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

Greetings to everyone. I am Chief Financial Officer, Toshiki Oya. Thank you for joining the full year FY 2025 financial results briefing of Gree Holdings. First, on Page 2, we provide an executive summary for the full year of fiscal year 2025. In fiscal year 2025, we posted 4 segments net sales of JPY 53.8 billion, operating profit of JPY 5.3 billion and EBITDA of JPY 5.6 billion. We improved profitability and achieved strong results in all 4 business segments, reaching our forecast for operating profit. We will provide a more detailed explanation later in this presentation. Our 4 segments forecast for fiscal year 2026 is for net sales of JPY 58.1 billion and operating profit of JPY 3.6 billion. We expect net sales to rise on sales growth in the Metaverse business and the DX business. But in the Game business, we expect operating profit of JPY 3.6 billion as we make investments to ramp up development of several new titles. In fiscal year 2025, on a consolidated basis, Gree Holdings posted net sales of JPY 57.1 billion and operating profit of JPY 4.9 billion. On Page 3, we provide an executive summary for the fourth quarter of fiscal year 2025. On a 4 segments basis, we achieved strong results in all business segments with results trending in line with expectations. We will provide a more detailed explanation later in this presentation. On Page 6, we provide an overview of financial results at Green Holdings. FY 2024 sales and operating profit were as shown here. Ordinary profit and net profit were impacted by foreign exchange losses on a quarter-on-quarter and year-on-year basis. On Page 7, we have an overview of 4 segments results in fourth quarter. On Page 8, we provide an operating profit analysis for fourth quarter on a 4 segment basis. While sales declined quarter-on-quarter, margins improved and variable costs declined, resulting in operating profit holding steady. On Page 9, we break down our cost structure for fourth quarter on a 4 segments basis. Advertising costs declined on the winding down of promotions for a major title conducted in the third quarter. Commission fees, et cetera, also declined sharply on sales decline and improved profitability. As a result, variable costs declined by a large margin and fixed costs were basically unchanged Q-on-Q. On Page 10, we show our year-end dividend. We plan to pay annual dividends of JPY 14.5 per share. Based on our dividend policy, we have decided to pay a regular dividend of JPY 4.5 per share. In addition to this, to celebrate the 20th anniversary of the founding of the company, we also plan to pay a commemorative dividend of JPY 10 per share for a total annual dividend of JPY 14.5 per share. On Page 11, we cover financial discipline. We have established an equity ratio target of 60% and an interest-bearing debt-to-EBITDA ratio target of 6x or lower, and we have cleared both of these targets by a wide margin. Our financial position remains strong.

Now Sanku Shino will provide an explanation of the progress we have made toward achieving our management plan targets.

Page 14 shows sales and operating profit on a 4 segments basis. Although sales declined quarter-on-quarter, operating profit basically held steady owing to our cost control efforts. Page 15 shows our vision for long-term growth. We position the Metaverse business, the IP business and the DX business as continuous growth businesses and target stable operating margins between 120% and 140%. We position the Game business as a long-term investment business, for which we see earnings upside. Page 16 shows sales and operating profit of continuous growth business. While we have achieved continuous growth in sales and operating profit in these businesses, sales and profit declined in fourth quarter. We will explain the major contributing factors later, but sluggishness in avatars in the Metaverse business had a sizable impact. Page 17 shows business conditions in 4 segments. Sales and operating profit were as shown. Page 18 shows our 4 segments forecast for first quarter of FY 2026. We expect sales and profit to decline, primarily due to rising costs as development of new titles in the Game business reaches a peak. Page 19 shows our forecast for FY 2025 on a 4 segments basis. We expect sales to rise and operating profit to decline. As mentioned before, the main factor is an increase in costs related to the full-scale development of multiple new titles in the Game business. Page 20 shows our 4 segments' medium-term targets. We expect operating profit to bottom in fiscal year 2026 and target growth in both sales and profit in fiscal year 2027 and fiscal year 2028. On Page 21, we present the expected share and growth rate of our continuous growth businesses in our 4 segments forecast. We expect continuous growth businesses to account for an increasingly high share of both sales and operating profit. As of fiscal year 2018, we forecast that continuous growth businesses will account for over half of total sales and operating profit. On Page 23, we have sales and operating profit by segment. For more details, please wait for the parts of this presentation covering each individual segment. Page 24 shows progress made toward our full year FY 2025 forecast. While we fell short of our sales targets in all 4 businesses, operating profit was basically in line with our forecast. We will also provide details as we discuss each individual segment.

Next, Yuta Maeda will explain the Game business.

Page 27 shows long-term trends in sales and operating profit in the Game business. Sales were JPY 9.1 billion and operating profit was JPY 1.6 billion in fourth quarter. On Page 28, we present an overview of the Game business. In fourth quarter, sales declined Q-on-Q on a reactive decline from anniversary events held in third quarter for Heaven Burns Red. However, even with upfront promotional investments for Puella Magi Madoka Magica: Exedra, profit increased partly due to contribution from that title. Our focus point for fourth quarter is improved profitability. Steady efforts related to our existing titles and diversification of payment options have steadily improved overall profitability, and fourth quarter operating margin was 18%. Page 29 shows the live service game business. As this is similar to the aforementioned Game business, we will not go into a detailed explanation here. Page 30 shows our development pipeline. We have updated some development schedules, but there have been no changes to approved development projects. Building on the success of That Time I Got Reincarnated as a Slime: ISEKAI Memories, Heaven Burns Red and Puella Magi Madoka Magica: Magia Exedra, we have established a strong pipeline, and we are highly confident in the projects that are currently underway. While this slide only shows titles on which development is fully underway, we are also making progress on other titles based on major IP. Regarding the question of how many large projects we have in the pipeline that could have a significant impact on our results, we are unfortunately unable to disclose specifics at this time, which we find frustrating as well. However, compared with both the industry as a whole and with our own past track record, we feel that exceptionally strong projects are coming together at Gree. We intend to maintain our high hit ratio and deliver even better titles to even more users, generating an even greater impact on our results. Page 31 shows our first quarter FY 2026 earnings estimates. We expect sales and profit to temporarily decline on a Q-on-Q basis in first quarter FY 2026, reflecting seasonal factors such as a lull following the release of Puella Magi Madoka Magica: Magia Exedra and a fallow period for mainstay existing titles as well as substantial planned spending as development projects enter full-scale production. From second quarter fiscal year 2026 onward, we expect a recovery supported by multiple events, including anniversary events for major titles. Page 32 shows our forecast for FY 2026. We forecast net sales of JPY 35.4 billion and operating profit of JPY 3.4 billion in FY 2026. As multiple large new projects will move into full-scale development in FY 2026, we factor some cost increases into our forecast. However, we aim to improve earnings through initiatives such as diversification of payment options and expect to secure steady profit. We have conservatively factored in the expected contribution to earnings from new titles scheduled for release as we have done in the past. On Page 33, we present our medium-term targets. Taking into account the recent status of our pipeline and other factors, we have lowered our FY 2027 medium-term sales target to 18% below our previous medium-term target. However, for operating profit, factoring in improvements in profitability achieved to date, we now expect a 20% increase compared with the previous target. In fiscal year 2028, we forecast sales of JPY 31.3 billion and operating profit of JPY 5.5 billion. We are steadily laying the necessary groundwork by moving multiple new projects into full-scale development and making upfront investments in console games as we work toward achieving growth as a long-term investment business.

Next, Eiji Araki will explain the Metaverse business.

Page 35 shows long-term sales and operating profit trends in the Metaverse business. Viewed Y-on-Y, sales rose 10%, while operating profit was down both Q-on-Q and Y-on-Y. We will explain in more detail later, but the main factors impacting earnings were weak avatar sales in the platform business and a temporary increase in upfront investment costs in the VTuber business. On Page 36, we have an overview of the Metaverse business. The main factor behind the decline in operating profit was successive new talent debuts in the VTuber business. New talent debuts are often accompanied by one-off upfront costs, such as those related to character production and 3D model production, and this was a major factor behind the profit decline in fourth quarter. Page 37 shows the platform business. Sales declined year-on-year, but held steady year-on-year. The main factor behind the weakness in sales was that avatar sales differed from the initial business plan. Gifting sales, on the other hand, were very strong. We also made progress in diversifying our payment options, and our operating margin continued to trend at a high level of around 25%. Page 38 covers the VTuber business. We posted a record high sales of JPY 390 million in the VTuber business on fourth quarter. We were able to achieve significant growth of nearly 150% compared with fiscal year 2024. On the other hand, as explained earlier, we incurred higher onetime costs associated with new talent debuts, and this resulted in a larger loss at the operating level. We aim to achieve single-month profitability during fiscal year 2026 and expect profit to improve thereafter. Page 39 shows our first quarter FY 2026 earnings estimates. We expect steady growth in both the platform business and the VTuber business and forecast record high sales. We also expect growth in operating profit on a decline in one-off costs in the VTuber business. We, therefore, forecast Q-on-Q growth in both sales and profit. Page 40 shows our forecast for FY 2026. We expect growth in sales and profit in FY 2026 on steady growth in the platform business and the VTuber business, with sales rising 40% year-on-year to JPY 11.6 billion. Over the past roughly 3 years, we have made aggressive upfront investments in the VTuber business, and we expect to reach profitability on a single-month basis in fiscal year 2026. This is expected to significantly improve the overall earnings of the Metaverse business. Page 41 shows our medium-term targets. This shows the differences from the medium-term targets we had disclosed up until fiscal year 2024. We have made some downward revisions in light of sales growth rates and market conditions. However, as before, we plan to continue expanding both the platform business and the VTuber business. We expect the VTuber business to enter the black on a monthly basis in fiscal year 2026 and on a full year basis starting from fiscal year 2027. We expect to continue posting steady growth in operating profit, including in the current fiscal year.

Next, Eiji Araki will explain the IP business.

Page 43 shows long-term sales and operating profit trends in the IP business. Previously, licensing existing anime IP to external game companies had been the main source of earnings in the IP business. However, we are shifting our portfolio to focus on monetizing and merchandising proprietary anime IP that we develop and own in-house. Although we had expected the anime business to make a positive contribution to earnings in fourth quarter, it instead made a negative contribution. This resulted in a temporary loss, but we expect to see a recovery from here. Page 44 shows conditions in the IP business as a whole. We are especially focused on increasing licensing revenue through participation in anime production committees and serving as the lead distributor for anime as well as pursuing M&A in preparation for the full-scale launch of our Merchandising business. Page 45 covers the Anime business. In this business, we earned licensing revenue by investing in and organizing anime production committees and serving as the lead or co-lead distributor. We posted a loss in fourth quarter, partly owing to the timing of distribution revenue being pushed back later than expected. We are currently making steady progress in preparing new titles and expect to achieve growth over the medium to long term. Page 46 shows the Merchandising business. As a new business, we are still in the stage of making preparations while validating business concepts. Accordingly, while the business is still small in scale, we are moving forward with discussions and evaluations aimed at achieving significant growth, including through M&A. Page 47 covers the Entertainment Solution business. This is a B2B business providing DX solutions for the e-book operations of manga publishers. Despite our current small scale, we are steadily developing new customers, and we have begun to grow gradually as a BPO business that leverages AI. We target significant growth over the medium to long term. On Page 48, we present our first quarter FY 2026 earnings estimates. We expect operating profit to temporarily weaken in first quarter fiscal year 2026 due to some anime business distribution revenue being pushed back to second quarter as well as the posting of higher outsourcing and other costs to strengthen the structure of the Entertainment Solutions business. On Page 49, we have our forecast for fiscal year 2026. Over the past several years, sales have been flat or on a declining trend, but we expect to return to growth starting in fiscal year 2026. Page 50 shows our medium-term targets. We have raised our sales target and are making the necessary upfront investments to achieve our goal of achieving greater growth. We have also lowered our operating profit forecast.

Next, Kazuhisa Adachi will explain the DX business.

Page 52 shows long-term sales and operating profit trends in the DX business. In the context of the long-term trend, recent performance has been flat. Page 53 shows conditions in the DX business as a whole. Sales were JPY 1.75 billion and operating profit was JPY 220 million. Earnings trended in line with our forecast in the DX Consulting business, while earnings in the DX Solutions business were sluggish. On Page 54, we present the DX Solutions business. Operating profit declined Q-on-Q as we continued to invest in the SaaS business. Although the customer base of the SaaS business expanded, sales in the existing media business and campaign projects declined more than planned, resulting in a Q-on-Q decline in sales. On Page 55, we cover the DX Consulting business. The DX Consulting business trended in line with our forecast. Page 56 shows our first quarter FY 2026 earnings estimates. We forecast that sales will hold steady, but expect operating profit to decline Q-on-Q as we plan to invest in our recurring earnings type businesses. Page 57 shows our forecast for FY 2026. We target sales of JPY 8.9 billion and operating profit of JPY 700 million. We expect operating profit to decline as we plan to invest in our recurring earnings type businesses. However, we expect sales to grow as a result of these investments. On Page 58, we present our medium-term targets. We will continue to invest in the transition to a recurring earnings type business as we aim to maintain growth through fiscal year 2027 and fiscal year 2028.

Finally, Toshiki Oya explains the Investment business.

Page 60 shows long-term sales and operating profit trends in the Investment business. Volatility was high in fiscal year 2025. On Page 61, we provide an overview of the Investment business. Distributions from investee funds came in at a moderate level in fourth quarter, but we recorded valuation gains on some investee funds, resulting in a quarterly loss. Also included in this loss is just over JPY 200 million from revaluation of cryptocurrency assets. Page 62 shows long-term profit trends and changes in the valuation of investments in the Investment business. We position the balance sheet and cumulative long-term profit as key indicators in the Investment business. Over the past 10 years, we have secured very substantial cumulative profit and our portfolio has remained stable. As there are no major changes on Pages 63 to 66, we will omit an explanation. On Page 67, we present our business plan. While it is difficult to provide a quantitative outlook for the Investment business, please allow me to explain our policies. We operate in 4 product categories: Japan, the U.S., fund investments and start-up investments. In the past, proprietary investments comprised a large share of our operations. Going forward, we aim to increase the LP investment ratio from external investors and enhance GP revenue through AUM growth. Recently, we held the first close for JP2, a Japan-focused fund investment, and are steadily moving forward with investment activities. We plan to maintain our investment balance while maintaining financial discipline. At end FY 2025, investment value stood at JPY 21 billion. Since then, we have made further progress in securing commitments and therefore, expect investment value to peak at around JPY 25 billion and then gradually decline. ROIC is expected to be roughly 10% around fiscal year 2030, and we target stable performance of over 20% over the long term. That's all for the Investment business, and this wraps up our presentation.