Macromill Inc

TSE:3978

Earnings Call Transcript 2022-Q1

[Toru Sasaki, executive]

Thank you very much for watching this video presentation of Macromill for the first quarter results of fiscal year ending in June 2022. I am Sasaki, Copresentative Executive Officer and Global CEO.

This time, again, we are using the video format to present the results. Here is today's agenda. First, I will summarize the first quarter followed by the presentation of financial information by Takahashi, Head of IR Department. Then I will explain Japan and the Korea business segment and Overseas segment, excluding Korea.

Lastly, I will take one of the frequently asked questions from the investors, namely, our view towards upcoming cookie-less era. Please turn to Page 3.

The first quarter revenue was JPY 10.89 billion, up 20% year-on-year and up 18% in constant FX. Operating profit was JPY 1.13 billion, up 66% end of year and up 67% in constant FX. We made a good start of the year with both revenue and operating profit, what we're achieving initial guidance and increasing significantly from the last year's results, which were impacted by COVID-19.

At this moment, with the announcement of the first quarter results, the initial guidance remains unchanged. This anticipation of post COVID recovery, increasing demand from consumers mindset and behavioral changes due to COVID and the pressure of increased private seat regulation. The value of data from consumer parts has been reappreciated and we feel momentum for the market expansion, which will not end up being just contract.

As I mentioned at the results announcement in August, in the current fiscal year, we are making a large investment to transform our business model and to build a sustainable working environment. The effect of such investment will allow us to capture market momentum and to aim at growing both revenue and operating profit. So much for the summary of the first quarter. I would like to invite Takahashi to present to you financial information.

[Ryo Takahashi, executive]

Now I'd like to talk about the financial results. Please turn to Page 5.

As Sasaki-san mentioned, in one word, the financial results for Q1 was good. The left side shows the revenue trend. The Q1 revenue was JPY 10.89 billion, up JPY 180 million year-on-year. Like the previous Q4, in this Q1 also last year, there was a strong impact of COVID-19.

Therefore, year-on-year growth rate went up 20%, showing a particularly strong growth recovery. The right-hand side shows the operating profit trend. Q1 operating profit was JPY 1.13 billion, up JPY 450 million year-on-year.

From the previous year, revenue recovered quarter after quarter, the profit recovery was delayed. Operating profit in the prior year Q4 turned to the positive growth year-on-year. But this term, we assume the large increase of employee expenses and outsourcing expenses and reduction of the first half operating profit, we expect a negative growth year-on-year.

But actually, revenue was higher than assumption and Q1 operating profit was larger than previous year with strong recovery, leading to an increase of 70% year-on-year. On the following pages, I'd like to discuss the details.

Please turn to Page 6, Revenue. Our business is seasonal, and every year, revenue is largest in Q3 and in Q2. Even under COVID-19, this trend did not change. On the other hand, consolidated revenue in Q1 went up 20% year-on-year, and the breakdown is shown on the left. In both segments, there was a 2-digit growth year-on-year. The graph on the right shows the trend by quarter.

In Q4 of FY 2020 and Q1 of FY 2021, you can see that there was a strong impact of COVID-19. Under such situation, in the last Q4 and in this Q1, you can see there was a strong growth year-on-year. But in this Q1 compared to pre-Covid 2020, that is compared to Q1 ending June 2020, there is a 2-digit growth.

We can see that we have shifted from a recovery phase from COVID to a growth phase. Next is Page 7, waterfall chart showing operating profits and factors of change by segment.

I mentioned that there was a growth of 66% year-on-year. The breakdown is a growth of 20% for Japan and Korea Business segment and a 46% increase in other overseas segment. As you can see in both segments, employee expenses are increasing. In Japan and Korea Business segment, in addition to that, outsourcing expenses increased.

On top of that, in both segments, strong revenue increase was able to offset the increase in expenses, leading to a realization of a 2-digit profit growth in both segments. Page 8 shows the cost trends.

The graph on the left shows the Q1 operating cost increase over prior year and the graph on the right shows the operating cost trends by quarter.

Overall, operating costs increased 16% year-on-year. General expenses are linked to revenue. Other expenses were flat year-on-year. As a regular movement that should be highlighted, are depreciation and amortization expenses, employee expenses and outsourcing expenses.

First, with the influence of a partial office return last year, depreciation went down 7% year-on-year. And next, with increase of demand from customers, currently, inquiries exceed our internal capacity, which you are responding by using outsourcing, therefore, outsourcing expenses increased.

As we have mentioned, the trend of strong revenue compared to our assumption is expected to continue. In Q2 and Q3, we expect we will continue to have higher demand than previous year. To respond to that, we will be increasing employee expenses. In other words, increase of outsourcing expense and employee expenses are intentional. The details are shown on Page 9.

In the midterm business plan, we have set a target of a recovery of operating profit margin to 15%. As explained in the previous full year results, the right-hand side shows the steps to realize this target. Currently, we are under first step.

As you can see on the graph on the top left from the last Q4, we are hiring employees towards the busy season of Q3. As of the end of this quarter, headcount is 2,686 increase of about 50 people compared to the full year financial results.

As of end of this year, we plan to increase to a scale of slightly less than 3,000 people. We will continue to hire employees this year. The page is showing you a detailed headcount plan, which we introduced every quarter is in the appendix. Please refer to that when needed.

In any event, we are hiring employees in this manner. And as you can see on the bottom left graph from Q4, we have a 2-digit growth year-on-year of employee expenses and to respond to the strong demand that we are facing currently, we are making full use of outsourcing.

And therefore, from Q4, we are seeing a large increase year-on-year. Basically, you can see that things are proceeding as we have assumed. One thing that was unexpected is the growth of revenue, which is higher than our forecast. This is a happy miscalculation. The point is that towards Q3, we have to firmly increase internal capacity.

Therefore, currently, we are taking from measures to this end. From Pages 10 to 12, we have shown the P&L, balance sheet and cash flow statement. Please refer to these pages when needed.

There are nothing to be highlighted, in particular, but I would like to make a comment on the balance sheet on Page 11. First, there are no major changes in the working capital and balance sheet continues to be sound.

As mentioned in the full year results, immediately before the end of prior term, in June, total JPY 15 billion funding was made of JPY 5 billion, a 3-year bond of a coupon of 0.38% and JPY 10 billion, a 5-year bond with a coupon of 0.56%, which are allocated to the redemption of the first bond, the 3-year bond, which reached maturity in July and partial prepayment of bank loans.

So total interest-bearing debt is steadily declining, and we've refinanced our borrowings using lower rate corporate bonds, interest repayment is steadily reducing to a level of below 1%. Net debt EBITDA is 2.55x, approaching the level targeted under the midterm business plan and ROE is 10.99x, achieving the target under the midterm business plan.

Lastly, Page 13 shows the achievement against our guidance. As we have mentioned and as written here, results in Q1 exceeded our initial guidance. Profits in particular, we are seeing a negative growth year-on-year for the first half, but the result was much higher.

However, we have just finished Q1 and the second and third biggest quarters are yet to come. As for the revenue growth year-on-year in the prior Q4 and this Q1, 2 years of the previous year were greatly affected by COVID-19. And we think after Q2, the figures will be more stable.

We are also concerned that the number of people infected with COVID-19 is increasing mainly in Europe. From this perspective, at this moment, our initial guidance remains unchanged.

Now the business update will be presented in detail by Sasaki-san.

[Toru Sasaki, executive]

Thank you, Takahashi-san. Now I'd like to give an update on Japan and Korea business segment. Please turn to Page 15.

The first quarter revenue increased 13% year-on-year and increased to 12% in constant Korean currency. The operating profit increased 17% year-on-year and increased 16% in constant FX. Just the first quarter results, year-to-date figures are the same.

Next, please turn to Page 16 for Japan business. As announced in the midterm business plan from this first quarter announcement, we have changed the classification of disclosure information of Japan business.

Instead of non-digital services such as online offline research versus digital categories -- We used the following 2 categories, namely research business and digital and other new business including testing digital, data consulting, life science, ad distribution and Southeast Asia.

For the details of other new business, please refer to the materials of the results announcement in August. The first quarter revenue of Japan business was up 12% year-on-year. Research business was up 6% and the digital and other new business was up 42%.

These figures show growth of a dose in the first quarter 2020, the year before last and the Japan business as a whole has topped the pre-COVID level.

Please look at Page 17. In August, I said that we would present the KPIs to show progress against midterm business class. For the current fiscal year, we believe that revenue is an important indicator. Therefore, this information shown on this page will be disclosed quarterly along with qualitative information.

In research business, we temporarily suspended taking orders for off-line usage. due to the declaration of the state of emergency. While online lease witnesses a very strong demand exceeding the level of 2 years ago.

In addition, global research from Japan is also doing well, which drives the research business with online research. In digital and other new business, digital measurement has been robust. With the launch of data analysis solution for which we work with Yahoo!.

Also, both data consulting and life science areas made a good start and showed a strong growth, leading to 42% year-on-year increase. Next, please look at Page 18 for Korea business.

The first quarter revenue was up 22% year-on-year and up 14% in constant FX. After the double-digit growth achieved in the last fiscal year, the momentum continues with further double-digit growth of the market and the competition are struggling.

Online research was up 24%, and the digital area was up 172% driving the growth. So much for Korea business. Now please look at Page 20 for other overseas business, excluding Korea.

The first quarter revenue was up 46% year-on-year and up 39% in constant FX, showing a stronger growth continuing from the fourth quarter last fiscal year. With this strong revenue growth, operating profit, which was in the red last fiscal year, also increased significantly and turned positive.

Page 21 illustrates regional results. As you can see, revenue grew double digits year-on-year in all regions, including Europe and the U.S. Our simple strategy to increase our wallet share in strategically important global key accounts has proven effective to be commissioned for GKA global project.

Sector-wise, FMCG, media and advertisement are doing well, while travel and entertainment continue to be in a bad shape. Recovery of alcohol beverage sector, which includes our large U.S. GKA is another positive development. So much for segment update.

Now as I mentioned at the beginning, I'd like to explain how Macromill is viewing and is preparing for cookie-less era. For digital marketing, to use the cookie is a usual and indispensable way to acquire and utilize behavioral data.

This global platform self-regulating and personal information being more keenly protected. However, the use of cookie is being restricted more rigorously, probably in late 2023, a further party cookie will practically extinct looking the cookie-less era.

Please turn to Page 23. We're targeting ad distribution, third-party cookie data have been used to distribute most suitable ad for each consumer. It will be impossible to get third-party cookie data in the near future. Platformers and others are creating safe space called data clean room. Platformers have a huge amount of data tied to their customer IDs. A data clean room provides a legitimate and secure environment to use such data in the form of anonymized and statistical data, allowing highly accurate targeting ads.

It is said that in the cookie-less world, data clean rooms will be the mainstream.

Please turn to Page 24. As data clean rooms become the mainstream of digital marketing, the platformers need to address some issues, how to obtain information outside their own platforms, privacy issues; and lastly, fairness.

It will contribute to solving these issues for Macromill to provide our own data with consent from our proprietary consumer panels. It will increase the value of insulation in the data clean room, allowing advertisers to distribute accurately targeting ads.

Please turn to Page 25. For Macromill to acquire more data and to have a stronger presence in the cookie-less world. We need to obtain rights to participate in each platform as data clean room while deepening mutual trust with our proprietary panels.

Fortunately, we have very good relationships with each platform and with our proprietary panels. I believe that I will be able to make reports on good developments to you.

Let me wrap up today's message. For the first half of the current fiscal year, we assumed an increase in revenue, but a decrease in profit due to significant investment in business model transformation and sustainable working environment.

The actual revenue increase, however, exceeded our assumptions, leading to a significant increase in profit as well. We made a very good start in the first quarter. Question is whether the current demand level is just transitory or will it continue ahead. I personally think that it is not transitory.

We will continue to work to achieve the goals of the midterm plan by making steady progress on this fiscal year's target. Thank you very much for staying with us until the end.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]