GREE : FY2024 1Q Presentation (Transcript)

Toshiki Oya, Senior Vice President, CFO:

Thank you for joining the FY2024 first quarter financial results briefing of GREE, Inc. I am Toshiki Oya.

Looking at the executive summary on page 2, we see net sales of ¥15.8 billion, operating income of ¥1.2 billion, and EBITDA of ¥1.3 billion. During the first quarter, the Metaverse Business remained strong and results were basically in line with our forecast. We will provide detailed information regarding each business later, but I'd first like to provide a quick summary. In the Game and Anime Business, earnings were strong owing to the success of the 1.5-year anniversary event for Heaven Burns Red. In the Metaverse Business, the REALITY Platform Business provided a strong earnings boost. In the DX Business, the Commerce Business progressed in line with our expectations. In the Investment Business, we posted an operating loss of ¥0.2 billion as there were no large distributions received.

On page 5, we provide an overview of financial results. We will provide explanations regarding net sales and operating income later. Also, there were no significant movements in terms of ordinary income and net income.

Page 6 shows trends in net sales and operating income. In the third quarter and the fourth quarter of FY23, we received large distributions in the Investment Business, but this was not the case in the first quarter of FY24. Companywide sales and income therefore declined QoQ due to this reactive decline.

On page 7, we have an analysis of sales and operating income by segment. We will provide an explanation of this later.

On page 8, we present an analysis of operating income in the first quarter. The main factor behind the decline in sales was the aforementioned reactive decline in the Investment Business and quarterly operating income was ¥1.2 billion.

On page 9, we break down our cost structure for the first quarter. Variable costs declined QoQ on the winding down of promotions for Heaven Burns Red. Commission and fee costs declined on a decline in sales. Looking at fixed costs, labor costs increased on allocation of human resources to growth businesses including hiring to expand REALITY operations in

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North America and increased hiring in the VTuber Business. However, we have narrowed our focus and, although fixed costs rose QoQ, we do not expect them to continue rising at this pace.

Page 11 shows our earnings estimates and forecasts. We expect results in the Game and Anime Business to be weaker in the second quarter FY24 than in the first quarter. Excluding the Investment Business, we forecast companywide operating income of roughly ¥0.5 billion in the second quarter. Our full-year FY24 forecast remains unchanged from our initial forecast. Excluding contribution from new titles and the Investment Business, we forecast FY24 operating income of roughly ¥4-5 billion.

Moving on to page 12, here we show progress toward our full-year forecast. Progress in the Game and Anime Business surpassed 25% due to strong performance in this business and, in the Metaverse Business, the Platform Business contributed to income. The DX Business and the Commerce Business trended in line with expectations.

Now, let's hear from the heads of each of our businesses.

Yuta Maeda, Senior Vice President:

Yuta Maeda will cover the Game and Anime Business.

First, page 14 shows an overview of the Game and Anime Business as a whole. In the first quarter, the Game and Anime Business posted sales of ¥11.72 billion and operating income of ¥1.56 billion. Focus points include the very well-received1.5-year anniversary event for Heaven Burns Red. While there was a negative QoQ impact from many of our titles marking anniversaries in the fourth quarter of FY23, collaboration events for That Time I Got Reincarnated as a Slime: ISEKAI Memories were successful and other titles performed very well.

Next, I would like to talk about our subsidiaries.

First, on page 15, we have WFS, Inc. As I mentioned before, the 1.5-year anniversary event for Heaven Burns Red was very well received.

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Next is Pokelabo, Inc. The company saw a reactive decline from anniversary events in the fourth quarter of FY23 and development costs rose sharply as development work on major titles peaked. Also, as just announced last week, we will be terminating support for SINoALICE and we have announced a tremendous story ending for this title. We began to see the impact from the termination of support for SINoALICE in the first quarter results.

Now let's turn to GREE Entertainment, Inc. The first quarter earnings were firm owing to very strong performance in licensing and outsourced development projects. In the first quarter, there were no extraordinary factors like the write downs posted on some titles in the fourth quarter of FY23.

Page 18 shows our pipeline. As we explained in our fourth quarter FY23 results presentation, we are diversifying our pipeline. We are making steady progress in this area and we feel that we have built a good, solid pipeline.

On page 19, we provide our second quarter FY24 earnings forecast. To be frank, we do not have many major focus points for the second quarter, but we continue to hold second anniversary events for That Time I Got Reincarnated as a Slime: ISEKAI Memories. Based on these factors, our forecast is as shown.

Page 20 shows our full-year earnings forecast. We are making smooth progress in terms of sales and income and we expect to reach our initial forecasts.

On page 21, we present our medium-term targets. As we explained previously, our forecasts for sales of new titles, which can be highly volatile, are very conservative. However, we view our medium-term cost estimates as realistic.

Thank you for your kind attention.

Eiji Araki, Senior Vice President:

Next, Eiji Araki will explain the Metaverse Business.

First, page 23 shows an overview of the Metaverse Business as a whole. Sales rose sharply in the first quarter, especially in the Platform Business. Also, although we continued to

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invest aggressively in the VTuber Business, we were able to offset this and post positive income by revamping our cost structure and selling high-margin services.

Starting on page 24, we show results at our subsidiaries. First is our Platform Business, which handles our REALITY platform. We conducted a number of successful campaigns to mark the fifth anniversary of the release of REALITY in August. Avatar sales were also especially strong in the first quarter. While avatars have always been a high-margin product, we further improved gross margin and cut costs, resulting in growth in overall operating income.

Page 25 covers REALITY XR cloud, Inc., which handles our B2B Metaverse Business. Earnings in this business deteriorated as service work on large-scale projects with timeframes of 1-2 years came to an end and we were unable to offset this with new projects. In the second quarter, we have been implementing major cost cutting initiatives and we are working toward a return to profitability.

Page 26 shows REALITY Studios, inc., which handles our VTuber Business. Starting in the third quarter of FY23, we shifted our strategy and began aggressively investing and focusing on growth businesses. In line with this new strategic plan, we steadily conducted investments in the third quarter to fourth quarter of FY23 and in the first quarter of FY24 and were able to increase sales. While REALITY Studios is still posting operating losses, costs and losses are within the range expected in our original business plan and we are making strong progress.

On page 27, we provide our second quarter of FY24 earnings estimates. We expect sales to decline slightly following the impact of the REALITY anniversary campaigns mentioned earlier and we plan to increase investment in the VTuber business. We therefore expect to post a loss of ¥0.16 billion in the Metaverse Business.

Page 28 shows our full-year earnings forecast. Based on progress made in the first quarter and our second quarter estimates, we forecast full-year FY24 sales of ¥8.2 billion and we expect to roughly break even at the operating level.

Thank you for your attention.

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Kazuhisa Adachi, Vice President:

Next, Kazuhisa Adachi explains the DX Business.

Page 31 shows overall sales and operating income trends in the DX Business. While we have been building up overall sales, operating income has been trending sideways.

On page 32, we have the Marketing DX Business, where we have been steadily accumulating projects.

Page 33 shows the Operational DX Business. Here, existing projects are shrinking and we are making preparations for new services projects such as quality control and digital risk management solutions. Costs are increasing as we invest in new hiring aimed at creating systems to serve external customers.

On page 34, we provide our second quarter FY24 earnings estimates. We plan to continue accumulating projects in the Marketing DX Business while investing in preparation for new services in the Operational DX Business.

Page 35 shows our full-year FY24 forecast. We expect earnings to trend in line with our initial earnings forecast.

On slide 36, we present our medium-term targets. In both the Marketing DX Business and the Operational DX Business, we continue to aim for discontinuous growth over the medium term while maintaining a growth rate above the industry average.

That's all from the DX Business.

Yosuke Nakamura, Vice President:

Next, Yosuke Nakamura will explain the Commerce Business.

Page 38 shows overall sales and operating income trends in the Commerce Business. Overall, we see a rising trend and we have achieved positive operating income. One of the main factors behind this is continuous growth in the SaaS business of aumo, the core company in the Commerce Business. Also, we have completed restructuring of LIMIA, inc.,

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which we began in FY23. This has resulted in an uptrend in sales and achievement of positive income.

Page 39 covers aumo, Inc. aumo's operating margin has risen to just over 7% owing to steady expansion of its customer base and rising unit prices in its SaaS business.

On page 40, we provide our second quarter FY24 earnings estimates for the Commerce Business. We expect the growth trend seen in the first quarter to continue in the second quarter, mainly from growth at aumo. Also, jobda, inc., which invests in the HR field, launched a job search engine service in October and, while we plan to conduct balanced investment in jobda, we expect sales of ¥0.35 billion and operating income of ¥0.01 billion in the second quarter.

Page 41 shows our full-year FY24 forecast. We expect growth in line with our second quarter FY24 forecast, especially from aumo's SaaS business, and plan to conduct balanced investment in jobda. We forecast sales of ¥1.5 billion and operating income of ¥0.1 billion in FY24.

On page 42, we present our medium-term targets. In the runup to FY26, we intend to leverage growth in the aumo business as a base from which to conduct investment in jobda. Based on the balance between these two businesses, we expect FY26 sales of ¥3.3 billion.

Thank you for your attention.

Toshiki Oya, Senior Vice President, CFO:

Finally, Toshiki Oya explains the Investment Business.

Page 44 shows sales and operating income trends. As we received no large-scale distributions in the first quarter of FY24, income was much lower than in the third quarter and the fourth quarter of FY23 and we posted a loss. However, we continue to conduct investment at a stable pace and, as we will see in another slide, we see no problems in terms of our investment portfolio.

Page 45 shows an overview of assets under management (AUM). Due to a net increase of ¥2.0 billion, AUM rose to ¥82.7 billion.

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On page 46, we provide a breakdown of our operational investment securities. We conducted dozens of new investments in funds and startups. Our portfolio has steadily grown and is now valued at around ¥33.2 billion including growth in unrealized gains.

On page 47, we show the status of our investment results. Our portfolio is broken down by investment phase and investments in the exit phase are valued at approximately ¥13.0 billion. As we expect distributions from these investments in the near future, we are satisfied with the content of our investment portfolio.

Thank you for your attention.

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