Macromill Inc

TSE:3978

Earnings Call Transcript 2021-Q1

[Toru Sasaki, executive]

Thank you very much for watching this video presentation of Macromill for Fiscal Year 2021 first quarter results. I am Sasaki, Representative Executive Officer and Global CEO. To avoid the spread of COVID-19, please allow us again to use the video format to present our first quarter results.

Here is today's agenda. First, I will summarize the first quarter, followed by Shimizu, CFO, to explain financial information. And then I will explain about Japan and the Korea Business Segment and Overseas Business Segment excluding Korea.

Please look at Page 3. The first quarter revenue was JPY 9.09 billion, down 8% year-on-year and down 9% in constant FX. Operating profit was JPY 680 million, down 44% year-on-year and down also 44% in constant FX. Both revenue and profit decreased. But compared to the fourth quarter last fiscal year, recovery in online and digital area has progressed, making revenue decline versus last fiscal year smaller. Also, consolidated operating profit has turned around. I believe we've made a good start in terms of recovery from the pandemic.

In the guidance at the beginning of the year, we set JPY 40 billion of revenue and JPY 3.4 billion of operating profit as target. Aiming at these targets and looking into after COVID impact, we will study and execute specific plans to evolve ourselves into research and data company and achieve global top 10 as well as #1 position in Japan and Asia.

That is the summary of the first quarter. Now Shimizu, CFO, gives update on financial information.

[Masahiro Shimizu, executive]

Thank you, Sasaki san. Please turn to Page 5. Revenue in Q1 was JPY 9 billion. We saw a decrease of 8% year-on-year. This is in line with the pace that we set for the annual guidance. As you recall, revenue from April to June declined by 23% year-on-year. We still see negative impact from COVID-19 in all the markets we operate. The degree of negative impact varies among the markets. But in general, our clients appreciate merits of online research, particularly in these difficult times and we continue to receive purchase orders from them.

Also, we have continued offline research services to our clients when they need product testing by providing safe environment to both monitors and clients. As to operating profit, it was JPY 680 million. We saw a decrease of 44% year-on-year. This is primarily because of the slow revenue and increase in depreciation cost and expenses related to IT investments in previous years. Thanks to the investments, though, we have been able to continue operations by working from home as we had completed moving research systems and ERP systems on to cloud. We believe that these investments were worth making. The profit attainment in Q1 is in line with the pace that we set for the annual guidance.

We'd like to walk you through P&L in more detail, so please turn to Page 6. Regarding revenue, we saw a decrease of 8%. Revenue in Japan and Korea segment declined by 4.9%. We still see negative impact from COVID-19 in both countries, but we believe that we've started to see recovery in clients' demand. Revenue in other Overseas Segment declined by 17.5%. We continue to see strong negative impact in this segment.

In terms of major expense items, we managed employee expenses and we saw a decrease of 1.3%. The total number of employees also declined slightly year-on-year. As to panel expenses, it declined by 6.7%, in line with revenue. Regarding outsourcing expenses, we saw a decrease of 13.4%. This is because offline research, which tends to spend higher outsourcing expenses, was slow in Q1. Depreciation expenses grew mainly due to IT investments. It increased by 8.9%.

Shift to cloud increased subscription fees paid to cloud operators, which are accounted for in other operating expenses. As I mentioned earlier, the move to cloud has enabled us to work from home and provide services to clients very smoothly. We saw savings in office utility cost and travel expenses, which offset the increase in IT expenses. We saw no change in other operating expenses from last year. Operating profit margin in Q1 was 7.5%. EBITDA margin was 15.6%. The negative impact in other Overseas Segment was stronger than that in Japan and Korea Segment.

Please turn to Page 7 for segment profits. Operating profit was down 44% year-on-year. Out of 44%, 22% came from Japan and Korea Segment and the remainder came from other Overseas Segment. Aside from decline in revenue, cost structure in both segments has not changed very much.

Please turn to Page 8. We'd like to show you historical revenue trend. As you can see on the left, Q1 revenue was down 8% in actual currency and in constant currency, it was down 9%. Japan and Korea Segment was down by 5% in both actual and constant currency. Other Overseas Segment was down by 17% in actual currency and down by 20% in constant currency. As you can see on the left, our business is seasonal, and we typically see lower revenue in Q1 than other quarters. As usual, we expect higher revenue in Q2 and Q3 than Q1.

We then like to share with you historical cost trend. Please turn to Page 9. As you can see on the left, operating expenses were down by 3% year-on-year. In each bar, we show a breakdown of variable costs such as panel and outsourcing, and fixed costs such as others, depreciations and amortizations and employee cost. You can see on the right chart that our fixed costs have been basically flat, except for the impairment in Q4 last year. We'd like to remain flexible and make wise decisions as to whether we restart investments in people and technology or keep controlling expenses.

Then we'd like to share with you historical head count trend. Please turn to Page 10. Total head count decreased by 13 year-on-year. We have used our capital to maintain the current workforce to be ready for the future revenue recovery. As mentioned previously, we'd like to remain flexible to make wise decisions on when we restart to invest in people. We do not have precise numbers today to share with you, but we are in the process of planning such investments for the remainder of the year and beyond in order to seize the chance of recovery.

Then we'd like to explain balance sheet on Page 11. Starting with working capital. We received cash from large institutions and governments in 86 days. We pay our partners, vendors and monitors in 47 days. We need to manage this imbalance in cash inflow and outflow. So we aim to keep our cash position equal to 2 months revenue. Goodwill on our balance sheet was JPY 41.5 billion. JPY 39.1 billion or 94% of total goodwill was attributed from Japan and Korea Segment. The remainder, JPY 2.4 billion or 6% of total was attributed from other Overseas Segments.

We managed finance cost reasonably low. The annualized cost was 0.87%, unchanged from a year ago. Our credit rating is BBB+ and outlook is stable. Net debt was JPY 26 billion, and our latest 12 months EBITDA was JPY 8.1 billion. Net debt-to-EBITDA was 3.18x. This is above our target of 2 to 2.5x, which we set prior to the COVID-19 confusions, but we intend to improve it as we start to rebuild our revenue.

Interest coverage ratio was negative 0.31x due to the impairment loss in FY '20. But without it, the coverage ratio should have been 13.45x. We have no solvency issues. Our ROE was also negative due to the impairment. But without it, it should have been 8.5%. Again, we intend to improve these numbers as we grow our revenue.

We'd like to explain details on goodwill on Page 12. Most of our goodwill was attributed from leverage buyouts of the former Macromill. The value is JPY 39 billion and it has not changed very much since then. It represents 94% of the total goodwill. When we see a 41.8% decline in cash flow in each year of the next 5 years and beyond, the value in use would equate to the current book value of goodwill. We, therefore, believe that the probability of impairment in this segment is very low. The remainder of goodwill was attributed from an acquisition of MetrixLab. We have written down the goodwill in 2015 and 2020.

The current book value is JPY 2.4 billion. It represents 6% of the total goodwill. We have no intention to write this off further, but in case we may need to, we believe that the magnitude of impairment in this segment to our financials would be small.

Next, we'd like to explain where and how we generated cash and spent it. So please turn to Page 13. Operating cash flow was minus JPY 1.3 billion due to lower revenue and corporate income tax. Investment cash flow was minus JPY 400 million due to IT investments, but this was lower than previous year by JPY 280 million. Our free cash flow was minus JPY 1.6 billion. Finance cash flow was minus JPY 1.6 billion as we repaid part of our bank loans. As a result of positive cash flow from the previous quarters, we increased cash by JPY 1.9 billion from a year ago. We have JPY 9.9 billion in cash and feel comfortable with this position.

Then let us explain how we did against our revenue and profit guidance. So please turn to Page 14. We expect that we will continue to see negative impact from COVID-19 throughout this financial year. The impact would be strong in the first half and we expect lower impact in the second half. We also expect solid recovery in online research. Based on such assumptions, our full year revenue guidance is JPY 40 billion or 3.1%, lower than FY '20.

Our profit guidance is JPY 6.5 billion in EBITDA, JPY 3.4 billion in operating profit and JPY 1.6 billion in net income. Attainment in Q1 was 22.7% for revenue, 21.9% for EBITDA, 20.1% for operating profit and 14.7% for net income. Impact from foreign exchange was slightly positive. Compared to the pace that we set in revenue and profit guidance, we believe that we had a positive start in Q1. However, we have started to see new cases. Risks remain. We'd like to stay flexible and make wise decisions on whether we accelerate investments or keep controlling expenses.

Based on such business environment and financial performance, let us explain our capital allocation policy. Please turn to Page 15. As we explained earlier, we have cash balance of JPY 9.9 billion. We intend to allocate such funds to maintain talent and research systems. We intend to continue to invest in IT maintenance and wait for the sign of recovery in research demand. Then we intend to allocate our capital to repay debt. Our net debt is JPY 26 billion. In July 2021, JPY 5 billion bond will mature. We plan to refinance this by bank loan and bond issue.

We then intend to allocate capital to shareholders' return. We intend to maintain annual dividend at JPY 11 per share. As to share buyback, we have suspended the study, but intend to restart it when we start to see signs of recovery.

Now I would like to hand this microphone to Sasaki san regarding business update.

[Toru Sasaki, executive]

Thank you, Shimizu san. Now let me give you business update on Japan and the Korea Business Segment. Please look at Page 17. Since this is the first quarter, the year-to-date growth on the left-hand side of the page and the quarterly growth on the right-hand side are the same. The actual revenue shown in the upper part of the page was down 5% year-on-year. And in constant Korean currency rate, it's also down by 5% year-on-year. Moving to the lower part of the page, segment profit was down 25% year-on-year and in constant FX also 25% down.

From the next page on, I give more details about Japan and Korea business respectively. Please look at Page 18 for Japan business summary. The first quarter revenue was down 7% year-on-year underperforming the previous year. By area, digital was down 5% and online, offline and database, et cetera, was down 7%. Although it is not mentioned on the slide, the breakdown is offline down by 28%, online down by 1%. Environment is still tough for offline research, which is based on face-to-face interviews. But for online and digital, revenue decline is reduced to single percentage respectively, showing recovery trend, as I mentioned, for the summary page at the beginning.

Please move on to Page 19 for details of Japan business. Our company is promoting work at home. Currently, 80% of our employees are remote working. Since the fourth quarter last fiscal year, we have been increasing meetings with clients on the web and webinars as Door Knocker, promoting digital transformation on the company level. The number of client meetings, an important revenue KPI, remains on the pre-pandemic level.

From the marketing activities of our clients, we can feel a solid recovery from the fourth quarter last fiscal year. It is in these circumstances that we believe, as I mentioned earlier, that online and digital results are recovering. Also client needs for marketing data utilization continue to increase.

Please turn to Page 20. On the left-hand side, our initiatives like Macromill Consortium and on the right are initiatives to become research and data company. On October 29, Macromill Consortium held a webinar focusing on consciousness and behavioral data approach. The audience works from areas such as FMCG marketing, product development and communication strategies. Data showing how the pandemic changed their life was shared with the audience. And Mr. Takahashi from Hojosen, our consortium partner, explained what we could read from the data and how we could use them for marketing.

It was a very lively webinar with more than 500 participants from our client companies. Another webinar is scheduled for November for clients in telecommunications sector. The second update about the consortium is initiatives with marketing force. The co-hosted seminar in February has led to 17 confirmed projects. Each one of them is not limited to research-related solutions. Final goal of these projects is to solve marketing issues, creating ultimate marketing plans.

This is clearly beyond the [indiscernible] project we worked on in the past. These projects also give a new perspective for positioning, significance and meaning of research as well, providing invaluable learning experience.

As to initiatives to evolve ourselves to research and data company, we announced a business alliance with Sumitomo Mitsui Card on September 4. The 2 companies work together to promote strategic data utilization. And on September 7, Macromill and Lion presented a project for data utilization in public dialogue format. These are all ambitious challenges and worth doing for us. It is an area where we have competitive edge and no real competition. It is certain that such needs are increasing, and we would like to add more cases and establish a unique position in this area. So much for Japan business.

Moving on to Korea business on Page 21. First quarter revenue of Korea business was up 15% year-on-year and up 17% in constant FX. Despite COVID-19 surging again in August, 2-digit growth was achieved year-on-year. According to Korea Research Association, the growth of fiscal year 2020 marketing research market is expected to be negative with competition, including Big 4, struggling. While in Korea, offline research, including research conducted by visiting interviewees, accounts for 30% of the market, Macromill continues to grow by capturing demand for online research, replacing such offline research.

We are the only company with a big proprietary panel in Korea. Our panel data service is also growing, leveraging the panel asset. The current growth trend is expected to continue into the future. That is all for Korea business.

Please move on to Page 23 for other overseas business. Upper half of the page shows first quarter revenue of Overseas Segment excluding Korea down 17% year-on-year and down 20% year-on-year in constant FX. Lower half of the page shows first quarter operating profit, which was down 193% year-on-year and down 190% in constant FX. Compared to the fourth quarter last fiscal year, revenue growth is improving, and EBITDA has turned positive, but its recovery is slower than that in Korea and Japan. In the whole region, business with clients in electric equipment, FMCG and OTC health care sectors has been good.

While overall client marketing activities are yet to recover, our wallet share with important clients is expanding, making us grow more than last fiscal year. On the other hand, we are still struggling in alcohol and entertainment sectors.

Now I explain briefly each region. Please look at Page 24. First quarter revenue of U.S. business was down 19% year-on-year and down 22% in constant FX. A main driver for the revenue decrease is challenging conditions in alcohol industry, where there are many key accounts.

Please look at Page 25. First quarter revenue of Europe business was down 20% year-on-year and down 23% in constant FX. Challenging conditions in the U.K., the Netherlands and France, where we have relatively large size of business in Europe, drove down revenue.

Lastly, please look at Page 26. First quarter revenue of Latin America, Middle East and Asia, excluding Japan and Korea, was down 4% year-on-year and down 7% in constant FX. The rest of the world is recovering faster than the U.S. and Europe. China, Mexico and India are increasing revenues, and Singapore is on the recovery trend.

Now wrap up. Impact of the pandemic continued, and both revenue and profit decreased year-on-year in the first quarter. However, performance is on recovery trend compared to the fourth quarter last fiscal year. Also, we have made a good start in terms of progress on full year guidance. That said, the end of the pandemic is not visible yet, and different segments have different levels of recovery. With the pandemic resurging in Europe, we can't be optimistic about the situation. Last time we announced results, I said that we act on our own words. We will first work to achieve full year guidance and continue to review specific strategies for future growth. And we will make announcement about such strategies at an appropriate timing. We'd appreciate your understanding and continuous support. That's all. Thank you very much again for joining us today.