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

Greetings to everyone. I am CFO, Toshiki Oya. Thank you for joining the First Quarter FY 2026 Financial Results Briefing of GREE Holdings. First, I would like to explain the changes to segment names as shown on Page 2. Until the end of fiscal year 2025, we had the Metaverse business, which consisted of the Platform business built around REALITY and the VTuber business. Starting this quarter, we have renamed it the VTuber business and reorganized it into the Platform business and the Production business. We are forming alliances between REALITY and VTuber talent agencies run by other companies and continue to broaden our user base via our app that allows anyone to easily become a VTuber. We changed the segment name from Metaverse business to VTuber business this quarter to more accurately reflect our current business activities. This is a change in name only and does not involve any changes to the structure or content of our reportable segments. On Page 3, we provide an executive summary for first quarter of fiscal year 2026. On a 4-segment basis, we achieved solid results in all businesses, with profit coming in above the levels announced in our fiscal year 2025 full year results. Net sales were JPY 12 billion, and operating profit was JPY 1.1 billion. Consolidated results for GREE Holdings, which include the Investment business, followed a trend similar to results on a 4-segment basis. On Page 6, we provide an overview of first quarter FY 2026 consolidated results for GREE Holdings. Net sales were JPY 12.8 billion, and operating profit was JPY 1.1 billion. Ordinary profit and net profit increased on a Q-on-Q and Y-on-Y basis as we posted foreign exchange gains from the revaluation of foreign currency-denominated assets resulting from yen depreciation as well as gains on the sale of investment securities. On Page 7, we have an overview of 4 segments results in first quarter. On Page 8, we provide an operating profit analysis for fourth quarter on a 4-segment basis. Compared with operating profit of JPY 1.7 billion in fiscal year 2025 fourth quarter, 4-segment operating profit JPY 1.1 billion in first quarter, reflecting lower sales and a corresponding decrease in variable costs. On Page 9, we break down our cost structure for fourth quarter on a 4-segment basis. Fixed costs remained largely unchanged, while variable costs decreased due to lower advertising expenses and a decline in commission fees resulting from lower sales. 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 4-segment basis. Sales were JPY 12 billion, and operating profit was JPY 1.1 billion. Page 14 shows sales and operating profit of continuous growth business. We achieved Q-on-Q growth in sales and profit as sales were JPY 4.4 billion, and operating profit reached JPY 0.5 billion. Page 15 shows business conditions in 4 segments. Sales fell slightly on a slowdown in the game business, which accounts for a high proportion of total sales. However, profit came in above expectations as profit controls were executed effectively across all businesses. Page 16 shows our 4 segments forecast for second quarter of fiscal year 2026. We expect sales to rise and profit to decline. We expect sales to rise on contribution from steady growth in the VTuber business. However, we expect profit to decline quarter-on-quarter, owing to higher expenses associated with the full-scale development of console titles in the Game business. Page 17 shows our full year forecast for fiscal year 2025 on a 4-segment basis. We now expect profit to surpass our initial projections. In the Game business, sales are expected to come in below our initial expectations, owing to a slowdown in existing titles, but we now expect profit to exceed expectations on solid profitability across all businesses. Page 18 shows our 4 segments' medium-term targets. We have made no major changes to our medium-term targets. We target a bottom in profit in fiscal year 2026, followed by a return to growth in fiscal year 2027 and fiscal year 2028. On Page 20, we have sales and operating profit by segment. Sales and profit declined quarter-on-quarter in the Game business, mainly on a reactive decline resulting from the tapering off of initial launch momentum of new titles and weaker performance from existing titles. For more details, please wait for the parts of this presentation covering each individual segment. Page 21 shows progress made toward our full year fiscal year 2026 forecast. We will also provide details as we discuss each individual segment. Next, Yota Yanagihara will explain the Game business.

Page 24 shows long-term trends in sales and operating profit in the Game business. Segment-wide quarterly sales were JPY 7.5 billion, and operating profit was JPY 0.8 billion. On Page 25, we present an overview of the Game business. Sales declined temporarily on a tapering off of initial momentum for Puella Magi Madoka Magica: Magia Exedra, which was released on third quarter fiscal year 2025, but this was in line with expectations. On a positive note, operating profit came in higher than projections as overseas contract development projects exceeded expectations. We also made progress on development of a major live service game title. We hope to be able to share more information about this with everyone at the appropriate time. Page 26 shows the live service game business. Sales were JPY 5.9 billion and operating profit was JPY 0.5 billion. Page 27 shows our development pipeline. We plan to release one console game based on our own IP in fiscal year 2026. We are also making steady progress in preparing for the launch of multiple large-scale live service games and console titles based on proprietary IP. Page 28 shows our second quarter FY 2026 earnings estimates. While we expect sales to hold steady, we project that profit will decline on an increase in expenses associated with the ramping up of development of a console game scheduled for release in fiscal year 2026. Page 29 shows our forecast for fiscal year 2026. Based on recent trends in existing titles, we factor in somewhat conservative sales estimates. However, we expect to meet our initial profit forecast by implementing profitability control initiatives even as we continue to make aggressive investments. On Page 30, we present our medium-term targets. We have made no changes to these targets. We factor in contributions from new titles conservatively and aim to drive business growth by turning major titles currently in development into hits. Next, Eiji Araki will explain the VTuber business.

Page 32 shows long-term sales and operating profit trends in the VTuber business. Viewed Y-on-Y, quarterly sales rose 9%, while operating profit jumped 142%, reaching a new historical high. On Page 33, we have an overview of the VTuber business. Avatar-related revenue in the Platform business has been weaker than expected and substantial sales growth has yet to materialize. On the other hand, operating profit reached a record high, owing to our continued efforts to reduce payment processing fees and to upfront investments gradually turning profitable, which led to a narrowing of losses in the Production business. Page 34 shows the Platform business. Although avatar sales were soft, live streaming gifting continued to show solid growth. Quarterly operating margin reached a high level of 27.5% as we improved profit margin through cost control efforts targeting payment processing fees and other costs. Page 35 covers the Production business. This business manages VTuber talent agencies. And until this quarter, it was called the VTuber business. While sales were slightly soft owing to a reactive decline from major events held in the previous quarter and seasonal factors, results were generally in line with expectations. In addition, sales outside of live streaming, such as from merchandising and live events increased, and profit margin also improved. Page 36 shows our second quarter FY 2026 earnings estimates. In the Platform business, we will continue working toward renewed growth in avatars and aim to expand sales. Although some outsourcing costs and merchandise-related costs are expected to increase in the Production business, we expect operating profit to remain at roughly the same level. Page 37 shows our forecast for fiscal year 2026. We now expect sales to fall slightly short and operating profit to come in slightly higher than our initial forecast. In fiscal year 2026, we aim for the Production business to move into the black on a monthly basis, and we'll continue working to achieve this goal. Page 38 shows our medium-term targets. We have made no changes to these targets. We expect the Production business to enter the black on a monthly basis in fiscal year 2026 and on a full year basis starting from fiscal year 2027, and we aim to build a structure that will drive profit growth in the segment as a whole. As profits grow in these 2 businesses, we will also work to achieve top line growth by launching related businesses and new businesses and by pursuing growth through M&A. Next, Eiji Araki will explain the IP business. Page 40 shows long-term sales and operating profit trends in the IP business. Sales declined slightly year-on-year, while operating profit fell sharply. Page 41 shows conditions in the IP business as a whole. Quarterly sales were slightly below expectations, owing to a delay in the posting of sales in the Anime business from first quarter fiscal year 2026 to second quarter. However, all other businesses showed solid performance. Operating losses have temporarily increased as costs were front-loaded for the Entertainment Solutions business and other new start-up phase businesses. Page 42 covers the Anime business. Anime business sales declined and operating losses broadened in first quarter, owing to a delay in the posting of sales, but we expect first half earnings to be in line with our initial expectations. Page 43 shows the merchandising business. We are making progress on launching the business and expect it to begin contributing to earnings starting in fiscal year 2027. Page 44 covers the Entertainment Solutions business. In this business, which provides solutions for manga publishers, we are launching a business that leverages AI, and we expect it to begin contributing to earnings from second quarter fiscal 2026. On Page 45, we present our second quarter FY 2026 earnings estimates. In second quarter fiscal year 2026, we expect sales and profit to rise quarter-on-quarter on the delayed posting of sales in the Anime business. On Page 46, we have our forecast for fiscal year 2026. We are making progress toward our full year forecast in line with our initial expectations. Page 47 shows our medium-term targets. Over the medium term, we aim to build a business structure that continuously generates sales over time as more anime production projects accumulate and the number of serialized works increases. In addition, as the merchandising business and other businesses now in the start-up phase grow, we are targeting an uptrend in sales and profit beginning in fiscal year 2027. Next, Kazuhisa Adachi will explain the DX business.

Page 49 shows long-term sales and operating profit trends in the DX business. Sales and operating profit are on a gradual uptrend. Page 50 shows conditions in the DX business as a whole. Quarterly sales were JPY 1.92 billion, and operating profit was JPY 0.27 billion. A large order in the DX Consulting business contributed to earnings. On Page 51, we present the DX Solutions business. While we continue to focus on the SaaS business, sales and operating profit declined quarter-on-quarter in the DX Solutions business, owing to a sharper-than-expected decline in the outsourcing business continuing from the previous quarter. On Page 52, we cover the DX Consulting business. Sales and operating profit growth in the DX Consulting business surpassed our forecast owing to large marketing support projects. Page 53 shows our second quarter FY 2026 earnings estimates. Although we expect the impact from large projects in the DX Consulting business to wind down in second quarter, we aim to achieve steady growth. Page 54 shows our forecast for fiscal year 2026. We will work to achieve our full year targets established at the beginning of the current fiscal year. On Page 55, we present our medium-term targets. Our medium-term targets continue to focus on 2 areas to drive further growth, transitioning to a recurring earnings type business and achieving discontinuous growth through M&A. Finally, Toshiki Oya explains the investment business.

Page 57 shows long-term sales and operating profit trends in the investment business. Quarterly sales were JPY 0.8 billion, and operating profit held basically steady. On Page 58, we provide an overview of the investment business. The investment business is inherently volatile and distributions from investments were moderate in first quarter. As we posted valuation losses on some investments, quarterly results came in around the breakeven level. As we continue to invest steadily and accumulate investment assets, overall potential portfolio value remains high. Page 59 shows long-term profit trends and changes in the valuation of investments in the investment business. Viewed from a long-term perspective, the investment business has contributed positively to profit. The portfolio's unrealized gains have also remained stable. Page 60 shows quarterly trends in proprietary operational investment securities. Potential value expanded significantly in the previous quarter, forming a new base level of potential value. On Page 61, we present our investment results. Performance is strong compared with benchmarks. As there are no major changes on Pages 62 to 63, we will omit an explanation. That's all for the investment business, and this wraps up our presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]