DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2022-Q2

[Shingo Okamura, executive]

Hello, everyone. This is Shingo Okamura. I would now like to present our earnings results for Q2 fiscal year 2021. First, as always, financial results and highlights. This slide shows our financial results summary. There are 2 main points. Our non-GAAP operating profit saw continued solid performance from Q1. For the second point, I will discuss more detail throughout the presentation, but we have seen good progress in our focus areas for the next 3 years in both Entertain & Serve. To share more detail, we had revenue of JPY 34 billion, which is a solid result, basically flat compared to Q1. Non-GAAP operating profit was slightly up quarter-on-quarter at JPY 5.1 billion. IFRS operating profit was up quarter-on-quarter, but that includes a gain on step acquisitions of JPY 2.3 billion as a result of the acquisition of all the shares of IRIAM.

This slide shows more detail on our results. Here we have more details in the financial results summary by segment. I will share more detail on each business later in the presentation, but each business is showing solid performance. The sports business had an operating loss of JPY 0.3 billion, but this was due to Tokyo 2020 being held at Yokohama Stadium leading to fewer home games for the Yokohama DeNA BayStars. I will share more details later.

This slide shows our cost and expense breakdown. One item to mention here is the sales promotion and advertising expenses under SG&A. This had been stable at JPY 2.8 billion or JPY 2.9 billion, but then was JPY 3.9 billion in Q2, which is an increase of JPY 1 billion. This was mainly due to the marketing costs for new game titles. I will share more details later. Recently, we have been endeavoring to share our thoughts on our long-term portfolio and corporate value creation. DeNA is working to evolve into a new unique kind of tech company, working to entertain and to serve through our businesses and encouraging synergy between the 2 approaches.

We've also revamped our mission, vision and value. We aim to form an earnings base on these 2 approaches and challenge ourselves to achieve leaps and growth. This includes, for example, the global launch of our live streaming business and new genres, specifically the company IRIAM that we recently acquired. We will invest in relevant areas and proactively consider M&A. Now let's look at the financial highlights. We are using our healthy financial base for new growth investment opportunities to grow corporate value. Going forward, we will make proactive use of our balance sheet, including debt to capture mid- to long-term growth opportunities.

We aim to grow our businesses in the future. So we want to proactively pursue opportunities in those businesses. To highlight recent updates, IRIAM and Nippontect Systems became subsidiaries in Q2, which was a change from the state as of the end of fiscal year 2020. We also completed the share repurchase program with a maximum of JPY 14 billion total in August 2021. Now that I have given the big picture update, I would like to talk about each of our businesses in more detail. First, under Entertain, I'll start with the game business. We made progress in new titles in Q2. We are expecting full contribution to virtual currency consumption from Q3 onwards. While we are seeing solid performance, Q2 is a decrease on a year-on-year basis. This is due to the fact that we had the expansion of new titles in Q2 fiscal year 2020. So the year-over-year profit change was mainly due to the decrease in top line. In any case, the game business is immature business. We need to invest to create new hit titles though we are working on streamlining initiatives, such as those for our organization to enhance the earnings base.

As you can see, we had 2 new titles come out in Q2. We are pursuing a pipeline strategy focused on major IP for the global market using DeNA established core competencies, including our development and live operations structure in Japan and China, partnerships with IP holders and global publishing. We had 2 titles launched in Q2, and they're off to a good start. The first is Toho Danmaku Kagura which was launched on August 4, 2021, and has achieved 4 million downloads. We also have the exciting major title, DRAGON QUEST The Adventure of Dai: A Hero's Bonds, which launched on September 28, 2021. This is a global title available in Japanese, English, French and traditional Chinese. As of the end of October, the game has 5 million downloads.

We will continue to work on creating new titles, but I also want to mention our existing titles. DeNA has a core competency in steady live operations and being responsive to users to create new value. I have mentioned these strengths previously. One excellent example of this for the game business is Pokémon Masters EX. This game has returned to growth 2 years after launch due to our live operations efforts. This is a partnership title with the Pokémon Company. It is available globally currently in over 70 countries and regions. It has over 30 million downloads. And as you can see, the revenue is split about 50-50 between international and Japan making this a true international game.

Please also see the graph on the right to see the impact of our live operations efforts. This chart compares the months from April to September for 2020 and 2021. And for each month, the virtual currency consumption in 2021 was higher. We paid careful attention to the desires of our core players and we did major updates, implemented content, added new chapters and ran events and optimization efforts. All of these efforts built up and were received positively by the core fan community. That helped to grow the user base and establish a positive reinforcement cycle. I believe this is a DeNA core competence that we can use in our other businesses, such as Pococha. This excellent result we were able to achieve in a game title, especially a major title like this with great proof of DeNA's abilities.

Now I would like to discuss the live streaming business quarterly results. First, let's look at the segment highlights. There are 2 updates. Pococha Japan saw good revenue growth in Q2. And while the scale is smaller in comparison, IRIAM became a wholly owned subsidiary in August and began contributing. Pococha Japan is currently in the growth phase. And in addition to aiming to further grow and enhance the service, we are also proactively investing in a global version and new genres. Now I would like to touch on each of our initiatives. First, I will discuss Pococha Japan.

We are continuing to acquire more viewers effectively through contribution from digital marketing and other initiatives. We are also seeing steady growth in highly active users, both broadcasters and viewers. And as you can see, this has led to increases in the retention rate and monetization ratio. We also have 3.21 million downloads as of September 30, 2021. So this new business continues to establish itself. As I mentioned, in the game business segment, we are doing well in Pococha to create a good community for people. We open and collaborative with users and take in their feedback to make a virtual space that is even more welcoming. Next, I will discuss new genres.

We are pursuing initiatives such as IRIAM with a view to genre diversification and market growth. IRIAM saw continued growth, including achieving 440,000 downloads as of September 30, 2021. This service has been run by an excellent team. And going forward, we will share our live operations know-how and management resources to achieve further growth. The service has seen good growth to date, and I expect to see continued growth in the future. We have previously discussed the global version of Pococha.

The U.S. version launched in May 2021, and we have seen good initial trends with users responding to our efforts. We started in the U.S., but we plan to launch service in English-speaking regions in stages, while refining the growth strategy and identifying priority launch regions. The broadcaster and viewer DAU continue to grow and we have seen good activity trends, including view time and broadcast time. In the U.S., we are seeing the same phenomenon as for our successful Japanese version. We expect that we will see the formation of a highly engaged community, which is essential for service growth and structural strength. We are also making future improvements for the region, specifically improvements for the U.S. We are investing in building the structure and marketing required to grow the U.S. service while diligently performing cost benefit analysis. That concludes our initiatives under Entertain. Now I will move on to Serve. First, I'd like to discuss the sports business. In Q2, we had Tokyo 2020. And we had fewer home games for professional baseball in Yokohama Stadium than usual. Last year, in Q2, we had 35 games. But this year, we only had 21. So over a dozen less. This impacted us and made our revenue lower for this business.

However, we received compensation from Tokyo 2020 for the operating profit side based on the expected operating profit for the sports business. Compared to last season, with the major COVID-19 impact, we saw a significant recovery this season despite the ongoing pandemic. We have streamlined our structure. So next year, while we do not know what the situation will be with COVID-19. If the restrictions on attendance are lifted, our business will return to its previous state.

Basketball is another important sport and the B.LEAGUE 2021 to 2022 season started at the end of September. So far, our team is doing well. In the sports business, we also look to the community. We use our sports IP to bring energy to the region and expand our business into that real space. This is unique to our sports business. We are making steady progress in using our core competencies and collaborating with stakeholders to take steps to evolve to fit the post-COVID-19 world and create excitement in communities not limited to our current business. I plan to continue these initiatives.

More specifically, we have online Yokohama Stadium and a new online initiative is the BayStars Prime Camera powered by au 5G app in partnership with KDDI, which allows fans to view the games from multiple angles, such as the bench or other player angles. This is one example of the new initiatives we are proactively pursuing. We also have established Yokohama in Kanagawa as our home base centered on the BayStars and pursue initiatives in this home base.

We do not limit ourselves to just initiatives with the Yokohama DeNA BayStars, but also include the Kawasaki Brave Thunders and our capital alliance partners, SC Sagamihara. This covers baseball, basketball and soccer. All of these sports are part of a partnership agreement with NEC to explore using ICT in our professional sports clubs and stadiums and arenas. Going forward, Kanagawa, Yokohama, Kawasaki and Sagamihara will all serve as basis for our real sports business initiatives that use ICT. Through these initiatives, we hope to bring DeNA's vision for smart cities to fruition.

Next is our health care business, which has seen solid performance we made Nippontect Systems, a company with dementia-related services, a wholly owned subsidiary. In September 2021, we started a trial with the Toyama police on the service MENKYO, which is a digital transformation of the dementia test for elderly drivers seeking driver's license renewals. We also have our partnership with Dai-ichi Life Holdings where we have launched 2 services, Haretoke and Karadamo.

Under our mission, making the shift from sick care to health care and lengthening healthy life spans, we will continue investing appropriately for growth and aim to achieve meaningful profit for the health care business within the next 3 years. Our various goals to achieve this mission are showing good progress, and we're excited about the potential for this business. We have our businesses under Entertain and have added Serve to that. Through the pursuit of these businesses, we will aim to achieve mid- to long-term growth and form our long-term portfolio and raise our corporate value. We will keep this image in mind and, of course, aim to achieve quantitative results, but also work to deliver results in the mid- to long term. This concludes my presentation. Thank you for your patience and your attention.