 19 shows the progress in overseas distribution of different titles. Some were released in FY 2020. The global version of SINoALICE was released on July 1. Page 20 is about REALITY. We strengthened its functionality as a platform and expanded its contents. Also in FY 2020, on Page 21, the advertising and media business strengthened its media potential while addressing the challenges of COVID-19. Page 22. On top of the game business, we will continue to grow the advertising and media business and the live entertainment business. Let me turn to our business strategy for FY 2021 on Page 23. We will continue to grow the game business, the live entertainment business and the advertising and media business. The themes of the game business in FY 2021 will be engine development, IP development from the long-term perspective and further expansion in China. The live entertainment business will invest to expand REALITY further. The advertising and media business will continue to strengthen its media potential. Page 24, please. Recent developments in the game business. We have announced Assault Lily, Heaven Burns Red and Knight of Sidonia (sic) [ Knights of Sidonia ], which will be released one by one going forward. More titles, though we cannot name them now, are in planning or development. Please turn to Page 25. Plans for overseas distribution. First, we started to see concrete progress in our preparation for distribution in China, working with partners such as Bilibili, X.D. and Shengqu on respective titles to prepare for release. The global version of SINoALICE was released on July 1 in 139 countries and territories. It is performing well. Please turn to Page 26. We will continue to expand REALITY, our distribution platform. Our plan also includes strengthening of our B2B business, which offers support for live shows and events. On Page 27. Expansion of media portfolio will continue to be our focus in the vertical media business. Thank you for your attention.