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

Thank you for joining the FY 2025 Second Quarter Financial Results Briefing of GREE Holdings. First, I would like to explain the changes to disclosure methods in results briefing materials shown on Page 2. As shown, the GREE Group has 4 business segments. Among these segments, the Investment Business is easily impacted by market conditions and subject to near-term volatility and is different from the other 3 business segments in terms of its key characteristics and its positioning in the group. For these reasons, in our results briefing materials, we have decided to separate the other 3 business segments from consolidated results and provide disclosure and explanations on a 3 segments basis. In our consolidated financial results and in other disclosures provided in accordance with the Financial Instruments and Exchange Act, we provide disclosure on a consolidated basis. Looking at the executive summary on Page 3. On a 3 segments basis, sales and profit rose Q-on-Q on strong performance in the Game and Anime Business. We will provide more details on individual business segment results later on in this presentation. We also achieved strong performance in the Investment Business due to sizable dividends from investment funds in which we invested. As a result, consolidated sales and profit rose Q-on-Q on strong contribution from the Investment Business. On Page 6, we provide an overview of consolidated results for GREE Holdings. Net sales were JPY 15.6 billion, and operating profit was JPY 2.2 billion. In addition, ordinary profit and net income rose quarter-on-quarter and year-on-year on the posting of foreign exchange gains. On Page 7, we provide an overview of quarterly earnings on a 3 segments basis. Net sales were JPY 13.7 billion, and operating profit was JPY 1.2 billion, surpassing the forecast we announced at our previous results briefing. On Page 8, we provide an analysis of quarterly operating profit. Profit increased Q-on-Q on contribution from sales growth in the Game and Anime Business. On Page 9, we break down our cost structure for second quarter on a 3 segments basis, looking at variable costs, commission fees, et cetera, rose due to higher sales. Sales in the VTuber business also rose, and this resulted in a rise in variable costs such as merchandise production costs.

Now, Sanku Shino will provide an explanation of the progress we have made toward achieving our management plan targets. Page 12 shows sales and operating profit on a 3 segments basis. Sales and profit rose Q-on-Q with sales of JPY 13.7 billion and operating profit of JPY 1.2 billion. Page 13 shows our vision for long-term growth, which we have explained previously. The GREE Group aims to achieve business growth in 2 categories: long-term investment businesses and continuous growth businesses. Page 14 shows sales and operating profit of continuous growth business. While sales and operating profit are not currently very large, they are growing steadily. Page 15 shows business conditions on a 3 segments basis. Quarterly profit came in above our forecast, especially in the Game and Anime Business. Page 16 shows our third quarter FY 2025 earnings estimates on a 3 segments basis. We expect sales to rise and profit to decline Q-on-Q on increases in the Game and Anime Business as promotional costs rise in the run-up to new title releases. Page 17 shows our full year FY 2025 earnings estimates on a 3 segments basis. We expect sales to decrease compared to the full year forecast owing to delayed release of a new title in the Game and Anime business. However, we expect operating profit to increase compared to the full year forecast. Page 18 shows our medium-term targets on a 3 segments basis. We continue to expect sizable growth starting in fiscal year 2027 on steady growth in the Metaverse Business and the DX Business. Page 20 shows sales and operating profit by segment, and Page 21 shows our estimates and forecast by segment. For more details, please wait for the parts of this presentation covering each individual segment. Page 22 shows progress made toward our full year FY 2025 forecast. Earnings are trending generally in line with expectations.

Yuta Maeda will cover the Game and Anime Business. Page 24 shows quarterly sales and operating profit in the Game and Anime Business over the past 5 years. Sales and profit rose quarter-on-quarter but declined year-on-year. On Page 25, we present an overview of the Game and Anime Business. Quarterly sales and profit rose Q-on-Q, again coming in higher than expected on strong performance from existing titles, mainly owing to anniversary events for mainstay title, That Time I Got Reincarnated as a Slime. Page 26 shows the live service game business. As mentioned earlier, mainstay titles performed well. We also implemented a large-scale restructuring on January 1. We will boost competitiveness by streamlining business operations and expanding the scale of our business in order to flexibly and quickly respond to the needs of the market. Page 27 shows the licensed game business. Sales rose Q-on-Q due to an increase in investment returns related to the start of new anime broadcasts. Page 28 shows our development pipeline. As we mentioned in our last results briefing, we have 4 titles in the planning and development stages. We are also making progress on titles based on major IP that do not yet have release dates and are not shown here. Page 29 shows our third quarter FY 2025 earnings estimates. While we expect a positive impact from anniversary events for Heaven Burns Red in third quarter fiscal year 2025, we also expect increased promotional costs for new titles and increased prototype development costs in the console games business, resulting in a Q-on-Q rise in sales but a decline in profit. Page 30 shows our forecast and outlook for FY 2025. These have not changed much since last quarter's results briefing. We continue to factor in earnings contribution from new titles conservatively, taking into consideration delays in new title releases. On Page 31, we present our medium-term targets. These also have not changed much since last quarter's results briefing. We positioned the Game and Anime Business as a long-term investment business, targeting long-term growth. and we will, therefore, focus on new titles and investment in preparation for full-scale entry into the console games business.

Next, Eiji Araki will explain the Metaverse Business. Page 33 shows long-term sales and operating profit trends in the Metaverse Business. Quarterly sales reached a record high level of JPY 2.1 billion. In the past, sales have tended to be strong in first quarter and then decline in second quarter owing to seasonal factors. This year, however, strong second quarter sales outstripped first quarter sales. Operating profit surpassed our forecast and remained in the black. On Page 34, we have an overview of the Metaverse Business. In the platform business, there was a reactive decline in sales following anniversary events in the previous quarter. Metaverse Business results were strong on earnings from Avatar's and room features and platform earnings from live streaming events. Compared with previous years, were able to limit the reactive decline from anniversary events and achieved solid earnings. Performance was also strong in the VTuber business, where sales reached a record high level. Page 35 shows the platform business. As mentioned previously, we were able to limit the reactive decline from anniversary events held in the previous quarter and achieved solid earnings. Page 36 covers the VTuber business. Quarterly sales reached a record high level in the second quarter. While we manage multiple VTuber talent agencies, no single agency accounts for an outsized portion of earnings and earnings streams from live events and merchandise sales come from multiple agencies. Earnings per talent also continues to grow. We plan to continue to invest aggressively in the VTuber business, owing to strong performance. Page 37 shows our earnings outlook for third quarter FY 2025. We expect continued strong growth in each business in this segment in third quarter FY 2025, with sales and operating profit rising Q-on-Q. Page 38 shows our full year forecast and estimates for FY 2025. Our initial forecast was for sales of JPY 9.1 billion and operating profit of JPY 500 million. Recently, however, sales growth in parts of the platform business has been trending slightly below our initial forecast. Factoring this in, we now forecast full year sales of JPY 8.7 billion. However, we expect to reach our operating profit target due to profit margin improvement, mainly from payment processing fees. On Page 39, we show our medium-term targets. We continue to target sales of JPY 17.9 billion and operating profit of JPY 3.3 billion in fiscal year 2027.

Next, Sanku Shino will fill in for Kazuhisa Adachi to explain the DX Business. Page 41 shows sales and operating profit trends in the DX Business. At JPY 1.8 billion and JPY 200 billion, second quarter sales and operating profit trended basically in line with our forecast. On Page 42, we provide an overview of the DX Business as a whole. We are in the process of transforming the DX Business into a recurring earnings type business, and we are investing in the development of products to achieve that transformation. On February 1, we also integrated several of the subsidiaries in the DX business into GREE X,Inc. In line with this integration, we have restructured the DX Business into 2 subsegments: the DX Solutions business and the DX Consulting business. On Page 43, we have the DX Solutions business. The DX Solutions business is a group of businesses that provides SaaS to support the marketing efforts of companies, including restaurants, and retailers. Owing to investments made in the development of new SaaS products scheduled for release in February, profit did not increase this quarter. However, we aim to achieve strong growth after the release. Page 44 shows the DX Consulting business. In this business, we leverage know-how cultivated by the GREE Group to support the expansion of our corporate clients' B2C businesses through our consulting and HR SES businesses. Our new SES business has gotten off to a start, and we aim to achieve continued growth. On Page 45, we show our earnings outlook for third quarter FY 2025. We expect sales of JPY 1.77 billion and operating profit of JPY 200 million. We plan to release new SaaS products. Page 46 shows our full year forecast and estimates for FY 2025. We forecast sales of JPY 7.3 billion and operating profit of JPY 800 million. On Page 47, we have our medium-term targets. We have made no changes to our initial forecast. We are in the process of transitioning from a project-based business structure to a recurring earnings type business structure, and we target strong growth in fiscal year 2027.

Finally, Toshiki Oya explains the Investment Business. Page 49 shows sales and operating profit in the Investment Business. In the previous quarter, we posted a sizable loss owing to a combination of low dividends and impairment losses and revaluation of assets. In second quarter, however, sales and operating profit both showed strong growth. On Page 50, we provide an overview of the Investment Business. Sales and operating profit rose on sizable dividend distributions from funds in which we invested. We also continue to make steady investments. In addition, we have recently been conducting fundraising for new investment funds. We will conduct fundraising for Japanese and a U.S. fund investments and a U.S. start-up investment fund, targeting a first close in mid-2025. Until now, fund investments have been made almost exclusively on a proprietary basis. However, we will shift our focus to achieving earnings from GP investments and increase the ratio of funds procured from outside sources. On Page 51, we have trends in the Investment Business shown on a fiscal year basis. As the Investment Business has a very long-term horizon, we show long-term profit trends over the past 10 years. As you can see, this business has contributed to profit over the long term, albeit with some volatility, valuation and translation adjustments, in other words, unrealized gains, which are the source of earnings remain stable. We believe we have built a portfolio that will continue to generate profit in the future. Page 52 shows quarterly change in operational investment securities valuation. Investment valuation, including unrealized value has risen to JPY 36.3 billion. This is because the amount invested has risen as we continue to make investments and the unrealized value of the finance value has also increased. On Page 53, we have the status of our investment results. Here, we show the valuation of our investments by investment period. Our IRR is outperforming the VC benchmark. Page 54 shows management fee revenue in the fund investment management business. Management fee revenue remains stable. Page 55 shows total AUM on which management fee income is based. On a total commitment basis, total AUM remained steady. That's all for the Investment Business, and this wraps up our presentation.