Macromill Inc

TSE:3978

Earnings Call Transcript 2020-Q2

[Scott Ernst, executive]

Welcome. Good afternoon, and thank you for joining us for our Q2 earnings announcement. On behalf of the entire team, I'd like to thank you for your continued support of Macromill. Similar to our last earnings announcement, we're planning on spending about 40 minutes today reviewing the content that we've prepared and then about 20 minutes for Q&A.

In today's presentation, we'll cover four topics: first, Q2 and year-to-date consolidated financial update; second, Japan and Korea segment update; third, we'll then share some details on the Macromill Consortium announcement that we've made over the last few weeks and then share our point of view on some regulatory changes that we are seeing both in Japan and overseas; and then fourth, we'll finish up with an update on our overseas segment. After that, we'll then open it up to questions.

As of note, in our last earnings announcement, we updated the format of this presentation to improve both our transparency and to provide additional segment-level details. The feedback that we have been hearing has been quite positive, so we'll continue to provide the information in this format going forward.

Now to a very high-level summary of Q2. The following are a few key takeaways that I'd like to share with you about today's presentation. As usual, we'll go into more detail on each of these summaries, but these are the main points I would like you to remember from this presentation.

First, Q2 stand-alone revenue and operating profit delivered consistent performance over prior year results. Revenue for the group was JPY 11.88 billion, a slight increase of 1% in reported revenue and 3% in constant currency. Operating profit of JPY 2.39 billion was a slight decrease of negative 1% in reported operating profit and flat in constant currency.

Second, we have seen improving performance as we move through the first half of the year, with revenue and operating profit improving in each of our segments in Q2. Q2 was an improvement over Q1, and December was particularly strong across each of our segments.

With that, we are optimistic that our overall performance will continue to improve as we move into the second half. Q2 Japan segment revenue was flat year-on-year, which is an improvement over the decline that we saw in Q1. In particular, we saw an improvement in Q2 sales to our direct clients, but we're continuing to see challenges with our ad agency-based businesses. While this is an improvement, we're not satisfied with the top line performance in our largest and most important segment, Japan. While challenges remain, we are starting to see positive results from both the short and the longer-term action plans that we've put in place.

Our Q2 Korea segment revenue improved to negative 4% in reported revenue and plus 5% in constant currency. While revenue was below our expectation, we have a strong backlog going into the second half.

In our Overseas segment, we continue to see improvement in the fiscal year with revenue growth improving to 4% in reported revenue and 12% in constant currency, reaching double-digit growth for the first half.

Third, year-to-date revenue was lower than our initial expectation, but operating profit is in line with our guidance assumptions achieved through active cost management. Total first half revenue was JPY 21.76 billion or a slight decline of 2% in reported revenue and a 1% increase in constant currency. Total first half operating profit was JPY 3.6 billion or a decline of 10% in reported operating profit and 9% decrease in constant currency.

Fourth, with these first half results, revenue may be challenging, but we can achieve our initial guidance -- but we believe we can achieve our initial guidance, especially in terms of profit, thus, our initial guidance remains unchanged.

In Japan, Q3 is our largest quarter of the year. We are focused on to continue to execute against the action plans that we've described to accelerate our profit conversion in the second half. And lastly, we remain committed to our revised strategy outlined in our mid-term plan to accelerate strategic initiatives by balancing cost control measures and investment we will make for future growth. We believe that we have the right strategy to address the issues that we're facing to achieve our goal to evolve to a consumer insight and data partner for our clients. To achieve this goal, we continue to be focused on initiatives aligned around strengthening our foundation, along with expanding the domains that we play, the solutions that we provide and the regions where we can expand our geographic footprint.

Expanding demands mean that we need to work together with our clients to address their increasingly complex marketing issues beyond the framework of market research alone. To accomplish this, we are enhancing both our internal teams and strengthening their relationships with external partners.

Earlier in February, we announced the Macromill Consortium along with new consortium members coming on board since the initial announcement. As of today, we have 5 consortium members, and we'll continue to expand this list over time. The Macromill Consortium is a critical element to achieving our evolution as a company by partnering with external companies that have unique expertise and strengths to deliver on a broader set of capabilities for our clients. The Macromill Consortium will provide a one-stop support for client companies seeking to address their increasingly complex marketing issues.

We will also continue to be focused on solution innovation. Solution innovation in Japan will be focused on digital. Digital continues to be a growth driver in Japan with year-to-date revenue growth of 37%. We also see additional growth potential for a broader set of digital marketing-related services that will create additional opportunities to accelerate growth behind a more traditional market research market definition.

Outside of Japan, we see growing client interest in ACT Instant, our AI-driven pretesting solution in the U.S.; Immerse, our online qualitative solution; and big panel data solutions in Korea.

Regarding regional expansion, I'm pleased to share that we've opened a new office in Delhi based upon the continued growth that we've seen in India and EMEA. We are uniquely positioned for continued digital growth in an increasingly regulated market. The changing regulations and concerns over privacy are increasing, but we believe these changes are a long-term net positive trend for Macromill and our privacy-compliant business model.

And now let me hand it over to Shimizu-san to take us through Q2 and year-to-date financial performance.

[Masahiro Shimizu, executive]

[Interpreted] Please turn to Page 5. Year-to-date revenue was at JPY 21.7 billion. Please look at the right-hand side. We saw a decrease of 2% year-over-year. This is mainly due to slow demand in Japan. This is a little behind compared to the pace we set for the annual guidance. As to the operating profit, we saw a decrease of 10% year-over-year. This is primarily because of the slow revenue. However, in second quarter alone, the decline was negative 1% since we managed expenses. The profit attainment is in line with the pace we set for the annual guidance.

I'd like to walk you through P&L in more details. Please turn to Page 6. Regarding revenue, we saw a decrease of 2%. This is mainly due to a slow demand in Japan and Korea, partially offset by other overseas market which grew ahead of plans, both in local currencies and the Japanese yen. Sasaki-san and Scott will give you a performance update on each segment later on.

In terms of major expense items, while we needed to add headcount especially in Japan in fiscal year 2019 to address so-called work style reform transformation, we saw a decrease in overtime allowance and other HR-related costs. As a result, we have managed our total employee expenses at a similar level to prior year. As to panel expenses, we reclassified certain items in other expenses to panel expenses in the first quarter FY 2019. Without the reclassification of certain items, they would have been almost flat versus last year.

Regarding outsourcing expenses, we saw a decrease of 8% by having developed in-house research capabilities. Depreciation expenses grew mainly due to IFRS 16. The impact was JPY 664 million. Increase in IT-related depreciation expenses was JPY 23 million. This may sound smaller compared to what we have communicated to you. Shift to cloud reduced depreciation expenses on physical servers and increased subscription fees paid to cloud operators, which are accounted for in other operating expenses. We saved interest costs by 52%. We also saw increased minority interest adjustments due to performance of joint ventures. Profit attributable to owners of the parent decreased 10% year-over-year. EPS after dilution decreased 11%. Including impact from IFRS 16, EBITDA margin improved to 22.8% from 21.1%. From this year, we show forth the full chart to share summary P&L of each segment.

Let's take a closer look at segment profits on Page 7. Operating profit was down 10% year-on-year in Japan and Korea segment. It was flat in Overseas segment. Decrease in revenue in Japan and Korea segment is the primary reason for the profit decline, and IFRS also had some impact on the depreciation. And we managed the employee costs in both segments. Both segments are affected by IFRS 16, and you can see a shift of rent cost from other expenses to depreciation. We reclassified certain expenses items from other to panel expenses in Overseas segment in Q2 last year, and you can see the shift in this graph.

Page 8. As you can see on the left, year-to-date revenue was down 2% in actual currency, but in constant currency, it was up by 1%. Japan and Korea was down 3% in actual currency and down 2% in constant currency. Overseas was up 2% in actual currency and up 10% in constant currency. As you can see on the right, in quarter 2 alone, you can see that the variance between revenue and actual currency and that in constant currency widened, as we were negatively impacted by strong Japanese yen over euro and Korean won. You can also see the seasonality of our business and how important Q2 was for our overseas business.

We would like to share with you historical quarterly cost trend. Please turn to Page 9. As you can see on the left, operating expenses were flat 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.

As you can see on the right, since Q1 in 2019, when we formed the joint venture with Hakuhodo in Japan, our fixed costs, such as IT, maintenance, investment, employee expenses, rents and so forth have been basically flat. And with -- since the joint venture formation with Hakuhodo and our fixed costs have been basically flat.

On Page 10, historical headcount trend. Total headcount increased by 223 and the majority, 151 employees, joined in Japan to address so-called work style reform. However, we saw financial benefits of lower overtime allowances and other items and have managed total employee expenses at a similar level as prior year. In the near future, we aim to focus on productivity enhancement and do not expect a large increase in headcount.

Then I would like to explain balance sheet on Page 11. Starting with working capital, we received cash from large institutions and governments in 91 days, and we pay our partners, vendors and monitors in 52 days. We need to manage this imbalance in cash inflow and outflow, so we aim to keep our cash position equal to 2 months average revenue. We also have point -- JPY 4.5 billion undrawn commitment line in case we need to raise working capital from banks.

We managed our cost of interest-bearing debt reasonably low. We lowered average debt cost to 0.92% per annum in the second quarter from 1.7 -- 1.07% per annum from a year ago. Our BBB+ rating from R&I is confirmed, and the outlook is stable. We improved the leverage ratio. We are on track to improve net debt-to-EBITDA ratio and confident that we will reduce it to 2 to 2.5x, as shown in the mid-term plan. We increased interest coverage ratio to 18.7x. Our ROE was 15.2%, which is higher than Japanese market average of 9%.

Please turn to Page 12. Operating cash flow was strong. It was JPY 2.1 billion, increased by JPY 655 million or 44% year-on-year. Investment cash flow was minus JPY 1.2 billion, increased by JPY 453 million mainly due to IT investments. Our free cash flow was positive. We generated JPY 958 million compared to last year. Finance cash flow was slightly decreased due to IFRS 16 impact. As a result, we increased cash and cash equivalents by JPY 1.1 billion from a year ago. We have JPY 8.8 billion in cash and cash equivalents and we feel comfortable with this position.

Let me explain how we did against our revenue and profit guidance. Please turn to Page 13. In the appendix on Page 29, we showed a guidance assumption slide, which we used at the time of announcement last August. Compared to the pace that we set in revenue guidance, we are a little slow, particularly in Japan. In Korea, also had impacts from some revenue bookings carried forward and decline of deals with low profitability. Rest of the world segment is in line with the plan. We have managed expenses better than our plan. Our attainment in profit is in line with the assumptions used for guidance. While we see a volatility in FX market, actual translation rates are in line with assumptions used at the time of guidance.

Now I would like to hand the microphone to Sasaki-san regarding Japan and Korea segment performance.

[Toru Sasaki, executive]

[Interpreted] Thank you, Shimizu-san. Now I would like to give you Japan and the Korea business segment update. First, please turn to Page 15. Revenue for the second quarter was flat from a year earlier, excluding the constant -- the impact of foreign exchange, up 1%. And profit was down 4% year-over-year, and in constant FX basis, it was down 2%. Revenue for the first half was down 3% year-over-year and minus 2% in constant FX. And the profit was minus 11% year-over-year, and excluding the impact of foreign exchange, minus 10%.

So these are the summary of the results for first half and the second quarter both in Japan and Korea. Q2 has shown a recovery compared to the first quarter. However, compared to the Korea, as a positive sign, although we have said that we have seen recovery in Japan, but still, the revenue has -- the business has been flat. Therefore, I do not think it is acceptable, so we cannot be optimistic.

Please turn to Page 16 because I'd like to explain further in details about Japan business. During the second quarter, digital revenue grew 27% over the previous year. And centering on our mainstay DMP Solution, during the first half, it has grown 37%, which was steady growth. On the other hand, on other areas, we have seen signs of recovery to almost double-digit growth in Q2 from negative year-on-year growth in Q1. In offline and global, which we are strengthening, but online recorded a negative growth from a year earlier in Q2 as in Q1, although, on the other hand, we have seen the minus -- down 4% year-over-year in the second quarter and minus 7% in the first half. And this is why we are -- we have said that we can't be optimistic earlier.

Please turn to Page 17. This is the same material we used at the previous meeting for Q1. And the changes in the market and client and competitive landscape are accelerating, and particularly, we are seeing impacts on such changes in the online domain business. We are currently in the process of evolution to address such changes, and we need to provide a solutions for marketing issues rather than research issues.

Please proceed to Page 18. This is, again, the same material that we used at the previous meeting. In the process of evolution to respond to the changes, this is the material that we used to explain what short-term action plans are in place. I'm going to give you the progress made from Q1. Regarding the Macromill Consortium, which will be explained in the following page, therefore, I'd like to talk about other measures than Macromill Consortium on this page.

First, measures that have been taken for top 100 clients, we strengthened governance and management first. We came up with a policy, changed the organization and revisited roles and as much as possible, we tried to secure time for salespersons to dedicate them to pure sales. As a result, the number of appointments with top 100 clients has increased 11%, and it has increased by 12 -- about 1,200 appointments quarterly. We have seen such increase in the number of appointment with top 100 clients. Of course, it has created more opportunities for projects and gathering information on clients and competition. We are updating account plan properly. And the revenue from top 100 clients have seen recovery from the first quarter, and particularly, the growth has been observed in FMCG industry. We believe that these are attributable to these measures. Therefore, we'd like to steadily continue working on these measures.

Next, digital -- direct coverage by digital and global teams. And these are making some benefits, particularly in global coverage. The -- we recorded negative growth over the previous year during the first quarter, but we have seen the almost double-digit growth in the second quarter. And we have been able to provide a higher value-added solution, and also clients are also increasingly assigning global team, and these are working positively and we have started already in the third quarter. We have assigned the global dedicated research professionals, and we'd like to enhance organizations as such.

On the other hand, measures that have been taken for ad agencies, we increased the employees stationed at ad agencies. But there has been a consultation needs decline in the data domain, which includes the research at an ad agencies. The demand has declined, and we are still facing the challenging situation and we are trying to develop solutions for ad placement.

Next, regarding the Macromill Consortium, I'd like to explain using Slide 19. We established Macromill Consortium to address more advanced needs. This is a measure to provide solutions, not only for research issues, but marketing issues at a pace which cannot be realized by us alone, Macromill, and to recover the online business performance, as I have mentioned, as a challenging business sector earlier. And we made a press releases twice, Monday, February 3, and today. Please refer to the materials. And there are five member companies now. And they are all as a specialist to find the solutions for clients' marketing issues, and they are working with national accounts in and outside of Japan. And we talked about the increased opportunities created through the increased exposure with clients when I talked about the short-term action plan. But on the other hand, if a solution for marketing issue and not only for research issue are required, and then there are a situation where opportunities were lost because of the limit of our resources to provide such solution now on.

Already, we have been co-organizing joint seminars with consortium member companies, and exchanges are being promoted through temporary transfer of employees. And we are promoting collaboration for specific clients. Let me give you one example. There is one company called Marketing Force, which is providing [ 9 sets ], which is a frame. And we are hosting the joint seminar scheduled on this Friday, on the 14th of February. As this is a popular frame, therefore, we have received a record-high number of applications for the seminar. And the request for individual consultations, we have been receiving a lot of requests for such individual consultations, and some of such requests had to be declined.

Another case, which is a client case that I would like to share with you today. At this occasion, at the previous meeting, we explained the case about the confectionery manufacturer. So this is a follow-up report on the case of a confectionery manufacturer, where we were committed to hypothesis building. And we established the -- reestablished the hypothesis that targets were -- had issues. And separate risk budget other than the research budget was allocated. And we have been able to have an exposure, not only with research department with whom we have been engaging but also with marketing department.

This is the key of this case. Through the report to marketing department, which led to workshop, and from there, we have been able to identify new research needs through -- only through the engagement with the research department, you will not be able to see marketing measures or relevance to such measures. But proposal and approaches could be broadened by having exposure with marketing department, and then such solution can be not only nice to have, can be must do. So the research needs is -- including the online needs is -- has become evident.

And there are many companies where research departments are separated from marketing department, particularly in FMCG clients. And research companies like Macromill usually work with research department in most cases. For your information, 5 member companies on Macromill Consortium are working with marketing departments in many cases. Therefore, research is derived from solution for marketing issues. Therefore, this case has been already practiced by them. And I hope that we'll be able to share with you some client cases through collaboration with the member companies of consortium in the near future.

Please turn to Page 20. In digital revenue, here is one good news. Starting from this third quarter, we are resuming YouTube measurements. Some of you may have heard of the voluntary regulations announced by global platformers, and I believe that these may have concerned or worried you. So we'd like to share with you the current position of the company as well as medium-term prospects.

First, the targets of the voluntary regulation put forth by global platformers are for third-party cookies. What we are obtaining from a proprietary in-house panel are first-party cookie. Therefore, first-party cookies are outside of the scope of the regulation. Therefore, we believe the impact on Macromill business is likely to be limited. I hope you will understand this for now. Of course, we assume that protection of personal information and privacy are to be regulated more stringently in the future. So with that understanding, we are promoting the acquisition of the ad ID.

From medium-term perspective, at least, we believe that acute and rapid adverse impact on our businesses can be avoided. And given the resumption of the YouTube measurement as well as digital measurements, we believe that these will continue to be our core growth drivers. And that is the summary of Japan business.

Next, I'd like to touch upon Korea business. Please turn to Page 21. Revenue for the quarter was up 5% year-on-year and down 5% in the first half. This is different from Japan. There has been a clear recovery from first quarter, and digital revenue as well as public sector research projects are driving the growth.

In digital revenue, as I explained at the previous meeting, we have the competitive advantage that we are the only and the largest in-house consumer panel in Korea. And we are promoting acquisition of various marketing data centering on proprietary IDs like we do in Japan, and this has been understood by clients widely, and as such, this penetrated into the market. And we -- there is a perception that we are good at the election, and the probability of recovery is high for this fiscal year when election is slated. And we believe that we can achieve the full year high-growth rate.

Now let me wrap up. Although the levels are different between Japan and Korea, but after Q1, we have seen clear recovery. Of course, the performance has been flat year-over-year in Japan and mainstay online business has been done from the previous year. Therefore, we do not believe that this is acceptable because we believe that this may have concerned you. But we have seen some good signs from the progress in the short-term action plan, and it's through the collaboration with consortium member companies and the good news about the resumption of the YouTube measurement. And we believe that we can see further recovery in the third quarter, which will be the biggest quarter for us.

Now this is the end of my presentation part. Please, Mike (sic) [ Scott ], please have the floor.

[Scott Ernst, executive]

Thank you, Sasaki-san. Now let's look at our overseas segment. In our overseas segment, the good start that we saw in Q1 has continued in Q2, resulting in both revenue and profit achieving double-digit growth for the first half in constant currency, exceeding our internal budgets and setting an all-time high for bookings in Q2. Q2 stand-alone overseas revenue reached JPY 2.5 billion, which was a 4% increase in reported revenue and 12% increase in constant currency. On a year-to-date basis, first half revenue growth was 2% in reported revenue and 10% in constant currency. First half revenue growth was driven by strong country performance in the U.K., the Netherlands and the U.S., along with several rest of world emerging markets. Q2 stand-alone overseas operating profit reached JPY 196 million, which is a 32% increase in reported operating profit and a 41% increase in constant currency. On a year-to-date basis, first half operating profit growth was 3% in reported operating profit and 11% in constant currency.

First half overall profit growth was driven by improved gross margin resulting in -- from higher revenue, tightly managed employee cost, lower travel cost and overall good cost discipline. While we've made good progress in our Overseas business in the first half, the volatility of the Overseas segment remains a risk. It's crucial that we continue to execute in the second half to achieve our full year targets for both revenue and profit.

Now let's look at our regional business information for the U.S., Europe and rest of world. Let's start with the U.S. Q2 U.S. revenue was JPY 1.16 billion, increasing 11% in constant currency, resulting in first half revenue of JPY 2.28 billion or growth of 7% in constant currency.

For the first half, revenue was once again driven by the food and beverage industry, primarily from our three large, long-term clients in the alcohol beverage segment. In addition to growth from our long-term client relationships, we also saw good growth from new clients ramping in the first half, including one of the big 4 Internet tech platforms.

In addition, Precision Sample, our U.S.-based panel subsidiary, continued strong performance, beating internal revenue budget in Q2 and delivering first half revenue growth of 14% year-on-year. Similar to our efforts in Japan, we're seeing results from a number of initiatives which are improving our performance in this priority market for Macromill. Our new U.S. leadership team has now been in place for over 6 months, and we can see the impact of this team working together. We're seeing improved communications and alignment across our commercial and research teams, which are improving both our business performance and our quality. We're also improving our strategic account planning process, which aligns our top talent against our biggest growth opportunities.

In terms of solution innovation, the launch of ACT Instant in the U.S. has created excitement in the region and also across our clients and our internal teams. We remain committed to achieving our targets in the second half and growing faster in the world's largest market research market.

Now let's look at Europe. In Europe, Q2 stand-alone revenue growth grew to JPY 964 million or a 6% increase in constant currency driven -- this in Q2 by our 2 largest European countries, the Netherlands and the U.K. First half revenue reached JPY 1.84 billion and grew at 8% in constant currency. The U.K. continues to be a strong contributor to overall company growth, and I'm excited to share that for the second year in a row, our U.K. team has been recognized as one of the top 3 fastest-growing research agencies in the U.K. in each of the last 2 years.

In Europe, we saw good growth from established client relationships across a broad range of industry segments, including agency, electronics and FMCG. In addition to growth from established client relationships, we also saw growth from new clients ramping in the first half, including a multinational travel and tourism company.

And now to rest of world. Rest of world includes EMEA, Latin America and rest of world countries. Rest of world showed strong Q2 revenue growth, reaching JPY 373 million or 33% growth in the third -- in the second quarter and JPY 685 million or 29% in the first half in constant currency in these emerging and increasingly important markets. We saw a particularly strong growth in China, the UAE and Mexico. Rest of world includes relatively smaller countries in emerging markets where we see high growth potential and additional expansion opportunities. In fact, we've opened a new office in Delhi based upon the growth that we seen in India and EMEA.

We're also excited to share that our India team has won two prestigious awards from The Market Research Society of India, the Best researcher under 30 in India award and the Best Client servicing team of the Year for our India team. Across rest of world, we saw industry segment growth in consumer and FMCG sectors. In rest of world, like other regions, we saw growth from new clients in the -- ramping in the first half, including a British technology company that designs and manufactures household appliances.

So now let's wrap up. In summary, Q2 stand-alone revenue growth and operating profit improved across each of our segments. In Japan, we saw improved sales to direct clients but continue to struggle with our agency-based businesses. Korea segment revenue also improved, and we entered the second half with a big backlog. Overseas strength continues with double-digit growth in the first half. While year-to-date revenue is a bit lower than our expectation, our profit performance is in line with our guidance assumptions in both Q1 and Q2, achieved through active cost management. We remain committed to the short-term action plans, and we're seeing an improvement.

In Japan, Q3 is our biggest quarter of the year, so we expect to accelerate profit in the second half. Based upon where we are today and our outlook going forward, we're maintaining our full year targets that we set for this fiscal year. We also remain committed to our revised strategy outlined in our mid-term plan, and we believe we have the right strategy to achieve our goal to become a consumer insight and data partner for our clients. And finally and probably most important, we remain positive about our market opportunity and delivering on our vision to be the first truly global digital research company.

So now with -- again, thank you for your continued support, and let's open it up to questions.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]