DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2019-Q2

[Isao Moriyasu, executive]

I would now like to start DeNA's earnings presentation for the second quarter of fiscal year 2018. First, I'd like to present our financial results summary for the second quarter.

For the first half, we've reached 45% progress for revenue and 69% for IFRS operating profit versus our full year guidance. The Sports Business has highly seasonal performance between the halves. And if you take that into consideration, our performance was not good. So our first half financial performance was behind our expectations. There were 2 major factors behind our performance. First, we sold DeNA Travel earlier this fiscal year, which had an impact on revenue. And second, the Game business is not progressing as we had initially expected. Slide 2 shows our financial results by segment. The Sports Business showed solid performance for Q2 with some help from the number of home games held. Meanwhile, the Game Business was down quarter-over-quarter for both revenue and operating profit. Our investment in New Businesses is proceeding according to plan with a JPY 3.5 billion net investment for the first half versus the JPY 8 billion planned for the full fiscal year. For our cost and expense breakdown, please turn to Slide 3. This is mainly for reference. We are optimizing costs, mainly in the Game Business, but we are also investing in New Businesses, leading to variation in expenditure levels over time. Now I'd like to discuss our various business updates. First, to ensure healthy profitability in the core Game Business, we have 2 initiatives. We are managing costs in accordance with top line performance to maintain profit at least at the level of fiscal year 2017. And we are steadily progressing with the development of future titles, including Mario Kart Tour and the other globally popular IP title and aim to drive growth next fiscal year. Please turn to Slide 5 for the Game Business virtual currency consumption and segment operating profit for the quarter. In Q1, we had seasonal factors that led to a significant quarter-on-quarter decline from Q4. We expected to see higher Q2 performance, but unfortunately, Q2 performance was slightly lower than Q1. Typically, summer initiatives provide a boost for Q2, but our first- and second-party apps and third-party titles in Japan did not meet our expectations, leading to the quarter-over-quarter decline in virtual currency consumption. This also led to lower segment operating profit than anticipated. Slide 6 describes our Game Business top line and bottom line performance in more detail. Looking at the change in the Game Business segment operating profit, JPY 0.2 billion came from the profit change associated with the virtual currency consumption decrease. We also had new title launches. And of course, we had costs such as amortization and initial launch marketing associated with that. But unfortunately, they seem unlikely to become hits. So those costs impacted the bottom line.

Going forward, in general, our cost optimization initiatives have been proceeding according to plan. However, we need to grow virtual currency consumption to maintain the bottom line. To do so, we need to create titles that will drive top line growth. From Slide 7, I'll discuss updates for individual titles. First, the update on the Nintendo Alliance. It has been almost 2 years since the release of Super Mario Run, but the number of downloads still continues to grow, and the app is now installed on nearly 300 million devices worldwide. As an evergreen Nintendo title, it has entered a cycle where a certain staple number of new downloads take place each month.

Next, Fire Emblem Heroes has seen a steady trend in active users and revenue. There is a major update planned for around the end of the year and an anniversary event next quarter. So we are looking forward to these exciting events. Around a year has passed since Animal Crossing: Pocket Camp was first released. Many users have continued playing the game since the initial release last year. And by continually tweaking the game content, the game is gradually improving in performance. For new titles, we continue to plan to release Mario Kart Tour this fiscal year. And we will provide more details about that in the future, including information about the game and the release schedule. Now let's talk about creating original hits. Megido 72 is a promising title. Both the user base and revenue are steadily growing. For this title, we've established a strong core fan community who are very passionate about the game and have helped us to grow. Just recently, we also held an offline event. And these types of events are popular, so we have built great fan support.

In Q3, we will celebrate the 1-year anniversary for this title, and of course, are planning various game updates and other initiatives to mark the occasion. We also want to expand our user base beyond core fans, and we plan to do a major marketing initiative, including TV commercials for the first time in order to grow this title. We're excited to see how this will develop. Slide 10 is the final slide for games. We mentioned in the previous earnings announcement that Chinese, Korean and other overseas hits are gaining traction in the Japanese game market. We view this as an opportunity rather than a threat. We've decided to partner with these exciting overseas companies to bring such hit titles to Japan. The first announcement to make in regards to this concerns an exciting, impactful title. We plan to partner with Tencent Games for the Japanese launch of Arena of Valor, which is the international version of the hugely popular Chinese title, Honour of Kings. Our role in this partnership is mainly marketing, localization, game operation support and customer support.

Honour of Kings is massively popular in China. But in Japan, the MOBA genre has not really taken off yet. In our marketing, we want to convey what's great about MOBAs to a Japanese audience and grow this title in Japan. So from Q3 to Q4, we want to launch and grow this title. I mentioned previously that we need top line growth in games in order to maintain operating profit levels, so we need to create good games that drive top line growth.

In the second half, we're excited about Megido 72 and the Japanese launch of Arena of Valor and aim to grow them into hits. Additionally, we have the other globally popular IP coming, including Mario Kart Tour, coming from the end of this fiscal year to the beginning of the next. And we aim to secure a return to growth. Now I'd like to shift to talking about our second major initiative for this fiscal year: to create new business pillars. We are pursuing proactive investment in TaxiBell, insurance integrated with wellness programs and social live streaming. And I'd like to share some updates.

On Slide 12 is TaxiBell, which is the largest new business in terms of investment. Our differentiation for this service is that through the TaxiBell app, when users request a dispatch, they can connect directly to the closest taxi, with the driver accepting user requests through a smart device in the vehicle. This makes for a quick matching process to the closest taxi and a convenient, easy-to-use experience for users. Meanwhile, with what we call traditional services, while the user may be using an app to make a taxi order, the core of the service must also connect with the existing phone dispatch system and relies on an operator who must connect to taxis using radio. With this system, it's much harder to guarantee matching the user with the closest vehicle. This makes our TaxiBell offering more convenient for users. In Kanagawa Prefecture, where we first launched, the service is going well. Our per-day dispatches are growing steadily and are more or less on target with our plan. We are also planning to roll out to Tokyo this year and to the Kyoto, Osaka and Kobe area in the spring. We continue to recruit taxi companies in each of these future rollout areas. Competition in this business area is fierce, so it is key for us to provide value to both users and business operators over the next 2 fiscal years in order to gain the top share in this market. For our healthcare business, I would like to talk about a new topic. To share the background, DeNA created a joint venture called PFDeNA with a top Japanese AI company, Preferred Networks, 2 years ago. We have been in discussion on a variety of initiatives and business possibilities that make use of AI technology since that time. After these various discussions about the possibilities, we can finally discuss this new initiative with all of you. The system we're developing is for early cancer detection using only a small amount of blood. We analyze the expression levels of the ExRNA in the blood sample using AI and by doing so, can detect 14 types of cancer with high accuracy in just 1 test. Our goal is to create a service using this technology. And if successful, this service will have a major impact on the world.

We think this is a promising service. We expect to be in the R&D phase for a while. And if everything goes smoothly, our goal is to put the resulting system to practical use in 2021. So we will continue with our R&D efforts for the next few years. This is the first time we've discussed this project, but it has been planned since the beginning of the fiscal year. So the investment in this project is included in our guidance for fiscal year 2018 investment into New Businesses. It is not a new investment, rather a part of our overall new business investment plan. Now turn to Slide 14. Our third topic is to discuss updates to the Sports Business and E-commerce business. Turn to Slide 15 for the Sports Business. The performance of this business was good. Please see the graph on the left. As you can see, we have still managed to grow stadium attendance for games slightly despite being nearly at capacity. However, the growth rate is slowing. For the revenue per game, we have been able to increase revenue per customer with higher sales of sponsorships and broadcast rights in addition to strong ticket sales, merchandise sales and concessions. Despite being almost at capacity, we are still pursuing revenue growth possibilities.

In the graph on the right, you can see our stadium attendance and plans for the stadium expansion. We plan to add 3,500 seats for next season and another 2,500 by 2020. With this increased capacity, we will be able to increase ticket sales and related sales to further grow this business, so we think we will be able to see further growth for the Sports Business. Now we have the E-commerce business. We excluded travel. Outside of the travel segment, both processing settlement and auction are showing steady performance. Finally, we come to strengthening business portfolio and view for mid- to long-term growth. We've shown the slide in previous earnings announcements. Our goal is to create multiple new business pillars by about the mid-2020s, and we will use fiscal year 2020 as a checkpoint to confirm our progress towards achieving our long-term goals and aim to show our progress to all of you by the end of that fiscal year. This is our mission and vision. This concludes my presentation for this quarter.

Thank you.