Macromill Inc

TSE:3978

Earnings Call Transcript 2023-Q1

[Toru Sasaki, executive]

Thank you for taking time be scheduled today to watch the video presentation of the first quarter financial results for the fiscal year ending June 30, 2023 of Macromill. I'm Sasaki, Representative Executive Officer and Global CEO.

This time, again, I'll provide you with an overview of our financial results in the form of a video presentation. I will start with a summary of the first quarter. And then Hashimoto, CFO, will present financial information. After that, I will give you an update on the status of the Japan and Korea Business segment as well as Overseas Business segment, excluding Korea.

Please turn to Page 3. The first quarter revenue was JPY 12.43 billion, up 14% year-on-year or up 11% with constant FX. Operating profit was JPY 810 million, down 28% year-on-year or down 29% with constant FX.

Sales revenue increased by double digits as the company was able to meet the continued growth in client demand from the previous fiscal year. On the other hand, operating profit declined due to an increase in total employee expenses as the company expanded its operational capacity since the previous fiscal year. The increase in revenue and decrease in profit in the first quarter were in line with expectations, and we are off to a good start with respect to our full year guidance.

In addition, the measures to improve productivity and increase operational capacity, as we explained last time, are progressing as come. We will continue to expand operational capacity, improve productivity and respond to stronger client demand to achieve the goals of our midterm business plan.

This is a summary of the first quarter, and I will now the baton over to Mr. Hashimoto for a detailed explanation of financial information.

[Shintaro Hashimoto, executive]

Please turn to Page 5. The left side shows revenue trend. Revenue for the first quarter was JPY 12.4 billion, up over JPY 1.5 billion from the previous year or up more than 14% year-on-year. Double-digit revenue growth was achieved on the back of continued growth in client demand from the previous quarter.

The graph on the right-hand side shows the trend of operating profit. Operating profit for the first quarter was JPY 0.8 billion, down about JPY 0.3 billion from the previous year or down 28% year-on-year. Although operating profit decreased from the previous year due to an increase in expenses associated with the expansion of operational capacity, there was a significant improvement from the fourth quarter of the previous fiscal year. We believe that we made a good progress in the first quarter against our full year guidance.

Now on Page 6, I'll show you revenue and operating profit by segment. Revenue from Japan and Korea Business segment in the first quarter was JPY 8.9 billion and revenue from other Overseas Business segment was just under JPY 3.6 billion. Both segments increased slightly, less than JPY 0.8 billion over the previous year with a year-on-year growth rate of plus 9% and plus 29%, respectively.

On the other hand, operating profit of Japan and Korea Business segment was JPY 0.8 billion in the first quarter and operating profit at the Overseas Business segment was around the breakeven point. On a year-on-year basis, Japan and Korea Business segment was slightly more than JPY 0.1 billion below last year's level with a 15% decline in growth. And the Overseas Business segment was also down slightly less than JPY 0.2 billion from the previous year, and its growth rate was down 95% year-on-year. In both segments, the main reason for the decline was an increase in operating expenses to expand operational capacity.

Next, using the waterfall chart on Page 7, I will explain in more detail the factors behind the change in operating profit by segment. The 28% year-on-year decline in consolidated operating profit can be broken down into minus 12% in Japan and Korea Business segment and minus 16% in other Overseas Business segment. Both segments delivered significant revenue growth but were unable to absorb the increase in total employee expenses and other expenses resulting in a decline in operating profit. In addition, other expenses increased due to the expansion of sales activities following the easing of COVID-19 wave restrictions and higher IT expenses.

Page 8 shows a breakdown of operating expenses. Operating expenses for the first quarter were JPY 11.6 billion, up 19% year-on-year, of which total employee expenses accounted for about half or JPY 5.7 billion. The 23% increase reflects the effect of recruitment initiatives to expand operational capacity, which has been underway since the previous year as well as the active hiring for newly focused businesses. Other expenses to expand the sales activities and outsourcing expenses to expand the creation capacity increased by 21% and 18%, respectively, surpassing the revenue growth.

Page 9 shows the trend of operating expenses. As reported on the previous page, operating expenses in the first quarter increased year-on-year but decreased compared to the fourth quarter of the previous year. This is due to a decrease in bonuses and total employee expenses and M&A-related expenses (sic) [ D&A-related expenses ] and other expenses.

Page 10 shows the trend of total employee expenses and outsourcing expenses as well as headcount. In this fiscal year, we are making steady progress as planned in improving productivity and expanding operational capacity, which are important factors for improving operating margin. As a result, although revenue increased compared to the fourth quarter, outsourcing expenses were at the same level as the fourth quarter of the previous year, as shown in the graph on the left. Total employee expenses decreased due to the inclusion of bonuses in the fourth quarter of the previous year.

As shown in the graph on the right, consolidated headcount in the first quarter increased by about 320 (sic) [ 321 ] year-on-year with a significant increase in the number of employees in the Overseas Business segment.

On Page 11, I'll explain again our efforts to improve the operating margin and our goals for the current fiscal year. Similar to the first quarter results, we expect both outsourcing and total employee expenses to increase faster than revenue growth in the first half of the current fiscal year. while total employee expenses increased significantly in the previous year due to the impact of increased headcount, we will seek to improve productivity in this fiscal year by enhancing the proficiency of hired personnel and expand/enhance operational capacity. Therefore, we expect the pace of increase in the number of hires to slow down compared to the previous year. Until the in-house capacity has increased, we will leverage outsourcing.

Over the second half of the year, we plan to gradually control the pace of total employee expense increases below revenue growth while reducing our dependence on outsourcing.

Page 12. I'll explain the balance sheet. Goodwill has increased due to the M&A transaction, which was explained in the previous financial results announcement and closed at the beginning of this fiscal year, resulting in a transfer of items from equity to liabilities. In addition, the year-on-year decrease in the first quarter profit has led an increase in the net debt to EBITDA multiple and the decrease in ROE.

Page 13, the statement of cash flows. Cash flow from financing activities improved year-on-year due to lower regular repayments (sic) [ payments ] as a result of the March refinancing and absence of the JPY 5 billion bond redemption in this fiscal year. Cash flow from operating activities is negative in the first quarter as in previous years.

Finally, on Page 14, I would like to explain our achievement against the guidance. We made steady progress in the first quarter, being on track to meet our full year guidance. As you can see, the second half of the year has a higher weighting in our full year guidance, especially in terms of profit because we expect an improvement in the profit margin due to higher revenue and productivity. We aim to achieve double-digit growth in gross revenue and profit for the full year by continuing to achieve the planned performance in the second quarter and beyond.

That concludes my explanation. Next, Mr. Sasaki will give a detailed explanation of the business.

[Toru Sasaki, executive]

Thank you, Mr. Hashimoto. I will now update you on the status of the Japan and Korea Business segment on Page 16. In Q1, revenue for the Japan and Korea Business segment increased 9% year-on-year or 8% excluding the impact of the currency for the business in Korea. Primarily due to the rise in total employee expenses for Japan, segment profit was down 15% year-on-year on both the reported and constant FX basis.

On Page 17, the graph on the left illustrates that Q3 in Japan and Q2 in Korea are the strongest quarters whereas Q1 tends to be slow. While the same trend is expected for this fiscal year, sales are growing steadily compared to last year.

On the other hand, as shown by the graph on the right, while segment profit was down mainly due to an increase in total employee expenses in Japan, there was a significant improvement from Q4 last fiscal year when the business recorded losses. From Q2 and beyond, sales are expected to grow going into the busy season. And profits are also expected to improve productivity gains, resulting in higher profit in the second half.

Please refer to Page 18 for more information on the Japan business. Q1 sales revenue for our Japan business were up 8% over last year, with an 8% increase in the research business, which includes online and off-line research, and a 10% increase in digital and other new businesses, which includes digital service, data consulting and life sciences, among others.

As mentioned at the outset, the operational capacity has been expanded as planned, resulting in a strong growth in the research business compared to the previous year. On the other hand, although the sales for digital and other new businesses were up 10%, the result was slightly below expectation.

Next, let me provide more details on the research business as well as the digital and other new businesses group on Page 19. In the research business, client demand remained strong, and revenue from the online research continues to grow. In addition, in the first quarter, there was a spike in off-line research driven by the resumption of the service which had been suspended due to the pandemic. Furthermore, organizational reforms implemented since last fiscal year for promoting partnerships with clients, specifically the integration of sales and research operations, have enabled us to scale up the project. We are also making progress with our consortium partner, Marketing Force, which provides [ nice ] marketing frames, and both initiatives are contributing to sales growth. In the meantime, as we still experience lost opportunities, we will continue to expand our operational capacity.

Next, the digital and other new businesses. Although the consulting business continued to drive good performance maintaining the trend from last year, digital service was down. And in life science, the timing to [ the sales ] of large projects was pushed back. And therefore, we were short of the growth rate target. Having said that, it was a timing issue for the Life Science business, and we expect solid growth for the full year.

Now looking at the digital business. We've announced in July the removal of the third-party cookie has been extended to the latter half of 2024, and we are currently working on building an alternative technology. While the digital measurement service revenue is growing, thanks to steady progress in building relationship with the major platforms and using data clean rooms, sales of DMP Sync services and other core offerings are declining. The main clients of the DMP Sync service are ad agencies, and we are currently collaborating with them to build technology that utilizes new key information with a view to the post-cookie era. That said, we have observed some client reluctance in using the current services, which has resulted in sales drop of the DMP Sync service.

We expect this trend to continue this fiscal year, but we will uphold a 20% growth target stipulated in our midterm business plan as we expect further growth in the consulting service and life science domains.

Next, please turn to Page 20 for the summary on the Korea business. Sales through Q1 were up 17% or 8% excluding the impact of ForEx. In Korea, we continue to achieve strong sales growth despite the challenges felt by the market as well as our peers. Digital solutions led the revenue growth with a 14% increase over last year. In addition, revenue from our strategic client, a major electronics company, expanded. Sales activities for the purchase data service, or QPR, scheduled to be fully deployed from the second half of the current fiscal year, are progressing steadily as well. This concludes my explanation on the Japan and Korea Business segment.

And now on Page 22, let me explain about the Overseas ex Korea Business segment. Sales for Q1 were up 29% year-on-year or up 20% on a constant FX basis. We continue to enjoy extremely strong growth following last fiscal year with double-digit top line growth in the U.S., Europe and the rest of the world. This is driven by continued robust demand from the clients, a trend that is expected to be sustained, which requires us to improve our supply availability by increasing the operational capacity as is the case in Japan. For that, we have increased the total employee expenses for hiring and augmenting retention measures, which resulted in a significant drop in profit.

Please turn to Page 23. Last fiscal year, sales trend deviated from the conditional seasonality of the segment as the business recovered from the pandemic and continued to grow under such environment. Normally, the big season for our overseas business is Q2, and we expect the return to the conventional is not the pattern in the current year. Although segment profit declined sharply in the first quarter due to higher personnel expenses, we expect profit to improve from the second quarter onwards, along with revenue growth.

Page 24 illustrates the revenue trends on a constant FX basis. As you can see, even excluding the currency impact, sales in Europe, U.S. and the rest of the world grew by double digits compared to the previous year. Our simple strategy to increase the wallet share of global key accounts or the accounts we have identified as strategic clients has proven to be successful, and this has led to an increase in our customer base and enhanced market presence. We are also gaining new customers. Sector-wise, FMCG and health care, especially OTC and the travel industry, are performing well. We have also opened new offices in South Africa and Poland in response to the client needs.

That's all the segment updates. Now let me wrap up. The first quarter profit was down, but it was in line with our expectation, and we believe we marked a good start for the year. With the strong client demand both in Japan and overseas, and as we communicated in August, we are making steady progress in expanding our operational capacity and improving productivity. We will continue to deliver ahead for growth in sales and improving profits in the second quarter and beyond, aiming to achieve double-digit growth in both sales and profit as guided in our full year forecast.

This will conclude our presentation. Thank you very much for your participation today.

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