Summary of Key Questions and Answers From Earnings Results Briefing for Q4 FY2016

The following is a summary of the key questions and answers from the earnings briefing for the fourth quarter of FY2016, held on May 11, 2017.

Q1 For your FY2017 first quarter guidance, what are the factors behind the expected quarter-over-quarter decline in revenue excluding Sports?

A1 In the fourth quarter of FY2016, Fire Emblem Heroes, a partnership title in the Nintendo Alliance, was released, and other key existing titles, such as Gyakuten Othellonia and Granblue Fantasy, which is provided by Cygames, ran large-scale in- game events, had major updates or were the focus of other initiatives. In addition, sales promotion & advertising expenses were lighter than in a typical quarter. In contrast, for the first quarter we are expecting a lighter in-game event cycle. We launched a new title earlier this quarter, but considering how new this title is, we have not factored in major contribution. On the cost side, we expect to run a typical level of marketing, and we also ran TV commercials during the Golden Week holiday in Japan. Recent trends, including the app store rankings, have been positive, so the first quarter is off to a good start. However, our game business fluctuates with the in-game event cycle in our key titles, so we take those factors into account when forming our expectations.

Q2 You mentioned that no decisions have been made regarding future plans for the curation platform business. Do you have an estimate for when any decisions might be made?

A2 If we do decide to create a business in this area, it will be on the basis of strong confidence in that business. This is not an easy decision to make. In order to make a more informed decision, we have reached an agreement with Shogakukan to discuss possibilities rather than keeping the discussion fully internal. At this time, however, we have no news to share on the future of any potential businesses in this area.

Q3 How many titles do you have in the pipeline outside of the Nintendo partnership?

A3 Our approach for new title development in Japan excluding Nintendo has not changed. We have the resources to develop 5 - 10 titles per fiscal year. Of those new titles, we expect about half to be IP titles.

However, given the market demand for a high level of quality, we are not focused on launching a specific number of titles. Rather, we ensure the pipeline is established, but we are flexible in our decision-making about stopping some titles in development, or delaying the launch of a title that needs more time.

Q4 Your FY2016 fourth quarter game business revenue and operating profit both grew about the same amount quarter-over-quarter. What were the factors behind this?

A4 More than half of the quarter-over-quarter increase in operating profit in the game business was marginal profit associated with the increase in the virtual currency consumption. The remainder was from lower-than-usual overhead allocation and sales promotion & advertising expenses, as well as the improvement in the operating results from the international business. Also, when looking at revenue, it is important to consider that the conversion of virtual currency consumption to revenue differs depending on the title. For some titles we recognize revenue on a gross basis, and for some we only recognize our revenue share on a net basis.

Q5 Now that multiple titles have come out from the Nintendo partnership, have you changed your approach to resource allocation?

A5 We continue to place high priority on titles in the Nintendo Alliance.

Q6 Ms. Namba, going forward, where will you direct your resources?

A6 As mentioned on slide 15 of the Operating Results presentation, we are currently discussing the strengthening of our business execution and corporate audit function, and we plan to provide more detail about our initiatives by the end of May 2017.

After transitioning to a two representative director system, I have been working on enhancing the quality of the decision-making of top management. The management team is involved in a lot of different initiatives. We have been reaching out to important partners, joining in the discussion about digital media, working on resource allocation, working on the strengthening of corporate governance and compliance, redefining our vision and mission, and working on corporate culture reform. We will continue to make important decisions with our dual representative director system, and effectively serve as checks and balances for each other.

Q7 What insights has DeNA gained from the titles that have been released in the Nintendo partnership?

A7 We feel that Nintendo IP, its fan base, and the Nintendo brand, are incredibly powerful. Many users not just in Japan, but all around the world play these games. Also, I think there's a lot we can learn from them about making games, including the gameplay and the feel of the game.

Q8 A lot of companies are talking about the pursuit of quality in smartphone games. How much are development costs per title now?

A8 It's difficult to give a general number since the development costs can depend significantly on the genre and whether there are any major changes in direction during development, but my impression is that the average is not less than 500 million yen. If a title becomes a hit, then it can make several hundred million yen per month, so it is possible to recoup the development costs. We believe it is key to regularly produce sizeable hits and to maintain or grow the size of those titles for a longer period. To do so, the game needs to be at a level of quality that users enjoy, so we believe it will likely be necessary to target a higher level of monthly revenue than 2 - 300 million yen.

Q9 On slide 14 you mention two important management topics. How will you achieve these goals? I would like to hear from both Mr. Moriyasu and Ms. Namba.

A9 (Moriyasu) For enhancing trust, it's not simply a matter of reinforcing compliance, corporate governance, and other systems. It is also key to ensure that we reform our corporate culture, to ensure that all employees and management prioritize delighting users.

We are continually discussing our growth strategy and I believe that there are major opportunities utilizing both the internet and AI. I feel that it has become more challenging to create a service that exists entirely within the internet in the short term, and that instead there are more possibilities in areas that have historically not utilized the internet and AI. To pursue these possibilities, we will have to have a more long term outlook.

(Namba) In strengthening our business portfolio, we are pursuing initiatives such as the automotive business, the healthcare business, the Sports business, and initiatives in the City of Yokohama. We intend to accelerate our pursuit of potential growth in these businesses. Also, for enhancing trust, it is important to further strengthen our compliance systems and ensure that they are functioning. However, I believe that true enhancement of trust will come from our approach to each of our businesses and services. We need to show everyone that the team at DeNA is striving to delight the world. I intend to spend time working on that.

Q10 Do you plan to make your automotive business and healthcare business into new business pillars?

A10 Each of these business teams are working very hard to make their business become a new pillar by leveraging current initiatives. Of course, we have resources that are working on new initiatives other than the ones mentioned in the question, but in general our approach is to utilize what we have already built.

Q11 There has been some criticism of "eternal venture." Why did you decide to use this term today?

A11 In the Third-Party Committee Investigation Report "eternal venture" was mentioned multiple times, and it was written that DeNA might have allowed its slogan of "being an eternal venture" to serve as an excuse. DeNA has valued being an eternal venture since its very early days, to mean that we always challenge ourselves to try new things. I went to the committee members to confirm their intent for what they wrote in the report. They told me that being an eternal venture, or being an organization that allows people to continually challenge themselves to do new things, is something that must be premised upon holding social responsibility as a priority. Their concern was that perhaps this was not fully understood by everyone throughout the organization. We agreed with that opinion, and instead of giving up this slogan that has driven our growth since the beginning, we decided to rally everyone around that slogan while ensuring that they all truly understood the correct meaning.

Q12 The City of Yokohama seems to be attempting to loosen the limit on the building coverage ratio in Yokohama Park. Do you have any comment on this?

A12 We submitted an expansion proposal for Yokohama Stadium on March 15, 2017. We did see the news coverage you mentioned, but we have no official comment at this time.

Q13 How do you intend to pursue the Yokohama Sports Town idea?

A13 First of all, I would like to thank all the fans of the Yokohama DeNA Baystars and the people of Yokohama for supporting our initiatives. We wanted to give back something concrete, so we have been working on the creation of the Yokohama Sports Town idea, which includes a variety of initiatives not only within the stadium, but also the surrounding area. In general DeNA provides internet services and smartphone games, but our initiatives in Yokohama have the potential to reach a broader audience. I believe it's very meaningful for us to develop that frontier. We have a comprehensive partnership agreement with the City of Yokohama to promote sports and stimulate the local economy. We plan to continue our efforts to promote activities for our fans and the people of Yokohama to enjoy.

DeNA Co. Ltd. published this content on 12 May 2017 and is solely responsible for the information contained herein.
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