DeNA : FY2017Q2 Results Briefing Q&A Summary

The following is a summary of the key questions and answers from the earnings briefing for the second quarter of FY2017, held on November 9, 2017.

Q1 Why was operating profit for Q2 FY2017 lower than you expected?

A1 The main factor was sales promotion & advertising expenses. Titles such as Gyakuten Othellonia have shown good performance, so we strengthened our marketing.

Q2 Do you have any comment about your impressions of Animal Crossing: Pocket Camp, which has been released in Australia?

A2 Animal Crossing: Pocket Camp is currently only available in one country, and has not been available for very long, so I would like to refrain from commenting. Many articles written by those who have had a chance to play the game have commented that Animal Crossing: Pocket Camp does a great job in recreating the feel of the Animal Crossing series on smart-devices, and that is my impression as well.

Q3 Does Q3 FY2017 guidance for the Sports Business include impact from the Yokohama DeNA Baystars reaching the Japan Series?

A3 The Japan Series games are not treated as home games for the Yokohama DeNA Baystars, so there will not be any significant impact from ticket sales.

Q4 What are the factors behind the expected quarter-over-quarter increase in revenue excluding Sports in Q3?

A4 We expect virtual currency consumption to grow quarter-over-quarter due to the growth in first and second party titles, such as Gyakuten Othellonia, and the usual seasonality in the holiday season. Meanwhile, we also expect sales promotion & advertising expenses to be slightly higher than Q2 levels.

Q5 Are you planning marketing measures to attract sufficient attention for the global release of Animal Crossing: Pocket Camp?

A5 We consult with Nintendo about the start of distribution for each Nintendo partnership title. We feel that Animal Crossing: Pocket Camp has had a strong response on social networks since the start of distribution. I expect that this title will draw sufficient attention.

Q6 Why did you choose to highlight SHOWROOM in your presentation for this quarter? Was SHOWROOM the factor behind the quarter-over-quarter revenue increase in Q2 in the New Businesses and Others segment?

A6 We are pursuing a variety of new businesses at DeNA, and each quarter we highlight some new business-related topic during our operations briefing. Last quarter we talked about an initiative in our Automotive business. SHOWROOM has been seeing steady growth, and we are excited about its possibilities going forward. It is profitable in some months, but at this stage we are prioritizing topline growth, and we will invest appropriately.

The quarter-over-quarter revenue increase in the New Businesses and Others segment was partially due to contribution from SHOWROOM, but there were multiple other factors as well.

Q7 In the Nintendo Alliance, are there possible opportunities for you to expand your revenue sources from initiatives other than smart-device game development?

A7 We have formed a capital alliance with Nintendo, and are engaged in a mid to long term partnership with them. Our initiatives broadly fall into two categories: the joint development and operation of smart-device game apps, and the joint development of the My Nintendo service operation platform. For the latter, we do service development and receive development fees.

Q8 In the E-commerce business, why did Travel revenue not grow very much year-over- year despite the growth in the gross transaction value over the same period?

A8 In the Travel business, we have jumped on the shift to purchase international airplane tickets online, and our gross transaction value has grown. However, we recognize our share as revenue, not the gross transaction value, so the growth rate for the gross transaction value and our revenue will not necessarily match. Recently, we have seen an increase in our handling of products such as LCCs, with relatively low take rates. However, we believe that it is important to first grow our gross transaction value in order to solidify our position as a major online travel business. As our operations expand, we believe there will be greater opportunities to improve our profitability, such as through greater diversification of the products we offer.

Q9 Why did your headcount for Q2 decrease quarter-over-quarter?

A9 During Q2 we sold a subsidiary in Vietnam, which had about 100 employees, to Evolable Asia Co., Ltd. That is the main factor behind the headcount change.

Q10 I believe that your revenue for Nintendo partnership titles has mainly centered on Japan, North America, and Europe, but do you expect contribution from other regions to grow going forward?

A10 I believe your understanding is essentially correct for our results to date. We expect that we will be able to grow the user base in a variety of regions outside Japan, North America, and Europe.

Q11 What are your expectations for New Businesses and Others profitability going forward?

A11 Losses from the Media Business, which is included in this segment, have become limited by Q2. For Q3 onward an equity-method affiliate has become the main entity for this business, so we expect impact from the Media Business on our consolidated operating profit to essentially drop out. For New Businesses and Others overall, we expect to see a level of approximately 1 billion yen per quarter, although that could vary depending on changes to our strategy and initiatives.

Q12 What kind of initiatives could you pursue for the Sports Business during the off season for baseball?

A12 Yokohama Stadium is owned by the City of Yokohama, and operated by our subsidiary Yokohama Stadium Co., Ltd., in compliance with certain requirements. Public and amateur events are also held in the stadium in addition to baseball. There are some limitations to the schedule we can set, but compared to before the TOB we have been able to pursue more opportunities outside of baseball. Going forward, we intend to make good use of not just the stadium itself, but also the surrounding areas to create excitement and energize this area.

Q13 What are your expectations for sales promotion & advertising expenses in Q3?

A13 We expect sales promotion & advertising expenses to be slightly larger in Q3 than in Q2.

Q14 If the decision is made to distribute titles from the Nintendo Alliance in China, would DeNA still receive revenue from backend work?

A14 There have not been any decisions made about distribution in China, so we would like to refrain from commenting at this time.

Q15 In Q3, is it possible that your sales promotion & advertising expenses will exceed your initial forecast, just like with Q2?

A15 We prioritize ROI for our marketing activities.

Q16 Please tell us about your game pipeline for 2H FY2017.

A16 In Japan, we have established a structure that enables us to create five to ten titles per year. However, we are carefully examining quality for all of our titles, and we might delay the launch of a title or do additional development after beta testing.

Q17 When do you expect to see meaningful results from your new business initiatives?

A17 Over the long term, we aim to create multiple new business pillars. We intend to use FY2020 as a checkpoint to confirm our progress towards achieving our long term goals. Net services, for example, could grow faster than we expect. In general, we are working in all our business areas to grow these new businesses into major businesses.

Q18 Are new users for Super Mario Run increasing?

A18 Generally, downloads tend to be strong for IP titles in the early days after launch. For Super Mario Run, I believe we have been able to excite users again through updates and a special price offer for a limited period. Going forward, we will operate the game to allow both existing and new users to enjoy the game.

Q19 How many original titles vs. IP titles will you make?

A19 In the Game Business we are developing about half our own original titles, and about half using IP.

Q20 What are your expectations for browser games?

A20 We are not planning to create any new browser games, so it is key to keep virtual currency consumption from existing browser games at a gradual decline while also achieving steady growth in apps.

Q21 Given that you are trying to increase the number of core businesses, what kind of company do you aim to be going forward?

A21 We are a company that has primarily worked on internet services. The Game Business in particular grew to become our core business, and we intend to strengthen it even further. Going forward, we want to become a company that utilizes the internet and AI to provide delight. We plan to use FY2020 as a checkpoint to confirm our progress towards achieving our long term goals of creating multiple new major businesses.

Q22 Do you have anything you can discuss now about your progress towards the FY2020 checkpoint for your long term goals?

A22 We have five groups of businesses: Games & Entertainment, E-Commerce & Net Services, Sports, Healthcare, and Automotive. For all the businesses outside of Games, we created plans to grow them into major businesses, and are currently implementing those plans. Outside these business groups as well, if there is something with good mid to long term potential, then there is a possibility we will pursue it.

Q23 What initiatives are you pursuing for AI?

A23 In addition to our core competence in the internet, we are working to build our strength in AI. AI will continue to evolve going forward, and we are currently looking into how we can utilize it in our businesses through various initiatives. For example, in the Automotive Business, we have created a taxi dispatch app called TaxiBell, which not only dispatches taxis, but also incorporates an AI-driven demand forecasting system.