DeNA Co Ltd

TSE:2432

Earnings Call Transcript 2020-Q3

[Isao Moriyasu, executive]

[Interpreted] Hello, everyone. I would now like to start the DeNA Q3 Fiscal Year 2019 Operating Results briefing. First, I'd like to discuss the financial results summary. This quarter, there are 2 main points I would like to discuss. First, as you can see, we had an IFRS operating loss of JPY 49.2 billion. We recognized a major impairment loss this quarter. I will discuss this in more detail on the next page.

Now on to my second point. For non-GAAP operating profit, Q3 was negative, the same as last year, with the Sports Business being in the off-season. However, looking at the cumulative performance for this fiscal year, we only have JPY 100 million. We have not disclosed a forecast for financial performance for Q4. But we expect that for the full fiscal year, we will have an operating loss on a non-GAAP basis as well.

Next, I would like to discuss the impairment loss. Given the current situation in the Game Business, we have taken a conservative stance in our implementation of accounting treatment. The impairment loss totaled JPY 49.4 billion and was primarily related to assets in the Game Business. This impairment loss is a onetime loss, with no expected cash out or impact on our financial position.

Looking at the post-impairment balance sheet. We have various assets on the books. We have JPY 86.4 billion in cash and noncurrent assets such as property and equipment and goodwill. Most of these are related to the Sports Business, primarily baseball, which is seeing growth. So we consider these to be good assets. We also have assets under equity method affiliates and other noncurrent financial assets. This is mainly our shareholdings in Nintendo and Cygames. And both of these are low-risk assets.

Yesterday, we announced the merger of the taxi dispatch app MOV with the JapanTaxi business. From our perspective, there are 2 main takeaways from this announcement. First, JapanTaxi has a network of 70,000 taxis throughout Japan. This is a very strong network. Meanwhile, DeNA and MOV have strengthen technology and the ability to use that technology to create services. So this is a very complementary partnership. The other main point is that in the taxi dispatch app business, scale is very important. This is true, both in terms of the number of taxi vehicles and the number of users. Combined, we will have over 100,000 taxis in our network. And together, our apps have over 10 million downloads.

Economies of scale will work well for us. And I believe that working together, we will be a strong team today. Going forward, we will be discussing how to merge the services and the schedule. Our focus will not just be on taxi dispatch apps, but will also include the future self-driving era and other mobility services. I'm confident that we will be a major player in the MaaS space going forward.

Next is the financial results summary by segment. One important point to mention is the Game Business performance. Game Business revenue was down, and operating profit was down from JPY 3.5 billion last quarter to JPY 2 billion in Q3. For the Sports Business, Q3 is the off-season. But for this fiscal year, we held matches for the Climax Series at home. So we had 3 games held in Q3. This led to revenue being higher and the loss less on a year-on-year basis.

Even looking at the cumulative Q1 to Q3 performance, the Sports Business had a strong showing for both revenue and operating profit growth. Next is the IFRS cost and expense breakdown. Up to this point, sales promotion and advertising expenses had been trending at somewhat above the JPY 2 billion level, but this quarter, it was JPY 3.6 billion. This was mainly due to the fact that we have a new app title in China, and in Japan, it was the holiday season, so we used sales promotion and advertising expenses primarily in the Game Business.

Now I would like to discuss our future approach. This is not our mid- to long-term approach, but rather what we plan to do for the next year or 2, more of the short-term view. Given our current performance situation, we have 3 main approaches: first, the Game Business. We had a major impairment and the Game Business earnings base has weakened. So we need to strengthen the core Game Business earnings base.

For the Game Business, as I have mentioned previously, we are working to maintain the performance of existing titles, but we expect they will continue their declining trend overall. We will try to reduce fixed costs while working to maintain their performance. But when thinking about how to strengthen the earnings base, it's essential to get new hit titles and achieve growth. We do not plan to change the overarching approach that we have had to date for the Game Business. Our strength is our strong relationship with IP holders. And our license to publish and our team to develop games in China. We will use major IP to make games in Japan and China and launch the games globally for users around the world. That will continue to be our approach for this business.

In the new business areas, our aim has been to make the next business pillar to add to our existing Game Business and Sports Business pillars. And we have been working towards this goal for the last few years. I will cover how we plan to optimize our approach in more detail in a later slide.

Our third initiative is to review all our businesses and functions, including the corporate and common departments to reduce our fixed costs across the company. This fiscal year, we expect to have an operating loss on both an IFRS and non-GAAP basis. But by pursuing these initiatives, we aim to achieve a return to profitability for both measures next fiscal year.

Next is the Game Business. Virtual currency consumption showed good performance. In particular, international app now has a higher percentage of the total than before. Mario Kart Tour contributed for the full 3 months of the quarter. And we also saw the launch of Slam Dunk in December in China, which had some contribution.

For Slam Dunk, it has only been a little over a month since the launch. But we are on track versus our initial plan. Meanwhile, on this slide, we show the virtual currency consumption per title organized by release timing on the left. Existing titles that we launched several years ago are in a declining trend, and new titles are making up the difference. However, looking at the operating profit many of the older titles tend to have higher profitability. So even though virtual currency consumption is flat to a slight increase, we are seeing a decline in our operating profit for the Game Business as a whole.

We also had marketing expenses for new titles and the holiday season, so higher fixed costs for the quarter. This led to a decline in operating profit quarter-over-quarter of JPY 1.5 billion.

Looking ahead to Q4, typically, the beginning of the year holidays show strong performance. And we have multiple strong existing titles with anniversaries in Q4. So we expect top line to grow. Also, marketing expenses should not be as high as they were in Q3. So we expect operating profit to return to Q2 levels in Q4.

Next, I would like to talk about our approach to investment in new business areas. Of course, we want to create a new business pillar to join the Game and Sports Business pillars. That hasn't changed. And we will be continuing our investment. But we did review our approach and reorganize our investment efforts into a few different categories. The first approach is the method we have used to date, where DeNA independently invests in promising businesses with the aim to grow them. We will continue this effort. We will ensure this is disciplined investment, and this category will include focus areas such as Pococha and social live streaming services and insurance integrated with wellness programs.

The second category includes businesses where it may be taking longer than we anticipated to achieve profitability or perhaps there are more costs than we anticipated. Or there is a good opportunity to work with a partner to accelerate growth in a business. We have some businesses and services that fall into this category. For these businesses, we will explore using external capital and reducing our cash expenditure or deconsolidating these businesses. We will be even more proactive than we have been in exploring these options. The third strategy is about sowing seeds for future businesses.

Last year, we established the Delight Ventures Fund, and this fund is proactively investing. Exciting new ideas from inside DeNA can be incubated through this fund. So looking at the whole picture, while we are still in the planning stages, for fiscal year 2019, our initial forecast was to have an approximately JPY 10 billion operating loss, and we expect we may be a little higher than that. But for fiscal year 2020, we are working on a plan to significantly improve the operating line performance.

Next, on Slide 10, we have the financial results forecast and dividend. As we have not disclosed a forecast for fiscal year 2019 performance, those sections are blank. But as I mentioned earlier, we expect the IFRS operating profit line and below to be a loss. For the dividend, as per our dividend policy, we expect to pay JPY 20 per share.

Finally, I would like to share the status of our share buyback. As of the end of January, we have spent about JPY 22.5 billion. That is our progress so far. The program is scheduled to continue until the end of April.

This concludes my presentation. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]