CEO Interview Isao Moriyasu, President and CEO June 2015 1. Fiscal 2014 Results Q: Looking back on fiscal 2014, the year ended March 31, 2015, could you discuss the results achieved as well as the progress on DeNA s stated strategies? A: Fiscal 2014 marked a big step forward for us from a strategic perspective. We prioritized two key strategies during the year strengthening our core business in mobile games and pursuing investment in areas with medium- to long-term growth potential. We made excellent progress on the former, recording a significant increase in the consumption of in-game virtual currency in native app games in Japan and internationally. With respect to the latter, we steadily expanded our user base in Manga Box, a digital manga magazine service, and Showroom, a virtual live performance stage, as well as launched new businesses in several sectors. In terms of business performance in fiscal 2014, consolidated revenue declined 21.5% year over year to 142.4 billion and operating profit fell 53.4% to 24.8 billion. Although new games did not fully offset the decline in existing games over the period, efforts to control costs such as sales promotion and advertising expenses were successful. 2. DeNA s Medium- to Long-term Goals Q: Given the progress DeNA made on key strategies during fiscal 2014, where do you see the Group in the medium to long term? A: We aim to achieve stable revenue contribution from existing businesses in Japan and improve international profitability. We hope to do this organically and by leveraging opportunities through the alliance with Nintendo Co., Ltd., announced in March 2015. In addition to strengthening our game business, we will build new business pillars in the medium to long term to boost our portfolio. Q: In the medium to long term, how would you position the game business in DeNA s overall strategy? 1
A: Even in the medium to long term, the game business will continue to be DeNA s core business. Japan, China, and the West, which includes the United States and Europe, are the three key regions in our game business. We have set up teams in each region to carefully identify trends among local players while developing and operating games customized for them. Going forward, we will jointly develop and operate games with Nintendo as well, based on our business and capital alliance. By delivering mobile games using Nintendo s intellectual property (IP) globally, we believe we will be able to tap into consumers previously beyond our reach, which should increase our business opportunities. 3. Game Business Strategy Q: What is the current status of the Japan game business? A: Although the downward trend of the highly profitable browser game business has impacted our profits, we are now in a good position to offset the decline with increased revenue from our native app games and generate stable profits. Q: How are you performing in China? Why do you think DeNA is more successful relative to other Japanese companies in that region? A: During fiscal 2014, we created several hit titles in China. To succeed in that region, we will continue to utilize popular anime and other premium IP as well as leverage our extensive local expertise. Our goal is to achieve sustainable profitability by the end of fiscal 2015 while making further investments in China, which is experiencing tremendous growth. The Chinese market is very unique. For example, relationship building through continuous customer support is essential to maintain long-term user engagement. Game operation methods for mobile games are more readily accepted if they resemble those of online PC games, a genre quite entrenched in the local market. This approach wouldn t work in Japan and the West, and understanding the local market is essential for any strategy to succeed in China. DeNA has local game development, operation and marketing teams in China. We also work closely with premium IP licensors, in Japan and the West, to launch licensed games in China that have a higher probability of success relative to original games. Companies that have such a highly localized team in China, with the ability to secure IP and utilize the assets appropriately, are indeed rare. Q: How is the game business in the West doing? A: In the West, the contribution from new titles is starting to offset the decline of existing titles. We reorganized the studio operations, in the beginning of fiscal 2015, to better align our people to our best opportunities and establish a clearer path to profitable growth. The mobile game market in the West is said to exceed $10 billion. We will leverage our strong production skills, especially in design and graphics, to appeal to users in the West and drive revenue higher. DeNA has studios in Japan, China, and the West, and having local teams is a competitive advantage that enables us to port successful titles to multiple regions as well as acquire global IP. Q: Please describe the business and capital alliance with Nintendo. A: The business alliance consists of two parts: joint development and operation of game apps using Nintendo s IP, including iconic game characters, for smart devices; as well as joint development of an integrated membership service that connects smart devices and Nintendo s dedicated video game systems. The resulting games and service will be available to consumers worldwide. Our goal is to launch the first title in calendar year 2015, with approximately five titles available by 2
the end of fiscal 2016, the year ending March 31, 2017. Both DeNA and Nintendo are already deep into the development phase and expect full contribution to business results beginning in fiscal 2016. I d like to point out that revenue from the titles jointly developed by DeNA and Nintendo will be shared based on the role that each company plays in the development and operation of a game. Roles may vary depending on the title, but for the most part, DeNA will probably handle the infrastructure side of the business, such as server-side technology and analytics. The capital alliance demonstrates that Nintendo and DeNA are committed to each other for the long term. Under the capital alliance, Nintendo acquired 10% of our total outstanding stock, which makes them our second largest shareholder. We also acquired 1.24% of Nintendo s outstanding stock. 4. Business beyond Games Q: Could you provide an update on new businesses and other activities outside the game business? Why is DeNA pursuing new businesses in different sectors? A: Since our inception, DeNA has built its expertise in operating online services. In particular, we are skilled in combining our partners strengths with our own and delivering large-scale services optimized for mobile. By leveraging these strengths, DeNA has partnered with major players in established industries to develop online services. This is in our corporate DNA and will never change. During fiscal 2014, we forged ahead into new markets. In the healthcare sector, we launched Mycode, a genetic testing service based on the results of joint research with the Institute of Medical Science at the University of Tokyo, as well as KenCoM coined from Kenko ( health ) recommendation Media through a joint venture with Sumitomo Corporation. In the lifestyle sector, we entered the curation platform 1 business with the acquisition of start-ups iemo Inc. and Peroli Inc. In the beginning of fiscal 2015, we made a foray into the automobile sector by establishing a joint venture with ZMP Inc. to develop a driverless taxi service. Q: Are there many new business ideas and investment opportunities out there for DeNA? A: The Internet holds tremendous potential in many industries, as its use spreads from desktop 1 Curation platform allows curators to aggregate online content from multiple websites with a specific theme and publish it as a single article 3
computers to mobile devices and IoT 2. I am confident that DeNA can cultivate and maximize business opportunities by teaming up with companies in industries that seek to harness this potential. We will control risk by investing resources prudently in promising areas. 5. Management Structure Q: How did the management structure change in June 2015? A: We aim to strengthen and improve corporate governance. Previously, six directors sat on the Board of Directors: five directors responsible for operations and one outside director. With the approval of shareholders at the General Meeting of Shareholders in June 2015, the Board was reduced to five directors: three directors responsible for operations and two outside directors. By including individuals with management experience in various industries, we achieved greater diversification on the Board and hope to enhance decision-making and discussion at board meetings. Additionally, a higher ratio of outside directors will improve the transparency of management as well as ensure independent supervision. To enable our outside directors and outside corporate auditors to make objective assessments and voice necessary business-related concerns, we will ensure timely sharing of information. We will also set up a framework to ensure objective evaluation of director compensation through our Compensation Committee, consisting of outside directors and outside corporate auditors. Q: What kind of role do you expect outside directors to play? A: In addition to supervising management duties of our executive officers, outside directors will be expected to provide constructive feedback and recommendations on our businesses and policies. Rehito Hatoyama, a managing director at Sanrio Company, Ltd., who has been reappointed to the position of outside director at DeNA, has been advising us on our global business and the use of IP. Hiroyuki Otsuka, a newly appointed outside director, brings extensive experience in corporate management as an executive at a major international private equity fund as well as an outside director at several companies. He has considerable insights into a wide range of industries. We expect that he will offer focused advice as we extend our Internet business into various industry sectors. 6. Return to Shareholders, Application of Capital Surplus Q: What are your thoughts on the balance of dividends and internal reserves? A: DeNA s primary focus is to enhance our corporate value through continual growth. Our objective is to consistently distribute dividends while investing in growth opportunities. The allocation of both capital and human resources, to increase our corporate value, is prioritized in the following order: 1) to establish competitive advantages in the game business; 2) to accelerate growth in proven business opportunities; and 3) to create new business pillars with growth potential over the medium to long term. By investing in these areas to spur growth and improve earnings per share through steady profit accumulation, we will enhance our ability to share our success with shareholders. Further, to emphasize return of profits to shareholders, we will also consider, when appropriate, the purchase of our stock from the market by flexibly responding to changes in stock price and conditions in the business environment. Q: Could you provide more details on DeNA s new dividend policy? 2 IoT: Internet of Things. Network of physical objects things, such as equipment not previously connected to the Internet, which are embedded with connectivity features to interoperate through the Internet 4
A: The allocation of profit, through dividend payments, is linked to our performance each fiscal year. We aim to realize a consolidated payout ratio of 15% or pay out an annual dividend of 20 per share of our common stock, whichever is higher. At the same time, our goal is to achieve a consolidated payout ratio of 30% in the future. We always strive to meet and exceed the expectations of our shareholders and investors, and on behalf of everyone at DeNA, I thank you for your support and encouragement. Disclaimer regarding forward-looking statements Statements of a forward-looking nature contained in this interview, including those pertaining to plans, strategies, and outlooks, were based on judgments regarding information that was available at the time of preparation. These statements do not constitute guarantees, and the DeNA Group makes no promises regarding the attainment, accuracy, or completeness of these statements. Therefore, as a result of changes in various aspects of the operating environment, the actual outcomes may differ materially from the content of the forward-looking statements. 5