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GREE, Inc.
Corporate Profile
Making the world a better place through the power of the Internet. GREE, Inc.s business started in 2004 with the launch of social networking service (SNS) GREE, created from an idea by Yoshikazu Tanaka, the Companys founder and CEO. Since then, business initiatives emerging from our strong desire to create new services and have them used by even more people have resulted in SNS GREE growing to 27.7 million registered users in Japan and over 150 million worldwide, including the U.S. and Europe, by September 30, 2011. The Internet still has the potential to change the face of our world. We at GREE aim to tap some of this potential and enable SNS GREE to spread its wings and reach even more users around the world. Looking ahead, GREE will use the new business model of social gaming to provide innovative products that transcend cultural barriers and win acceptance throughout the world, whether in Asia, North America or Europe. GREE continues to take up the challenge of creating services that will be enjoyed by one billion users worldwide.
Contents
Corporate Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Milestones in GREE History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . To Our Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategies & Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Social Responsibilities (CSR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managements Discussion and Analysis of Financial Conditions and Results of Operations . . . . . . . . . . Business Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quarterly Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01 02 04 05 06 10 14 16 22 22 25 25 26 28 28 32 38 40 41 41 42 43 44 45
Forward-Looking Statements This Annual Report contains forward-looking statements that are based on judgments made by the GREE Group with reference to information available as of February 2012. These statements are subject to risks and uncertainties. As a consequence, actual results may differ materially from those expressed in these statements, for a variety of factors. The important factors that may impact on actual results include the economic environment within which the GREE Group conducts business, market trends and exchange rate fluctuations.
Corporate Message
Making the world a better place through the power of the Internet.
We can make the world a better place through the power of the Internet. GREE began from this one passion and principle. Since the day we started, we have been exploring the new potential of the Internet and working to provide such innovation as soon as possible, to as many people as possible. New challenges dont always end in success. There are times when we cannot achieve our highest aims. But as long as there is a slight possibility, we will ceaselessly continue our efforts. The changes the Internet will have on the world have only just begun. There is infinite potential that remains to be discovered. To bring this potential into the world, GREE will continue to put our passion and principle into action, in order to provide enjoyment and happiness to our users lives and make our society more open and convenient. Through the power of the Internet, we can make the world a better place.
01
MAY Launch of Tsuri-Suta (Fishing Star), the world-first mobile social game.
(Millions of yen)
70,000
60,000
Net sales [left scale] Number of employees (people) Number of GREE users [right scale]
50,000
40,000
30,000
20,000
10,000 46 3 0 2004.6
* Consolidated
18 2006.6 2007.6
2005.6
02
2008
2009
2010
2011
DECEMBER The growth rate for the past three years was No. 1 among Japanese companies for the second consecutive year.
FEBRUARY
Establishment of GREE International, Inc., the first office in North America.
JUNE Released the first social application developed through the GREE Platform.
APRIL
Acquired OpenFeint, Inc. and signed business partnership agreements with Tencent (January) and Project Goth, Inc.
APRIL
The number of GREE users exceeded 100 million.
(Thousands of people)
140,000
80,000
60,000
174 102
40,000
74
20,000
Financial Highlights
Millions of yen
2007.6 Nonconsolidated 2008.6 Nonconsolidated 2009.6 2010.6 2011.6 NonNonNonconsolidated consolidated consolidated Consolidated
FOR THE YEAR: Net sales Operating income (loss) Net income (loss) Net cash provided by (used in) operating activities Net cash used in investing activities Free cash flow Net cash provided by (used in) financing activities Capital expenditures AT YEAR-END: Total assets Cash and cash equivalents Total net assets PER SHARE DATA*1: Basic net income (loss) Diluted net income Net assets Cash dividends FINANCIAL MEASURES (%): Operating income (loss) margin ROE (Return on equity) ROA (Return on assets) Equity ratio (32.2) (42.0) (31.9) 72.5 35.7 88.1 37.6 36.9 60.0 88.7 49.1 58.4 55.6 77.5 48.1 63.9 48.6 62.8 38.7 60.5 48.5 59.5 (10,128.65) 58,607.22 37,227.75 95,834.97 207.66 188.37 407.64 5.00 255.77 236.89 452.47 25.00 80.49 79.92 75.64 165.41 9.00 75.11 163.10 9.00 $0.99 0.93 2.02 0.11 510 324 370 2,582 1,292 952 15,619 10,594 9,122
Yen
13,945 35,231 8,361 4,467 5,721 (85) 5,636 3,665 55 19,578 11,505 11,630 (10,793) 837 (76) 113
64,169 64,178 31,205 18,368 980 31,135 18,240 15,679 (3,273) 12,406 (1,090) 982
62,707 37,928
*1. GREE, Inc. conducted a 2,000-for-1 stock split on August 22, 2008, a 2-for-1 stock split on October 1, 2009, and a 5-for-1 stock split on October 1, 2010. The above per-share figures have been retroactively adjusted to incorporate the effects of these stock splits. *2. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of 80.73 to U.S. $1, the rate prevailing at June 30, 2011.
NET SALES
(Millions of yen)
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 07.6 08.6 09.6 10.6 11.6
TOTAL ASSETS
(Millions of yen)
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 07.6 08.6 09.6 10.6 11.6
Non-consolidated Consolidated
Non-consolidated Consolidated
Non-consolidated Consolidated
04
Business Highlights
REGISTERED USERS
(Millions of people)
200
Japan
15.3%
150
DEC. 2011
100
84.7%
50
2010
2011
The number of users for the entire group has reached 190 million, of which users in Japan accounted for 14.8%.
* GREE Groups user base is a total of GREE and OpenFeint
BY GENDER
Hokkaido
9%
Female
47%
DEC. 2011
53% Male
Tohoku
7% BY AGE
Koshin-etsu/ Hokuriku
40 and above Under 18
5%
Chugoku/ Shikoku Kinki
21%
12% 6%
DEC. 2011
18, 19
34% 11%
Tokai
7%
Kyushu/ Okinawa
16%
30 to 39
27%
34% 20 to 29
11%
Share of the 30- and 40-year-old demographic, who have a relatively high ARPU, continues to maintain high levels.
05
To Our Stakeholders
Making the World a Better Place Through the Power of the Internet
Thoughts on GREE
Since this is our first annual report I wanted to share with you some personal thoughts on GREE the company. In the 1990s, when I was in middle school and high school, a significant period of growth had ended in Japan and the country was between treading water and sinking. Another world away in Silicon Valley, U.S.A., scores of young people entranced by the great potential of the Internet were gleefully going about trying to create new businesses. They talked passionately of creating a society in which everyone used the Internet, of changing how we communicate and disseminate information just as the invention of the printing press and telephone did, of creating a turning point in human history and changing society and the world, of working because of peoples real need for their products. I had always thought of work as an obligation that isnt fun, that the business world was completely greedy and that corporations were bad. But these young people in Silicon Valley had shockingly different values and an entirely different take on things. I was completely taken with the values and philosophy of Silicon Valley. The idea was you yourself could create societys future by building new businesses, and to do this you had to be willing to work hard and take on a mountain of challenges. I remember having an overwhelming desire to live my life like these young entrepreneurs. A direction in life was not the only thing I picked up from Silicon Valley. Through the example of companies like Netscape, Yahoo!, Amazon, eBay and others, I learned that the technologies and services that came out of Silicon Valley could make the world a better place. I also learned the importance of teams of people taking on new challenges, persisting and not giving up. 06
The social networking service (SNS) GREE was born in 2003 of a small idea I had. It all started when I began doing volunteer work in my free time out of a desire to make the world a better place through new forms of communication and community. I really wanted to help make the world a better place, if only a little, and change the world through the power of the Internet, so I launched SNS GREE. I put SNS GREE online in February 2004 and in just one month it had over 10,000 users. It became exceedingly difficult for me to operate the service on my own, so in December 2004 I established GREE, Inc. Full-fledged operation by the company got underway and continues to this day. SNS GREE, which I started as a one-man operation, now provides services to its many, many members all over the world, but its growth has not always been smooth sailing. At the time, many people thought GREE was destined to fail and that it had no future. Many thought we wouldnt be around very long. When you take on new challenges, you end up failing many times more than people who dont. And every time you fail, there is a feeling of emptiness, like all your efforts have gone to waste. Sometimes you may even find yourself blaming other people or disliking those youve worked with. It is only the people who continue on despite it all who are able to create something new. I suspect my Silicon Valley predecessors who inspired me so much persisted in this way and ended up changing the world and creating the society and lifestyle we know today. The Internet changes everything: this is our starting point. We do not simply look at the changes taking place as an innocent bystander and pass right on by like a spectator; we think for ourselves about the way the future should be and take action to make it happen. This is the type of person I want to be. My engagement in GREEs management has constantly been guided by this commitment.
Review of Fiscal 2011 Consolidated operating income Consolidated operating income margin
123.59
million
31.1
billion yen
48.5
In the fiscal year ended June 2011, the seventh term since the companys founding, we worked to expand our mainstay Internet media business by increasing user numbers and further developing our earnings base for SNS GREE for mobile and PC, the core of the business. To increase users, we continued to focus on forming alliances with major communications providers and generating publicity with television commercials and other media. As a result, on a combined mobile and PC basis, SNS GREE users totaled 26.41 million as of June 30, 2011. The number of GREE Group members, including overseas subsidiaries, grew to 123.59 million. Thanks to a strong performance for the term, on a consolidated basis, net sales totaled 64.1 billion yen, operating income was 31.1 billion yen, and our operating income margin was 48.5%. Net income came in at 18.2 billion yen. 07
Our international expansion made significant progress in fiscal 2011. With smartphones becoming increasingly popular throughout the world, in January 2011 we established a North American subsidiary, GREE International, Inc., and in April 2011 we made OpenFeint, Inc. a subsidiary. OpenFeint is developing a global social gaming platform for smartphones for North America, Europe, Asia and other regions. And, in January and April 2011, respectively, we formed business alliances with Tencent*1 in China, and Project Goth, Inc.*2, which does business in Southeast Asia, India, South Africa and other emerging markets, to standardize specifications for smartphone platforms. Responding to the Great East Japan Earthquake of March 2011, we helped support relief and recovery efforts in a way that utilized Internet services, providing fundraising through the purchase of avatar-items and disaster-related news and information through SNS GREE. All of Japan needs to work persistently to solve the problems that are now occurring in connection with the recovery. As a business executive, I intend to actively support economic growth through the power of innovation and contribute to the recovery while remaining focused on Japans future.
*1. Tencent aims to enrich the interactive online experience of Internet users in China by providing high valueadded Internet services for computers, tablets and mobile devices. The company offers a wide range of Internet services for communication, information, entertainment and e-commerce, including the QQ instant messaging service, QQ.com web portal, QQ game portal, Qzone social networking service, and portal sites for tablets and mobile devices. It is Chinas largest online community. *2. Project Goth, Inc. provides the mig33 social networking service for mobile devices, which boasts 47 million users, primarily in emerging markets like Southeast Asia, India and South Africa.
300
million
Release of
One
Global Platform
08
In addition, we are anticipating greater user activity and corresponding sales growth as a diverse range of content is provided by a wide variety of developers worldwide through partnerships with prominent platforms, communications carriers and game developers in countries around the globe. Going forward, we intend to provide varied content and expanded functions to increase user activity while keeping a close watch on user trends. Regarding revenue from advertising media, we will work to identify and acquire new advertisers as the advertising media value of our services increases alongside steady growth in scale. We will also seek to increase ad media revenue from smartphone ads, where growth is expected, by developing new advertising products.
*3. GREE estimate based on Nintendo DS unit sales of 146.42 million (from Nintendo Co., Ltd.s 2011 English Annual Report) and other sources.
Making the World a Better Place Through the Power of the Internet
The growing smartphone market is buoying the expectation that social gaming will further develop into a major industry. GREE Group members, including the U.S., Europe and other regions, reached 189 million as of December 2011, but our goal is to increase this number to 300 million by the end of the fiscal year ending June 2012. To do this we will further strengthen global operations by releasing a single global platform, and by leveraging partnerships with prominent platforms, communications carriers and game developers around the world, as discussed above. I believe the Internet still has the potential to change the world. Our ongoing challenge is to create a global online community of 1 billion users by providing innovative borderless products used everywhere, whether in Asia, North America or Europe, through this new business model called social gaming. February 2012
09
Our Services
Sengoku Kingdom Wage major battles with this Sengoku card game!
Sangokushi Kingdom A full-scale game adaptation of The Chronicle of the Three Kingdoms
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12
GREE, Inc. operates the social networking service (SNS) GREE for mobile devices and computers. Registered users can use the overall GREE service free of charge, although some services and digital content are fee based. These sales constitute GREEs revenues. Moreover, we have positioned the SNS GREE as an advertising media, and we derive revenues from selling advertising space on the SNS GREE to advertisers.
About GREE
SNSs are community-type services on the Internet that can be used by registered users. These users create a profile page and can enjoy exchanging information and communicating with friends and trusted members. The SNS GREE operated by GREE offers various features that support proactive information sharing by users such as profiles, diaries, communities, photos, and email services. It functions as a platform that encourages mutual understanding and active communication among users. The SNS GREE was originally designed for PCs, but utilizing the opportunity created out of the business partnership formed with KDDI CORPORATION in November 2006, it now focuses on developing mobile services. In the mobile version of GREE, various content customized for the mobile environment has been developed, such as social gaming, Flash games, horoscopes, dictionaries, FAQs, and news. We offered these features in addition to the basic SNS functions of profiles, diaries/short comments, and communities. This varied content all links closely with the SNS and is characterized by having various entertainment components that function around communication between users. Since the opening of the GREE Platform to developers outside the Company in June 2010, we have been offering over 1,100 diverse titles from more than 500 developers (as of June 30, 2011). This has led to a vast increase in user activity and contributed to revenues. OpenFeint, operated by consolidated subsidiary OpenFeint, Inc., is a social gaming platform that provides community functionality like rankings, achievements, head-to-head battles with friends, forums, and chat, to Android and iOS games. The OpenFeint platform is being developed in Asia, North America, Europe and other parts of the world. Between April and June 2012, we
Developers
Advertisers
Advertising fee payments (including affiliates)
Earnings distribution
Corporate Group
Providing of paid services
SNS GREE
Ad network AdLantis
Payment of collection agency fees Use of free services Providing of free services
Users
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plan to release a global unified platform for the GREE and OpenFeint brands, our user base, social media and social platforms.
avatar can also be used as the photo in a user profile. Avatar items can be purchased from the Avatar shop within the SNS GREE, and they can be exchanged between users. We will be able to increase our paid services revenues by introducing attractive avatar items and associated items, and by increasing the number of users.
Business Structure
GREE users are able to obtain points (coins), which can be used within GREE, either by purchasing coins, registering with paid-advertising affiliate programs, or by inviting friends to join GREE. Users are able to trade coins for various paid-for items in social games and avatars. Accordingly, the business structure is built around increasing the number of users as well as increasing sales of fee-based services and advertising to affiliates by encouraging the use of coins through the expansion of the lineup of social games and avatars.
Revenue Structure
Sales of GREEs Internet media business are composed of 1) revenues from paid services and 2) revenues from advertising sales.
Platform revenues:
We have opened the GREE Platform to software developers outside the Company. As a result, these outside developers offer social games on the GREE Platform, and the developers generates revenues from paid items in these social games. GREE generates revenues from the use of our platform.
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In this section, we discuss GREEs growth strategy going forward and introduce initiatives from the fiscal year ended June 2011. Expanding Proprietary Social Games
In the fiscal year ended June 2011, we focused on expanding the number of proprietary social games in order to stabilize and secure our revenues from paid items. We have already been offering social games with high entertainment value that include some paid items and which contribute to our revenues, such as the fishing game Tsuri-Sta, the pet-raising game Odoriko Clinoppe, the adventure game Tanken Doliland, the gardening game Hacniwa, and the monster battle game Mon-Pla. We moved forward in the fiscal year under review and introduced new games, comprised of a pirate battle game Pirate Kingdom Columbus, a feudal card battle game Sengoku Kingdom, a social strategy RPG Cerberus Crusade, and Decobito, a game in which you live with mysterious animals. GREE intends to further increase the number of releases of its proprietary social games by building and reinforcing a global development framework. We will also actively make use of the vast intellectual property owned by GREE.
Tsuri-Sta
User can collect fishing goods, introduce their fish prints in their diary, organize a team, and participate in a fishing competition, etc.
Odoriko Clinoppe
The user can develop their original pet Clinoppe by looking after it and changing its clothes
Mon-Pla
The user can enjoy an adventure with monsters, encountering new monsters, evolving their monsters, coordinating the outfit of their avatar, collecting and training their monsters
Sengoku Kingdom
The user can collect cards of Sengoku generals, and use them to battle other users or participate in collaborative battles through joint states with other users
Cerberus Crusade
Fantasy simulation RPG game with a high-quality motif and strategy. Users lead their own countries to prosperity through communications with war comrades
Decobito
The user can assume the role of li l d h l f little dwarfs f (Kobito), who live in a small village with animals. The user can enjoy decorating their own home with furniture received from animals and small scaled dwarfs slow life
Dragon Master
GREEs first full-scale RPG game. You can collect materials to produce powerful weapons with alchemy, and hunt monsters with comrades, to defeat a dragon and save the kingdom
Bakumatsu Kingdom m
In this game, your mission is to conquer Japan along with patriotic samurai heroes from the last days of the Tokugawa era by developing and expanding your own territory through battle.
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Generate Revenues
GREE partners can put advertising space on their applications as a type of media and generate advertisement revenue on top of revenue from paid services.
Comprehensive Partnership with Unity Technologies, Provider of the Unity Game Development Tool
GREE has entered into a comprehensive business partnership with Unity Technologies to promote diverse game content as the companys exclusive partner in
Japan. Unity Technologies is a U.S. company that develops and markets Unity, an all-in-one game development tool that simplifies development of full-fledged interactive 3D content. With this comprehensive partnership, GREE obtains exclusive rights in Japan related to free secondary distribution of professional licenses for Android and iOS, which are currently distributed for a fee. This will significantly reduce initial development costs for Android and iOS applications for developers who provide social applications for SNS GREE.
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profitablewith the worlds largest user base for smartphone social gaming platforms, which is possessed by OpenFeint. The platform will make it possible for GREE partners in Japan to develop an application and then seamlessly deliver it to 189 million users around the world. Moreover, for GREE partners outside of Japan, the platform provides the necessary functions for developing highly profitable social applications along with related expertise, and makes it possible to provide applications to high-ARPU users in Japan who are accustomed to paying for content.
* Based on Nintendo DS worldwide unit sales of 146.42 million. From Nintendo Co., Ltd.s 2011 Annual Report.
(Millions of units)
4.7 billion units 4,700
3,600
2,600
1,700
2008.6
2009.6
2010.6
2011.6
2012.6
2013.6
2014.6
2015.6
The GREE Platform has great potential for growth in the booming smartphone market
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Advantages of the New GREE Platform Global: Cost: Makes it easy to distribute apps to 189 million users Minimizes development costs for apps for the global market
Expertise: Provides GREE technologies and expertise to developers worldwide ARPU: Content deliverable to the high-ARPU Japanese market from all around the world
On a GREE Group basis, membership has increased to approximately 189 million users. We are also steadily establishing overseas offices, which will serve as the foundation of our global expansion. Beyond the U.S., offices have already been opened in China, South Korea, Singapore and the U.K. Progress is also being made in establishing subsidiaries in the Netherlands, Brazil and Dubai. We will continue aggressively developing the global market going forward.
So Paulo
19
20
Growth Strategy
Looking ahead, GREE plans to actively pursue the future growth potential of its business activities. Specifically, we will gradually expand our domain by developing various businesses on the SNS platform. Moreover, with the rapid growth in smartphones worldwide, we will engage in full-fledged international expansion. GREE intends to further accelerate growth through a good balance of domain extension and regional expansion.
To be offered (Planned)
Advertising Business
GREE
Partner Games
Currently offered
To be offered (Planned)
GREE
To be offered (Planned)
To be offered (Planned)
SNS Platform
GREE
GREE
GREE
GREE
Offices
Tokyo
San Francisco
So Paulo
Japan
North America
Latin America
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Our Management
Corporate Governance
1. Corporate Governance Framework
1) Basic Approach
To maximize corporate value and shareholders value, GREE aims to strengthen competitiveness by strictly controlling risks. It positions corporate governance as one of its most important management issues in this context. Based on this approach, directors, corporate auditors and employees work to understand their respective roles, and strive to raise their awareness about related laws, regulations, social norms and ethics, so that they can steadily practice appropriate and effective corporate activities.
The Board of Directors decides management policies, strategies, business plans and other important management issues, and oversees business execution.
a. Board of Directors
The Board of Directors comprises six directors, two of whom are outside directors. The Board of Directors meets regularly once a month to facilitate effective management and speed up decision-making, and meets at other times if necessary.
c. Management Meeting
The Management Meeting, which comprises in-house directors, executive officers and senior vice presidents, formulates business strategies, and reports on and decides important matters. To do this, the Management Meeting convenes once a month, in principle, and holds
Accounting Auditors
Cooperate Audit
Corporate Lawyer
Consult/ advise
Cooperate
Direct/report
Representative Director
Direct/supervise
Report/deliberate
Management Meeting
Report/deliberate
22
extra meetings if necessary. The Management Meeting receives reports about operational progress and business results from the departments, and holds discussions concerning actual and forecast results together with formulating plans. This system enables the representative director and other members of the senior management team to understand business circumstances in a timely manner and facilitates discussions and decision-making regarding future business developments.
2) Cooperation Among Internal Audit Office, Corporate Auditors (including Outside Corporate Auditors) and Accounting Auditors, and Relationships With Internal Control Divisions
The corporate auditors and the accounting auditors exchange opinions about accounting audit processes, accounting matters important to the audit process, system and the operating status of internal controls about four times a year. In addition, the standing corporate auditor attends accounting audits conducted by the accounting auditors, and exchanges opinions and information with the accounting auditors. Corporate auditors and the Internal Audit Office always cooperate when conducting audits. The standing corporate auditor and the Internal Audit Office exchange information about auditing activities and status of the Company approximately every two weeks. The Internal Audit Office shares the auditing results of internal audits with corporate auditors, and attends Board of Corporate Auditors meetings to report information about the status of the Company. In addition, the standing corporate auditor attends internal audits as necessary, and promotes internal control by cooperating with the Internal Audit Office. Outside corporate auditor Mr. Kiyohito Hamada is a certified public accountant and from the perspective of a professional accountant offer opinions and advice regarding the Companys finances, tax and accounting matters and the execution of duties executed by the Companys directors.
23
Company management. Outside directors attend the Board of Directors meetings, which are held every month, oversee business execution and actively offer their opinions and advice from objective and neutral viewpoints.
2) Relationships With Outside Corporate Auditors and Their Roles and Duties Regarding Corporate Governance
There are three outside corporate auditors. Mr. Zenichiro Tanaka offers his opinions and advice regarding the Companys business strategies and service development, and regarding business execution by the Companys directors, based on his extensive knowledge and experience regarding the media industry. Mr. Kiyohito Hamada is a certified public accountant and offers his opinions and advice regarding the Companys finances, tax and accounting matters, and the execution of duties by the Companys directors, from his professional accounting viewpoint. Mr. Toru Nagasawa is a qualified lawyer and offers his opinions and advice regarding legal matters, compliance, corporate governance and business execution by the Companys directors, from his professional viewpoint as a lawyer. All members of the Board of Corporate Auditors are outside corporate auditors to ensure independence from operating divisions. Outside corporate auditors conduct audits by attending the Board of Directors meetings and other important meetings, and by reading important documents.
4. Directors Remuneration
1) Total Amount of Remuneration by Classification, Remuneration Type and Number of Eligible People
Total Basic remuneration remuneration (Millions of yen) (Millions of yen) Eligible persons (No. of people)
Classification
72 11 15 99
72 11 15 99
4 1 3 8
(Note) There were 2 outside directors as of June 30, 2011. This differs from the number of directors above because there is 1 director who does not receive remuneration.
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Board of Directors
Yoshikazu Tanaka
FOUNDER AND CHIEF EXECUTIVE OFFICER
Kotaro Yamagishi
CO-FOUNDER AND EXECUTIVE VICE PRESIDENT, BUSINESS STRATEGY
Kotaro Yamagishi joined GREE in December 2004, and serves as the companys co-founder and executive vice president. Prior to joining GREE, he was editor-in-chief of CNET Networks Japan. Prior to joining CNET Networks Japan, he worked at Nikkei Business Publications. Yamagishi received a bachelors degree in economics from Keio University in 1999.
Yoshikazu Tanaka founded GREE in December 2004, and serves as the companys founder and chief executive officer. Before founding GREE, he previously worked at So-net Entertainment Corporation and Rakuten, Inc. While at Rakuten, Inc., he started developing SNS GREE in his spare time. This project became GREE. Tanaka earned a bachelors degree in law from Nihon University in 1999.
Masaki Fujimoto
SENIOR VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER
Masaki Fujimoto joined GREE in June 2005, and serves as the companys chief technical officer. Prior to joining GREE, he worked at Astra the Studio, Inc. and Tunebiz Co., Ltd. Earlier in his career, Fujimoto was a member of the consulting staff of a PHP open source project. Fujimoto graduated in 2001 with a bachelors degree in literature from Sophia University.
Naoki Aoyagi
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Naoki Aoyagi is the Chief Financial Officer of GREE, Inc. and Chief Executive Officer of Gree International, Inc. He joined GREE, Inc. in March 2006 and since then has overseen the alliance with KDDI, Grees IPO, and the establishment of the GREE Platform Business. Overall, he has 10 years of experience in finance and management including his prior career at Deutsche Bank. Aoyagi earned a bachelors degree in policy management from Keio University in 2002.
Toshitake Amamiya
Takeshi Natsuno
Toshitake Amamiya joined GREE in September 2009 and serves as a director, while working as an Executive Director and Chief Operating Officer in Advanced Business Development at KDDI. Amamiya joined KDDI (previous DDI Corporation) in June 1984.
Takeshi Natsuno joined GREE in September 2009 and serves as a director, while working as a Professor of the Graduate School of Media and Governance at Keio University since May 2008. Prior to joining GREE, Natsuno was promoted to SVP, Managing Director of Multimedia Services, after having worked at NTT DOCOMO for eight years. Prior to joining NTT Corporation, Natsuno worked at Tokyo Gas Corporation.
Corporate Auditors
Zenichiro Tanaka
Zenichiro Tanaka joined GREE in July 2006, and serves as an auditor. In addition to his responsibilities at GREE, Tanaka writes a blog called Media Pub, where he personally forecasts and publishes the industry trends. Prior to joining GREE, Tanaka was the chief editor of Nikkei Communication and Nikkei Baito, and a journalist for Nikkei Electronics in Nikkei Business Publications since 1974, after having worked as a system engineer. He graduated with a bachelors degree in technology and engineering from the University of Osaka.
Kiyohito Hamada
Kiyohito Hamada joined GREE in July 2006, and serves as a part-time auditor. Hamada established Yotsuba Sogo Accounting & Consulting Firm in 1998, after having worked in Deloitte Touche Tohmatsu Japan. He is a licensed Certified Public Accountant.
Toru Nagasawa
Toru Nagasawa joined GREE in September 2007, and serves as a parttime auditor. Nagasawa passed the bar exam while in law school at the University of Tokyo in 1981, and joined Kajitani Law Offices 3 years later. In 1995, he established his own accounting & consulting firm, Nagasawa Law Offices, and is currently working as a representative lawyer.
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GREE continues to consider the improvement of its social well-being as an important management issue, while also further strengthening a rigorous site operational system. Moreover, we will continue to actively promote educational activities to contribute to the improvement of Internet literacy among youth in order to fulfill the responsibilities we possess as a social networking service operator active in the community.
Auditor
Legal Affairs
Public Relations
getting into other kinds of trouble. GREE places a priority on remedying this situation. To ensure that children can safely and comfortably use the Internet, we have established an operational policy and have been carrying out various measures. 2) Authentication of Users Particularly from the viewpoint of the protection of youth, GREE is engaged together with mobile phone carriers in various activities to improve the authentication of the age of users. 3) Functions Restricted by Age For people to better enjoy the safe use of the Internet, GREE restricts email functions and search functions by age. For example: Restriction of email exchange between users under 18 years old and users 18 years old or older. Exclusion of users under 18 years old from the results of a Friend search made by a user over 18 years old.
26
Restriction of communication when a user wishes to send a Friend request to a user under 18 years old, whereby the former is only allowed to use message templates. 4) Strengthening of Our Patrol System In November 2006, GREE started a 24-hour, 365-day patrol system, and has been strengthening its auditing system as needed in tandem with the expansion of our websites. 5) Educational Activities to Ensure Internet is Used Securely and Safely Through cooperation with external organizations, GREE has been implementing various measures for the sound development of youth and the realization of a safe and secure Internet society. 6) Cooperation With External Organizations Through cooperation with external organizations, GREE is actively working for the provision of a more enjoyable and safe service environment and the sound education and development of our youth.
GREE Patrol CenterGREE has been operating a 24-hour, 365-day patrol system, paying considerable attention to improving the soundness of websites for the healthy development and protection of youth.
GREE and Our Six Promises, an Application for Educating Youth About the Internet According to a survey of guardians published in October 2011 by the Cabinet Office, 50.5% of children have their own mobile phone. If we look by school level, we see that the higher the level, the higher the percentage of students who own mobile phones. The figures are 16.7% for elementary school students, 44.1% for middle school students, and 94.6% for high school students. Thus, nearly all high school students have a mobile phone. This high diffusion rate among youth means that it is increasingly necessary to raise the levels of Internet literacy among them. In light of these circumstances, GREE has revamped GREE and Our Six Promises, a software application for youth aimed at educating them in the secure and safe use of their phones. On December 20, 2011, the SNS GREE service started providing content tailored to each age group. Looking ahead,
GREE will adopt an even more active stance and participate in regional educational activities that make use of this application. Three types of explanations of GREE and Our Six Promises
For middle school students and older For elementary school students and younger
27
Financial Information
2. Business Environment
In the fiscal year under review, Japans Internet environment, both fixed and mobile, was in the process of development, moving toward higher network access capacity and lower prices. There were 94,620,000 Internet users as of December 2010, with 72,850,000 broadband users and 77% of total users able to use fiber-optic or DSL connections (source: Communications Usage Trend Survey in 2010, Ministry of Internal Affairs and Communications). Mobile Internet also grew rapidly, with 121,240,000 mobile phone contracts as of the end of June 2011, with 120,150,000 being for 3G phones; 99% of all mobile phones were able to use high-speed data transfer (source: Telecommunications Carriers Association). Additionally, the number of smartphones increased rapidly, with 8,550,000 smartphones shipped in the fiscal year ended June 2011, 3.7 times the number of smartphones shipped in the previous fiscal year, and accounting for 22.7% of all mobile phones shipped that year (source: MM Research Institute estimate).
GREE for mobile devices and computers. To increase the number of users, we have conducted promotions via TV commercials and partnerships with major communications businesses. As a result, the number of GREE users for mobile devices and computers reached 26,410,000 as of the end of June 2011.
60.0
55.6 48.6
48.5
To establish a profitable business model, we launched multiple new titles for highly entertaining social games with items which are partly fee-based.
Net sales (Non-consolidated) Net sales (Consolidated) Operating income (Non-consolidated) Operating income (Consolidated) Operating income margin
28
Subsequent to the opening of the GREE Platform to all developers in June 2010, we were offering over 1,100 diverse titles from approximately 500 developers as of the end of June 2011. This has contributed to increased user activity and to increased profits through titles which include items which are partly fee-based. Also, in response to the growing smartphone market, we released iPhone and Android versions of GREE, and started to provide original social games for these devices. Furthermore, we have opened up the GREE Platform for smartphones to all developers. As of the end of June 2011, content for around 250 titles was offered by approximately 150 developers. As a result of the above, consolidated net sales for the year under review were 64,178 million yen. Cost of sales amounted to 5,513 million yen, mainly due to higher rental fees resulting from an increase in server numbers and higher labor costs resulting from increasing development personnel. Selling, general and administrative expenses amounted to 27,530 million yen, mainly due to increased advertising costs, higher personnel expenses
arising from increasing employees, higher recruitment expenses due to aggressive recruiting activities, increased paid-charge commissions paid to communications carriers in line with higher net sales, and increased outsourcing costs due to business expansion. As a result of these factors, operating income was 31,135 million yen, and the operating income margin was 48.5%. Net income was 18,240 million yen and the net income margin was 28.4%.
4. Financial Position
Total assets at the end of June 2011 were 62,856 million yen, which comprised current assets of 47,607 million yen, net property and equipment of 960 million yen and investments and other assets of 14,289 million yen. Current assets consisted mainly of cash and cash equivalents of 22,254 million yen and accounts receivabletrade of 16,945 million yen. Buildings, and tools, furniture and fixtures together amounted to 1,235 million yen. After accumulated depreciation of 275 million yen, net property and equipment was 960 million yen.
Other
Other
1,092
5,080
SELLING, GENERAL AND ADMINISTRATIVE 13,584 Advertising costs EXPENSES
COST OF SALES
5,513
Labor costs
1,725
Paid-charge commissions
27,530
7,055
29
Goodwill at June 30, 2011 includes goodwill from acquiring OpenFeint of 8,543 million yen. Our policy is to begin amortizing this goodwill in the fiscal year ending June 2012. Total liabilities at the end of the fiscal year under review were 25,393 million yen, which comprised current liabilities of 25,202 million yen and long-term liabilities of 191 million yen. Total net assets at the end of the fiscal year under review were 37,463 million. Current liabilities consisted mainly of accounts payableother of 13,758 million yen and income taxes payable of 9,967 million yen. Net assets mainly comprised retained earnings of 33,434 million yen. Equity ratio, a sign of financial stability, was 59.5% at the end of the fiscal year under review. Meanwhile, the current ratio, a sign of solvency, was 188.9% at the end of the fiscal year under review. ROA, a sign of asset efficiency, was 38.7% on a nonconsolidated basis for the fiscal year under review, and ROE was 62.8% on a non-consolidated basis.
49.1 37.6
48.1
38.7
88.1
88.7
77.5
62.8
08.6
09.6
10.6
11.6*
08.6
09.6
10.6
11.6*
30
As a result of the above factors, cash and cash equivalents at the end of the fiscal year under review amounted to 22,254 million yen. The GREE Group recognizes that returning profits to shareholders is an important aspect of operations. The Groups basic policy is to provide appropriate returns matching the Companys operating results, financial situation and related forecasts, while giving consideration to bolstering the internal reserves necessary to expand and streamline businesses. As regards the payment of dividends of retained earnings, GREEs basic policy is to pay dividends twice a year: an interim dividend and a year-end dividend. The year-end dividend is determined by the General Meeting of Shareholders, and the interim dividend is determined by the Board of Directors. GREE decided to pay an ordinary dividend of 9 yen per share for the year ended June 30, 2011 to provide stable returns to shareholders while continuing to bolster retained earnings in order to invest in future business expansion and other areas, and allow greater flexibility with expenditures, since GREE is prioritizing further growth in the year ending June 2012.
Dividends applicable to the year ending June 2012 are yet to be determined. However, appropriate shareholder returns will be considered based on the abovementioned policy. GREEs Articles of Incorporation stipulate that the Board of Directors can pass a resolution determining an interim dividend with a record date of December 31 each year.
CASH FLOWS
(Millions of yen) 25,000 20,000 15,000 10,000 5,000 0 324 1,292 10,594 11,354 22,254
20,000 36.9 0 07.6 08.6 09.6 10.6 11.6 Total assets (Non-consolidated) Total assets (Consolidated) Equity ratio
5,000 10,000 15,000 07.6 08.6 09.6 10.6 11.6* Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Cash and cash equivalents (Year-end)
* Consolidated
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Business Risks
Of the items included in this annual report, items concerning business conditions, accounting and other matters that may have a material impact on investor decisions are included in this report. Also, items that do not necessarily include risk factors, but may be material to investment decisions are indicated below as part of an active effort to disclose information to investors. The GREE group, while being fully aware of the possibility of these risks, has a basic policy of working towards avoiding risks and dealing with them should they occur. However, we believe that the following items, along with other items included in this annual report, should be carefully considered when deciding to invest in the companys stock. Furthermore, this annual report contains forward-looking statements based on determinations made by the group on the date this report was issued. These forward-looking statements do not cover all potential future risks.
II Technological Innovation
One of the unique characteristics of the Internet industry is that the cycle for technological innovation and changes in customer needs is extremely fast, leading to a constant introduction of new services using new technologies. Technological innovation also continues for Internet devices, such as with the introduction and adoption of smartphones as high-performance mobile Internet devices. In order to respond flexibly to this rapidly changing environment, the groups policy is to actively recruit skilled engineers to increase our knowledge and know-how of cutting-edge technologies, including those that are open source. However, in the event that it becomes difficult to accumulate the necessary knowledge or acquire engineers with the appropriate skills, the group may be unable to properly address technological innovation, or may be completely unable to do so. Furthermore, responding to this technological innovation may require an increase in expenditures such as personnel costs and system investment. This could lead to a decrease in the groups technological superiority and competitiveness of service, which could affect business expansion and the business results of the group.
2) GREE Service
I Presence of Competitors
Since GREE began a serious effort to expand services in the mobile sector, the Company has released several social games, and worked to expand and improve the content line-up to respond to user needs. Additionally, through advertising activities such as collaborations with major telecommunications companies and television commercials, the member base has steadily grown. However, competitors have also worked to expand and improve their content line-ups, and engaged in advertising through TV commercials, so there is no guarantee that the group will be able to retain industry superiority through these methods. There is a need to adapt to trends and develop services considering factors that could affect GREEs position in the Internet industry, such as the presence of existing domestic and foreign competitors with an advantage in customer awareness, financial resources, marketing strength, customer base, systems or content, or the appearance of innovative new Internet services. In the event that the GREE group is unable to carry out an appropriate and effective response to these domestic and foreign competitors, the groups business expansion and business results could be affected.
32
i) Factors leading to certain changes in market conditions, such as slower growth in the Internet advertising market, expansion of competing media, and a decrease in advertising fees ii) The companies that provide advertisements reduce their marketing and advertising budgets due to economic trends iii) Changes are made to the marketing strategies or marketing strength of the advertising agencies and media reps used for advertising sales iv) The GREE brand is damaged due to problems with the safety or soundness of the service If any of the above occur, the groups business expansion and business results could be affected.
communication functions while also allowing large numbers of anonymous users to register, there is the risk of various problems occurring. To deal with these problems, the group is taking the following measures:
(i) Respond to intellectual property infringement, intrusion of privacy, the submission of obscene material, slander, commercial use, or other usage with a high degree of criminal propensity in light of the law.
(a) Clarify prohibited acts in user agreements In the user agreements, details of acts (antisocial activities, obscene or violent expressions, seeking dates, commercial activities, and posting of personal information, etc.) that users are prohibited from engaging in during the use of GREE are clearly specified. In the event that the acts of a user are determined to be one of the aforementioned prohibited activities, the group will respond strictly with the deletion of submissions, suspension of usage of the GREE service, and termination of membership. (b) Strengthen the submission oversight system and user training and awareness activities A two-layer system made up of a full-time team within the company and external specialist operators is in place and oversight is conducted 24 hours a day, 365 days a year, and oversight operations (Note 1) are structured around a uniform standard in accordance with a manual prepared independently by the company. Additionally, besides increasing awareness of autonomous content oversight by users through the placement of a reporting function on major webpages on the site, the group is working to maximize the sites ability to regulate itself by enriching awareness and user etiquette educational content. (c) Certification by third party organizations The Community Operations Management Certification System certification has been received (Note 2) from the Content Evaluation and Monitoring Association, hereinafter referred to as EMA, and while this shows that the groups operations system is objectively above a certain standard, the operations system is also working on activities to improve user literacy through the implementation of EMAs awareness and training program. (d) Establishment of the Security and Safety Improvement Committee The group has set up a Security and Safety Improvement Committee, which is headed by the president of the company, and through this committee, management and the workers who patrol the site periodically exchange information and work to improve and maintain the integrity of the site.
(Notes) 1. As a rule, submission checks are implemented through visual inspection and systems in real time. 2. In order to receive the certification, 23 items, which fall under the four categories of Basic Policy, Oversight Systems, User Interaction, and Awareness and Training, must all meet required standards, and the site must pass an inspection of its operations management system.
Along with the increasing popularity of the Internet, public demand for maintaining the safety and soundness of services has also continued to increase. Since SNS provide a variety of
33
(ii) Measures for the sound education and protection of young people
In addition to the standard efforts aimed at maintaining the safety and integrity of the site that were mentioned in (i) above, particular efforts are being carried out which are aimed at the sound education and protection of young people. The group is increasing the reliability of user age confirmation by introducing a zoning system that makes use of blacklist mobile phone filtering, and it has also set up age-specific usage limits on areas such as search and email exchange since August 2009. Additionally, since July 2010 the content of messages, such as mini-mails sent between users using the GREE sites functions, were added to the scope of site patrols, in addition to the previously monitored diary entries and submissions to communities. Additionally, since January 2011 efforts have been made to make user age confirmation stricter by implementing age confirmation based on age information retained by KDDI Corporation. The group believes that through measures listed in (i) and (ii) above, safety and well-being are currently being maintained for the services the group provides. Also, we will continue to increase the number of patrol staff and improve functionality of related systems, as well as continuing user awareness and education programs. However, in the unlikely event that a problem occurs related to the services the group provides, the group may be faced with legal responsibility as well as having trust in the group and brand damaged, and it may be difficult to provide stable service. As a result of the foregoing, the groups business expansion and business results could be affected. In addition, if the number of patrol staff is increased to improve measures taken, costs will increase, which could affect the groups business expansion and business results.
Number of Users
The number of users for GREE and OpenFeint has grown steadily, and as of the end of June 2011 had reached a total of 123,590,000 worldwide. For group business, increasing the number of users not only means an increase in income from
34
paid service fees due to increased usage of paid services, but also increased value of GREE as an advertising medium and thus increased advertising media income. Therefore, the group recognizes that increasing the number of users and strengthening its member base are both important tasks for improving business results. However, if the increase in the number of users should slow, due to competition with other companies, failure to provide appealing content, a lack of safety or soundness in the service, loss of trust in the groups services or brand, or due to some other factor, the groups business expansion and business results could be affected.
XI Global Expansion
In order to further develop the business, the group is proceeding with global expansion of businesses. If it becomes difficult to carry out business in the course of global expansion due to problems dealing with potential risks associated with such factors as laws, regulations, political and social conditions, or exchange rates in various countries, the groups business and operating results could be affected. Also, if businesses do not proceed as planned in various countries, business results could be affected.
3) Systems
I Burden of Capital Investment in Systems, etc.
In order to operate a stable service and improve user satisfaction, the group recognizes there is a need for up-front investment in systems and infrastructure in line with the growth of the service. Continual capital investment in equipment is planned considering predicted increases in the number of users and traffic, as well as improving security and introducing new services. However, if the number of users or traffic significantly exceeds initial estimates, there will be a need to invest earlier or more than initially planned, creating a large investment burden, and this could affect business expansion and business results of the group.
35
5) Intellectual Property
I Policy on Protection of Intellectual Property
Given the importance of legal compliance and corporate social responsibility, the group considers the protection of intellectual property to be an important issue. Therefore, the group works to prevent any infringement of intellectual property rights or the equivalent of a third party by any employees during the process of developing group services or while using software for work duties, by setting internal company regulations and training all employees about intellectual property rights. However, in the case that an employee or executive of the group infringes on the intellectual property rights of a third party intentionally or accidentally, this could damage the trustworthiness and brand power of the group and its services. In addition, the group could be held accountable for claims for damages and other legal responsibilities. As a result, the groups business expansion and business results could be affected. Also, the group works to prevent the infringement of its own intellectual property rights by third parties. If the group incurs large costs as a result, or if the group is unable to maintain competitiveness due to the inability to protect intellectual property rights against infringement by a third party, the groups business expansion and business results could be affected.
36
respond rapidly to notifications of content including copyright infringement. With these measures, the group believes that its liability is limited to the scope described in the Provider Liability Limitation Act, with the likelihood of successful claims for damages and injunctions by copyright holders due to copyright infringement being low. However, if legal responsibility of the group was pursued, and the dispute escalates into litigation, this could affect business expansion and business results of the group.
Additionally, a Compliance Committee has been established with the CEO as chairperson, and is working to improve the compliance structure. However, even with these measures it is difficult to completely eliminate risks related to compliance, and in the case that the group violates laws during business operations, this could affect the corporate value and operating results of the group.
6) Business Structure
I Reliance on Specific Persons
The CEO of the group, Yoshikazu Tanaka, not only founded the group but has fulfilled a vital role in business operations since the beginning. Developing and announcing GREE as an individual in February 2004, he has a wide array of experience and knowledge in areas ranging from planning to development and operation of Internet services. Since the founding of the group, he has fulfilled an important role in deciding management policy and business strategy, as well as carrying them out. The group has worked to strengthen its organizational structure by sharing information and delegating authority to executives and employees through meetings of the board of directors and management meetings, to create an operating structure that does not overly rely on Mr. Tanaka. However, if he should become unable to continue managing the execution of the groups business operations for some reason, this could affect business expansion and business results of the group.
7) Investments
As part of the groups growth strategy, the group plans to form capital alliances and other strategic alliances with other companies, as well as carry out related investments. The GREE Fund has been created as a means of providing financial support to developers who develop and provide applications using the aforementioned GREE Platform. The goal is to capture business synergies with developers while offering financial assistance to them. In other business areas as well, the group may invest in other companies where it determines that investment would speed growth and help to expand business. When investing, sufficient preliminary research will be performed, and the decision will only be made after a process of inspections and discussions following company guidelines to carefully analyze the risk. However, if the business of the investee does not perform according to plan and the anticipated business synergy cannot be achieved or the investment cannot be recovered, or if accounting for impairment or allowance for bad debts is required due to the investees business performance, this could affect the operating results and financial position of the group. Also, in the event that the investee performs illegal or unauthorized activities, this could have a negative impact on trust in the group.
8) Dilution of Share Value due to the Exercise of New Share Subscription Rights
As an incentive for executives and employees of the group, new share subscription rights (stock options) are provided. In the case that these stock options are exercised, the issuance of new company shares may dilute the share value and voting rights of existing shareholders. As of the end of June 2011, there were 13,820,000 dilutive shares associated with these stock options, equivalent to 6.03% of the total number of outstanding shares, which was 229,300,000.
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2011
ASSETS
CURRENT ASSETS: Cash and cash equivalents Accounts receivable: Trade Other Allowance for doubtful receivables Deferred tax assets Prepaid expenses and other current assets Total current assets PROPERTY AND EQUIPMENT: Buildings Tools, furniture and fixtures Total Accumulated depreciation Net property and equipment INVESTMENTS AND OTHER ASSETS: Investment securities Investments in an associated company Goodwill Other assets Total investments and other assets TOTAL
Millions of yen
Note: These consolidated financial statements are stated in Japanese yen. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of 80.73 to U.S. $1, the rate prevailing at June 30, 2011. Such translation should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.
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2011
Millions of yen
25,202
312,176
191
2,366
NET ASSETS: Common stockauthorized, 640,000,000 shares; issued, 229,300,000 shares Capital surplus Retained earnings Treasury stock 2,110 shares Accumulated other comprehensive income Unrealized gain on available-for-sale securities Foreign currency translation adjustments Total Minority interests 98 (401) 37,399 64 1,214 (4,967) 463,260 793 2,136 2,134 33,434 (2) 26,458 26,434 414,146 (25)
37,463
464,053
TOTAL
62,856
$778,595
39
NET SALES COST OF SALES Gross profit SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Operating income OTHER INCOME (EXPENSES): Interest income Contribution Gain on sales of investment securities Othernet Other expensesnet INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS INCOME TAXES: Current Deferred Total income taxes NET INCOME BEFORE MINORITY INTERESTS MINORITY INTERESTS NET INCOME
PER SHARE OF COMMON STOCK: Basic net income Diluted net income Cash dividends
40
NET INCOME BEFORE MINORITY INTERESTS OTHER COMPREHENSIVE INCOME (LOSS): Unrealized gain on available-for-sale securities Foreign currency translation adjustments Total other comprehensive loss COMPREHENSIVE INCOME TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the parent Minority interests
18,278
$226,409
17,937 38
$222,185 471
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Total
Minority Interests
BALANCE, JULY 1, 2010 Stock split, five shares for each one share Issuance of new shares Net income Cash dividends, 25.00 per share Purchase of treasury stock Net change in the year BALANCE, JUNE 30, 2011
45,424,000
2,113
2,111
16,330
(2)
20,552
20,552
181,952,000 1,924,000 23 23 18,240 (1,136) (0) 98 229,300,000 2,136 2,134 33,434 (2) 98 (401) (401) 46 18,240 (1,136) (0) (303) 37,399 64 64 46 18,240 (1,136) (0) (239) 37,463
Thousands of U.S. dollars (note) Accumulated Other Comprehensive Income Unrealized Gain on Availablefor-Sale Securities Foreign Currency Translation Adjustments
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Total
Minority Interests
BALANCE, JULY 1, 2010 Issuance of new shares Net income Cash dividends, $0.31 per share Purchase of treasury stock Net change in the year BALANCE, JUNE 30, 2011
$202,280
$(25)
$254,577 570
225,938 (14,072) (0) $1,214 $26,458 $26,434 $414,146 $(25) $1,214 $(4,967)
$(4,967) $463,260
41
OPERATING ACTIVITIES: Income before income taxes and minority interests Adjustments for: Income taxes paid Depreciation Amortization of goodwill Increase in allowance for doubtful receivables Decrease in allowance for head office transfer costs Changes in assets and liabilities: Increase in trade accounts receivable Increase in other accounts receivable Increase in other accounts payable Othernet Total adjustments Net cash provided by operating activities INVESTING ACTIVITIES: Proceeds from withdrawal of time deposits Purchases of property and equipment Purchases of intangible assets Payments for lease deposits Purchases of investment securities Cash decrease due to acquisitions of newly consolidated subsidiaries Othernet Net cash used in investing activities FINANCING ACTIVITIES: Proceeds from stock issuance Dividends paid Othernet Net cash used in financing activities FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR ADDITIONAL CASH FLOW INFORMATION: Cash decrease due to acquisitions of newly consolidated subsidiaries: Current assets Non-current assets Goodwill Current liabilities Minority interests Acquisition cost Cash and cash equivalents included in the above current assets Cash decrease due to acquisitions of newly consolidated subsidiaries 42
30,935 (10,861) 180 169 154 (148) (9,201) (5,163) 9,236 378 (15,256) 15,679
$ 383,191 (134,535) 2,230 2,093 1,908 (1,833) (113,973) (63,954) 114,406 4,682 (188,976) 194,215
NET SALES
(Millions of yen) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
1Q 2Q 3Q 4Q
OPERATING INCOME
(Millions of yen) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
1Q 2Q 3Q 4Q
2010.6 2011.6
6,837 12,410
15,017 26,712
24,291 43,085
35,231 64,178
2010.6 2011.6
3,939 6,221
9,013 13,146
14,283 21,345
19,578 31,135
* Accumulated basis.
* Accumulated basis.
NET INCOME
(Millions of yen) 20,000
TOTAL ASSETS
(Millions of yen) 70,000 60,000
15,000
50,000 40,000
5,000
0
1Q 2Q 3Q 4Q
2010.6 2011.6
2,129 3,695
5,345 7,856
8,391 12,551
11,505 18,240
2010.6 2011.6
32,170 30,645
32,170 40,392
24,952 46,418
32,170 62,856
* Accumulated basis.
Note: Up to the 2nd quarter of the fiscal year ended June 2011, figures are non-consolidated. Figures are consolidated from the 3rd quarter.
43
Share Information
Share data
Authorized share capital: 640,000,000 shares Number of shares issued: 229,300,000 shares Unit of shares: 100 shares
Principal shareholders
Name
(as of June 30, 2011) Number of shares held (shares) Shareholding (%)
Yoshikazu Tanaka KDDI CORPORATION State Street Bank and Trust Company (Standing proxy: The Hongkong and Shanghai Banking Corporation Limited Tokyo Branch) Kotaro Yamagishi Japan Trustee Services Bank, Ltd. (Trust Account)
Composition of shareholders
Other companies 7.11% Financial institutions 8.87% Foreign investors 22.29%
09.12
10.12
11.12
GREE
TOPIX
44
Company Information
GREE, Inc. Social Media Business Social Application Business GREE Platform Business Advertisement/Ad Network Business Venture Capital Business
Founded: Founder and CEO: Headquarters: Employees: Independent Auditors: Stock Listing:
December 7, 2004 Yoshikazu Tanaka Roppongi Hills Mori Tower, 6-10-1 Roppongi, Minato-ku, Tokyo, Japan 934 (Consolidated, as of December 31, 2011) Ernst & Young ShinNihon LLC Tokyo Stock Exchange First Section
Account Management Institution: The Chuo Mitsui Trust and Banking Company, Limited* 3-33-1 Shiba, Minato-ku, Tokyo, Japan
* The Chuo Mitsui Trust and Banking Company, Limited will become the Sumitomo Mitsui Trust Bank, Limited on April 1, 2012 following a merger between the Sumitomo Trust and Banking Company, Ltd. and the Chuo Mitsui Asset Trust and Banking Company, Limited.
Location of head office after merger: 1-4-1, Marunouchi, Chiyoda-ku, Tokyo, Japan Contact: e-mail: Telephone: Website: IR, GREE, Inc. ir@gree.co.jp +81-3-5770-9500 Corporate information about GREE, Inc., including the Annual Report, business results and news releases, may be viewed on the Companys website. URL: http://www.gree.co.jp/en/
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Printed in Japan