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Edited Transcript of 4751.T earnings conference call or presentation 27-Apr-17 7:30am GMT

Thomson Reuters StreetEvents

Q2 2017 CyberAgent Inc Earnings Presentation

Tokyo Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of CyberAgent Inc earnings conference call or presentation Thursday, April 27, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Presentation

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Operator [1]

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(Spoken in foreign language)

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Unidentified Company Representative [2]

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(Interpreted). Thank you for coming and joining us as we announce the second-quarter fiscal financial results. I know you're all very busy, so our fiscal year begins in September. So we just finished -- it ends in September, so we just finished the first and second quarter.

In March -- January to March quarter, if we look at the entire quarter, we -- it was a very good, steady quarter. Every year or -- it's especially true of our advertising business, but at the end of March, our clients, advertising clients, their fiscal year ends in March, so usually we see a higher growth in March. So we tend to see a rise in March, but we have seen the highest growth in our history.

In terms of OP, of course it's still an upfront investment period for AbemaTV, but if we exclude that, if we just look at the existing business, we have -- just looking at the existing business, we marked record high sales in OP. And with AbemaTV, it's -- we just celebrated the first anniversary of AbemaTV. It has grown steadily and I will go into detail later.

And as I mentioned about the advertisers' financial year ending in March, so it was a great quarter in terms of ad business for us. And with respect to the game business, of course in addition to the existing games performing well, we just released in March BanG Dream! Girls Band Party, so this became a new hit. So this has actually become a key title for us, so in the future this will probably contribute significantly to the growth of the game business. So this is as the shift in sales.

So as I mentioned, it was an upfront investment period and also the game business, there is higher volatility that is widely assumed or set, but we feel that it is very important to have long-term stability, so we are going to continue to expand our businesses.

And with respect to OP, as I mentioned in the very beginning, it was the highest OP if we exclude AbemaTV, so you can see that that is true here. So we did JPY13.7 billion in OP of existing businesses, and AbemaTV was minus JPY5.8 billion, which puts us at JPY7.9 billion OP for the quarter.

With respect to SG&A, as you can see here, if we look at the total SG&A, it didn't really change since the previous quarter. Number of employees, we have more than 4,000 employees now. We have 4,153, and in April this year we just welcomed 301 new employees. So we will be seeing more employees in the future as well.

If we look at -- this is a PL. As I mentioned in the previous announcement of the first-quarter results about the final profits, it's really difficult to generate final profits, and of course AbemaTV, although we have invested 60% of AbemaTV, we are actually investing 100% into AbemaTV, and side games, actually we don't have -- we only have minority interest in that, so our profit attributable to shareholders apparent is affected by these factors.

But, as I mentioned in the first-quarter financial announcement, we are setting the DOE at 5%. So if we look at the special losses and special profits, even if there are special losses and special profits, we will continue to set DOE at 5% as a guideline.

And this is the balance sheet. There are no major changes here.

We have six months left, but if we look at the business forecast for the full year, as I have already mentioned, this year is an upfront investment period. So OP is JPY28 billion; that is the forecast, as we've already announced. And if we look at the progress in comparison to our fiscal-year forecast, we are generally at 50%. It's just the OP that has fallen behind, but, as I mentioned, it's hard to end up with final profits, and also we have special losses. But we hope to actually meet our forecasts in the end.

If you look by business, the progress in comparison to -- is actually around 50% for each business. So it's on schedule, so even if we look at Internet advertising, game, and media. So we've already done more than half of the year now, so it's a little bit more than -- it's a little bit higher than 50%.

Now if we can look at individual businesses, first of all, Internet advertising business. This has been the case for a while now, but we have been doing very well. Of course, it's the highest in the past, so we did JPY52.5 billion, which is the highest ever for us. In this graph, if we assume 2012 as 100, this is our growth rate. So you see how our sales growth far exceeds the market growth.

This is because smartphone assets grown and we have been able to keep apace with that. And this is the shift in smartphone ad business. If you look at 2011, it's almost zero, and in the past five or six years, we've actually won majority share, so we've actually expanded quite quickly. So that is our forte, our strength.

And if we look at the most recent results, this is from 2013, we didn't even have this in 2012. So it's only been about four years, but if we look at the infield ads and video ads, these have grown quite significantly. So this video ads, this quarter we've grown significantly this quarter, and this is due to YouTube and Facebook, so there's -- they hold a majority. AbemaTV, we hope to increase sales in AbemaTV as well. So, we believe that we can expect high growth. We just started.

If we look at the OP for the Internet advertisement business, of course the agency fee is actually set, and so -- and I have explained it's been very difficult to actually achieve high OP because of the set margins, but we have actually been able to grow this business segment into revenue stream. If we look at the OP margin, as you can see in the mid- to long term, it's stayed around 10%. So it will probably remain around there; that is the basic level.

Next, onto the game business. The game business as well, unlike what you might think of games, if one game hits, it doesn't go up and then suddenly come back down, but usually when that title hits, then it actually stays on top for a while. So it has a long life cycle. But if you look at the graph in different colors, it actually shows when the game was introduced.

And as you can see in the most recent quarter, the past games have remained the same level, but 2017 we've only -- it's only been three months, but that's added to the business sales. BanG Dream!, the one we released in March [16], that is actually a big hit, so we believe that we will be entering a new growth phase once again.

This is the OP for the game business, so we have advertising and promotion and also labor costs and bonuses. So these will affect the OP, but this is the OP for this business. This is the sales ranking per game, (inaudible) here are some of the key titles.

In addition to that, we have added BanG Dream!, which was just released in March. So, of course, this is only increased six months of the fiscal year, but it's been one month since we released it -- released this game and it's become quite a significant hit. And this is the game in question. We actually distributed the animation series on AbemaTV and then released the game afterwards. But there were a lot of pre-registrants as well, and once we released it, it has become a great hit.

Third quarter and onwards, we have already released Black Rose Suspects and Singing in a Twilight World with You. Those two games aren't a big hit yet, but we believe that they will become quite a significant title. And then, there are some other titles in the works, so we hope to continue to make these a hit as well.

In addition to those efforts, for example, Granblue Fantasy the Animation, we will be -- we have been airing that on AbemaTV. It has gained a lot of popularity, and also Bahamut Virgin Soul and 100 Sleeping Princes and the Kingdom Dreams Short Stories, those are also offered us animation, so we are actually nurturing these games as our original IP.

Next, the media business. Of course, it is an upfront investment period for AbemaTV. So, of course, that understanding we had internally, but Ameba Blog has grown once again, and also matching application has also grown internally as well. So these have become new revenue streams and we have been able to grow once again. Matching application, we are not disclosing the figures for that, but it has grown to about JPY200 million to JPY300 million a month, so we believe it will continue to grow. We improved the operation of the blog, so the Ameba app have actually gotten back in form, so the renewal has worked well.

Next, I mentioned the matching application being JPY200 million to JPY300 million a month, but Tapple is the main service. And as of April 12, we have 40.86 million matches. So matching means both sides like each other. So we've seen 40.86 million matches. So we hope that this will help contribute to the lower birth rates and people getting married later.

So AbemaTV, we started on April 11, so we just celebrated our first anniversary and we actually have special programs celebrating our anniversary, so this week and also [golden] week next week is going to be the largest peak. First of all, AbemaTV, having done this for a year, we've actually exceeded [60] million downloads. Last year, we were recognized as the best app by many awards, but it's actually excellent to be able to name the best app, not the runners' up or a special award, but for most rankings we've been awarded the best. We've been recognized as the best app.

AbemaTV, many people always ask me how is it going and they say they don't understand how it's doing, so they want to ask the President. But it has grown significantly well. Right now, the MAU is about 7.5 million, but in April it will be more than 8 million. And this also grows at the beginning and the end of the year. But we are actually getting closer to those figures.

And the weekly active user is around 4 million, but this will also go up in April. The WAU, when it reaches 10 million, it will be a mass media and we want to start monetizing. But this is just my guess, but the 10 million, I don't think that that's a wrong target to have. And in addition to that, suddenly something might -- it's not like we will reach 10 million overnight, but by operating the service and making it growing steadily, we don't think that it will take -- it won't take too long. So continue to grow year on year, we believe that we will be able to hit 10 million.

Having said that, but external indices, not our indices, but the video service active user numbers, when external party calculates that, AbemaTV -- unique user-wise, AbemaTV was ranked number one. Of course, it's free, so it would be number one, but the market, we are actually pioneers and we are -- the market wasn't there; we are creating the market. So we are not trying to steal market overnight in one day, but we hope to continue to make steady progress.

So this is the member attribute; this is not so different from before, but tens, 20s and 30s. 70% of the users fall within that age group, so many young people are using this service. And as we have said, the ratio of women were lower and hasn't changed that much yet. So we want to get to 50-50 in terms of male-female ratio.

So the programs that we are planning, and also the men tend to maybe use new products or new apps sooner than maybe women, but we believe that once women try the app, they will continue to use the app. So we hope to continue to make efforts to increase the female ratio.

AbemaTV over the three months and in April, here are some of the topics. We actually in January, at the beginning of the year, we did a lot of ads and TV commercials, so we grew significantly there. And we thought that it would come -- the growth would come down a little bit, but in February and March we've actually added new programs, so we've seen steady growth. And in April, we have actually also been able to raise the base.

AmebaVideo, actually the other version was just made available today. So today is the launch date, basically, for AmebaVideo. But now, portrait view will help grow the AmebaVideo service.

With respect to portrait view, we released this maybe a few weeks ago, but the numbers that we've seen, overall users, we believe that the number of users and the time that they spend watching has grown by 15%. A lot of people have thanked us for making it for the core offering as a portrait. A lot of users didn't like to have to watch on landscape, so we received a lot of feedback and they thanked us for offering this new feature.

AmebaVideo was just released today, so today is the starting point. So if you are a member, you can watch as many videos as you want. Some of the videos, 1/5 of the videos, are available free of charge. So this is one of the areas that we will continue to spend a lot of time and effort on, so this is what the AmebaVideo looks like. So 1/5 of all programs are free of charge; 4/5 is you have to be a paid member.

And I mentioned the low female ratio and we wanted to increase that. But this is a new program, You Can't Fool Me, Mr. Wolf; the young women really like this program and it was a great big hit. So a lot of young women started to watch this program, and they also watch linear broadcast and also timeshift of AmebaVideo as well.

From April, we've also started the Abema Golden 9. There's a lot of key contents available from nine o'clock, so we wanted the users to get used to watch AbemaTV from nine p.m. because there will be something interesting going on.

Another news program that we've actually added is a popular Hodo Station, which is actually available as a delay, which we just started offering. So one year ago, I thought maybe we can start offering Hodo Station and many people were surprised by my comment, but it's a high-quality TV program, and a year ago it was unbelievable that this would be offered on Internet. But now, they recognize us as the media that would be worthy of broadcasting this. And also in addition to that, we have started recruiting new news presenters for AbemaTV.

So we've celebrated our anniversary and we've received many questions about the competitors. We haven't seen any competitors and we don't think that we will continue to witness any [regards] of any competitors. It's actually very difficult to have to create content and have to invest into content, but as we mentioned, we are frontiers and we've seen that we don't really need to invest heavily in content, so we actually can go at our own pace.

But our competitive advantage, especially in Japan, is that the TV quality and the procurement ability to procure TV content, or actually number one, especially in terms of the news and creating TV programs, there aren't any companies that can actually create high-quality TV programs, and we need to be up to procure content at the same level of quality, and even if it's sports or movies or all of these contents are made available on the TV network, and so it needs to be available on the TV channels first. But this in the service, content quality, service quality interface, we need to actually offer that at a high quality as well, so you need to be able to do both, and an Internet company is the only company that would be able to do that.

And, of course, I am -- we are going to be investing JPY20 billion and so that's a significant investment, and there is no company that has -- abroad or even in Japan that has succeeded in doing that. So, you need to have the financial stability to invest, and so as a result we don't think that -- we believe we are the only company that is able to do that.

So we will continue to expand this business model, and we think that there won't be any competitors and that we are only fighting ourselves, basically. So we will continue to make steady efforts to grow this business.

So, as I mentioned, we wanted to become a mass media. So one of the criteria is 10 million WAU, and until we reach that point, right now we are at 4 million and we hope to continue to grow that number year by year. Especially younger generation, it is said that they no longer watch TV, but they are watching AbemaTV, so we have a lot of younger users. And, of course, that will make it easier for us to secure better content. And by having better content, we can actually get more younger audiences, so that we hope to create a positive spiral, positive circle -- circulation.

So right now, advertising and also membership is the key monetization. But we want to explore other revenue streams once we actually receive a lot of younger audience. The TV networks are also doing something similar. But we have just started on exploring other revenue streams.

So just to recap, in the mid to long term, AbemaTV will be a mid- to long-term key pillar for us. So right now, it's a period to actually help the service grow. The upfront investment period in terms of the ad business, it has done very well, so we hope to continue to grow at a higher rate than the market growth.

And in terms of the game business, it's hard to tell whether a game will become a big hit or not. BanG Dream! has become a great hit, so we are actually -- we feel a little relief, so we will continue to develop a new hit and also continue to upgrade the existing title as well.

We will continue to invest in media and smartphone, but right now we are starting to invest in the video business. So we will continue to make a sufficient investment here to accelerate our growth in the future.

And this is how we introduced this slide in the first-quarter announcements. The DOE, we hope to actually maintain it at 5% or higher, so, as we mentioned, the final profits are not easily achievable and also we are making upfront investments right now. So right now, it's intentional, but the OP margin has come down, but if the DOE comes down for some reason, we will actually increase our treasury stocks and do share buybacks to help offset that. Thank you very much for your time today.

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Editor [3]

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The portion of this transcript marked (Interpreted) was spoken by an Interpreter present on the Live call. The Interpreter's services were provided by the Company hosting the call.