Full Year 2020 DeNA Co Ltd Earnings Call
Tokyo Jun 5, 2020 (Thomson StreetEvents) — Edited Transcript of DeNA Co Ltd earnings conference call or presentation Thursday, May 14, 2020 at 7:00:00am GMT
TEXT version of Transcript
* Isao Moriyasu
DeNA Co., Ltd. – President, CEO, Head of the Game & Entertainment and Representative Director
Isao Moriyasu, DeNA Co., Ltd. – President, CEO, Head of the Game & Entertainment and Representative Director 
[Interpreted] I would now like to start the DeNA Fiscal Year 2019 Operating Results Briefing.
First, I’d like to discuss the financial results summary. Revenue was JPY 121.4 billion, which is 2% down from last fiscal year. We recognized a major impairment loss in Q3, and this had a major impact on our full year IFRS operating line, resulting in a loss for the fiscal year of JPY 45.7 billion. For non-GAAP, we had an operating loss as well amounting to JPY 1 billion.
Next is the financial results summary by segment. For the Game Business, we had a slight increase in full year revenue on a year-on-year basis. So revenue was up, but we had a decrease in operating profit for this business year-on-year. If we look at Q4 alone, the Game Business showed solid performance with revenue and operating profit increasing, both on a quarter-over-quarter basis and year-on-year basis. For the Sports Business, we had been expecting strong performance for the full fiscal year with increasing revenue and operating profit. But as I will explain in more detail later, we were impacted by COVID-19. So we ended up having an increase in full year revenue, but a decrease in profit year-on-year. For our initiatives in New Businesses, which includes Automotive, Healthcare and the New Businesses and Others line, we have been investing more proactively. So we ended up having larger losses this fiscal year than in the previous fiscal year.
Next is the cost and expense breakdown. Please see this chart for more information about our cost of sales and SG&A trends. As we have had a number of financial events during fiscal year 2019 as well as into the beginning of the current fiscal year, I would like to discuss our financial highlights. First, our cash position as of March 31, 2020, was JPY 73.5 billion. I mentioned earlier that we had a significant operating loss for fiscal year 2019 due to the recognition of a significant impairment loss, but this did not involve any cash out. So we had solid free cash flow for fiscal year 2019 at JPY 4.2 billion.
Next is our non-current assets or what we consider are good assets on the book. Such items include our Nintendo shares, which are recognized on the balance sheet at their quarterly market value, and our 20% share in SI Games are equity method affiliate. This company is unlisted, and it is recognized on our balance sheet at book value.
Also, we have been implementing a major share buyback program since May of last year. This program was concluded as of April 30, 2020. And cumulatively, we purchased JPY 36.3 billion worth of shares, which was 21.92 million shares in total. As we shared in a separate disclosure today, we have decided to cancel most of these shares. We plan to cancel 20.6 million shares, which is 13.66% of the issued shares before cancellation and represents the majority of the shares repurchased through our buyback. When we announced our share buyback program in May last year, we set a maximum of JPY 50 billion for the program. As you can see, we only ended up using JPY 36.3 billion of that amount.
Going forward, given the uncertainty about COVID-19, among other factors, we have decided that we need to ensure we have a good capital base, and we will not implement any additional share buybacks now. However, I would like to reiterate that our thinking about share buybacks in general has not changed. We consider various factors, including our cash on hand, the state of our businesses and the share price, and if we feel that a share buyback is appropriate then we will be flexible about implementing such a program.
Another update is actually from the fiscal year 2020 as it was implemented in April. We feel that it is important to have good cash reserves on hand, particularly considering COVID-19, so we decided to borrow JPY 20 billion in long-term funds.
Next, I want to discuss the impact of the spread of COVID-19. For our business overall, we have transitioned to working from home from the early stages of the spread of the disease, and about 98% of our employees are now engaged in their duties while working from home.
Now about the impact on our businesses specifically, the main business that is seeing major impact is Sports. Normally, the baseball season begins in late March, but this year, the season has not yet begun. To share the most recent information, the 12 baseball clubs are working together and aiming to start the season sometime in mid- to late June. However, it continues to not be clear when games may actually begin or how games would be held. If, for example, the current state does continue, and we are not able to hold any games for the whole fiscal year, then the worst-case scenario is that we will have quarterly operating losses at the baseball off-season level for the Sports Business.
For our other Internet services, such as games and social live streaming services, we are not seeing any negative impact. Our financials are as I described in the previous slide.
COVID-19 has impacted all of us in a variety of ways. We, at DeNA, want to do our best to support our customers, broader society, our employees, and other stakeholders to get through this time safely, in good health and as well as they can. And here, I want to share some of our activities in this regard. We are also posting information on our website, so you can look there for information about any future activities as well.
Next I would like to talk about our future approach. I shared these 3 major initiatives at our previous operating results presentation. We plan for these 3 major initiatives to continue to be our focus for the next 1 to 2 years. As I have mentioned, our Sports Business, in particular, has been significantly impacted by the spread of COVID-19. So while we will continue to aim to achieve a return to profitability on both an IFRS and non-GAAP basis, as I talked about during last quarter’s presentation, we now understand this goal to be excluding Sports.
Now I would like to present each of our individual businesses. First, the Game Business. We had strong Q4 performance in the Game Business. Our virtual currency consumption and segment operating profit grew not only quarter-on-quarter, but also year-on-year. Some factors include contribution from key existing titles, such as Granblue Fantasy. A number of our key existing titles have anniversary events during Q4, and they exhibited strong performance. We also had contribution from the new game, Slam Dunk, that was launched in fiscal year 2019 in China, which had a solid start. Our half-anniversary event for PokéMon Masters was also a success. So we had multiple factors that all combined to contribute to this strong quarterly performance.
Now for Q1 of fiscal year 2020, we expect to see factors such as the usual seasonality. But because this Q4 performance was so strong, we expect a larger-than-usual drop in Q1, resulting in lower performance than usual. For this reason, we expect that Q1 will be a year-on-year decline.
Our China business showed strong performance, and I would like to take some time to talk about it in more detail. We entered the China market in 2006. And over a fairly long period, we invested in establishing a local team and structure there. We now have a team of about 350 people in the country, who can both develop and operate games in China. This is a strong organization. Our basic strategy has been to use our ability to secure IP licenses, especially those from Japan, and then use our local development resources and publishing structure to make games for the China market.
For the past few years, we have been operating at about breakeven. In December last year, we launched the new Slam Dunk game, which produced the results we were expecting, and was proof of the success of our strategy. This game provided full contribution in Q4 that was meaningful both for revenue and operating profit. We will continue to operate Slam Dunk in China in a stable manner. In addition to that, we are also looking to distribute this title to areas outside of China, so that will be an important initiative for us this year.
Now I would like to talk about the strategy and approach for the Game Business overall. Our approach has not changed from what we have described previously. Our strengths include our studios in Japan and China that are able to develop and operate games as well as our long-standing and strong relationships with IP holders built over many years. And we intend to use these strengths to develop major IP-based games in these 2 regions and publish them around the world. We have a pipeline with many new titles planned for launch from around the end of fiscal year 2020 into the next fiscal year. We are going to do our best to create new hits from these titles.
Next I’d like to talk about the Sports Business. Last season was a great season for us, both in terms of the team’s results and in terms of the stadium attendance. Last year, the construction on the right wing seats was completed, and our capacity increased. But even though we increased our capacity, the percentage of attendance compared to capacity actually increased even higher than it had been before we opened up the new seats. It was great to be able to welcome so many fans to enjoy games. This season, the 2020 season, we finished construction on the left wing seats, and we now have a capacity of 34,000 seats. So even more space available for fans.
But unfortunately, as I talked about earlier, it’s not clear when we will be able to start holding games. It is typical in Q4 that we would have some exhibition games and maybe a couple of home games played. But unfortunately, even though they were scheduled for Q4 fiscal year 2019, we were not able to hold these games. This led to a decrease in both quarterly revenue and higher operating loss year-over-year.
In the short term, we expect for things to be tough in the Sports Business. However, when the situation with COVID-19 does get better, we have our newly expanded stadium ready, and we will be able to welcome our fans for games again. To touch on the future for the Sports Business, as I just mentioned, we have finished the expansion for Yokohama Stadium, and we now have a wonderful new stadium facility. We are going to do our best to use this facility and provide the maximum entertainment possible. In addition to that, right next to Yokohama Stadium is the city of Yokohama City Hall district. The city of Yokohama has decided to relocate their city hall facilities, leaving the current city hall district open for redevelopment.
DeNA has been selected as a member of a consortium that will be the plan operator for this development project. DeNA will be working on a live viewing arena and entertainment facility, and this overall project is planned to be opening in 2025.
Naturally, our main focus is on the sports angle, holding games and so on. However, we also want to contribute to the vitality of the surrounding neighborhood and provide delight that is not limited to just holding games. Previously, we talked about our Yokohama sports town concept, and this development project will be an important part of that concept.
Now I would like to talk about our new business areas. 3 months ago, we shared how we reorganized the various initiatives in our business portfolio into 3 approaches with consideration for things like the project timing, characteristics and the project phase. The first approach is to pursue growth ourselves while maintaining disciplined investment. In the second approach, we will work with various external partners, be flexible about capital policy and look for the optimal structure.
For developing the seeds of new businesses, we have set up Delight Ventures, and we’ll use this fund to support business development. Within the first approach, our initiatives in social live streaming services will be particularly important for growth this fiscal year. Pococha is seeing good growth. We have also talked about pursuing insurance integrated with wellness programs, with a particular focus on KenCom. We plan on full-scale development of products to be released this fiscal year. KenCom is a service that targets health insurance societies. And going forward, we plan to work not only with the health insurance societies, but also with the national health insurance providers, and proactively work to provide services.
Under the second approach, MOV was a very important service that we had been pursuing. As we have talked about previously, we have joined forces with the largest industry player, JapanTaxi, to create the largest mobility provider in Japan. This company took on a new name in April, Mobility Technologies, or MoT. They have just kicked off under the new structure.
For fiscal year 2020, our social live streaming services will be particularly important. And I would like to briefly talk about Pococha, which is showing good growth. We have live streamers and listeners, as shown on the graph. We have been able to grow this service in a way that is satisfying for both the listeners and the live streamers. DAU for both live streamers and listeners has been growing steadily. In this fiscal year, we will continue engaging in this service with the aim to create continued healthy growth and establish a solid profit structure.
Finally, I would like to talk about our view for fiscal year 2020. Our consolidated financial results forecast cannot be provided for fiscal year 2020, but we have shared some information about expectations for each of our businesses. In the Game Business, as I mentioned earlier, we have many new titles planned for launch from the end of fiscal year 2020 into the following fiscal year. And this means that contribution during fiscal year 2020 is expected to be limited. This means that contribution for fiscal year 2020 is expected to be primarily from existing titles, and existing titles that are in the growth phase will be important. In particular, this means that our efforts to enhance and grow such titles as Slam Dunk and Pokémon Masters will be important as well as our efforts to further streamline fixed costs throughout the company.
For the Sports Business, as I mentioned earlier, we have been directly impacted by 2019, and there is still much that is not clear. For new business areas, we will pursue each of the 3 different approaches that I described. We will do our best to grow businesses in each of the new business areas. And in particular, we aim to drive growth in social live streaming services. But we will be disciplined about investment, so the total amount of losses should improve significantly. Under Other Income and Other Expenses, we expect to recognize a onetime profit in Q1 due to the transition of MOV into the new structure.
This concludes our presentation. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]