Macromill Inc

TSE:3978

Earnings Call Transcript 2021-Q2

[Toru Sasaki, executive]

Thank you very much for watching this video presentation of Macromill for fiscal year 2021 second quarter results. I'm Sasaki, Representative Executive Officer and Global CEO.

To avoid the spread of COVID-19, please allow us to use the video format to present the second quarter results.

Here is today's agenda. First, I will summarize the second quarter, followed by Shimizu, CFO, will present 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 second quarter revenue was JPY 11.93 billion, flat year-on-year and also flat in constant FX. Operating profit was JPY 2.16 billion, down 10% year-on-year and down 10% in constant FX as well. I have just said that the revenue was flat year-on-year, but more precisely, it was up 0.4% compared to the previous year, where there was no pandemic impact renewing record high for the second quarter revenue.

Japan and Korea Business and Overseas segment, excluding Korea, have shown a clear recovery compared to the first quarter. In particular, the revenue of Japan and Korea Business was standing positive with 2% increase year-on-year.

Based on the second quarter results, the cumulative results of the first 6 months of the year are as follows: the revenue was JPY 21.03 billion, down 3% year-on-year and down 4% in constant FX; operating profit was JPY 2.84 billion, down 21% year-on-year and down 21% in constant FX as well, outpacing the initial guidance.

We are looking positively at this progress vis-à-vis the guidance. That said, Europe is under another lockdown since last year. And this year, the Japanese government declared and already extended the state of emergency period. Such developments due to the pandemic will, we think, give impact on our second half revenue.

We are also planning to make proactive investment to deal with resource shortage due to all the employees globally working from home to achieve the midterm business plan and to prepare for growth for the coming year. Accordingly, the revenue of JPY 40 billion and operating profit of JPY 3.4 billion in the guidance remain unchanged.

This is the summary of the second quarter. Now Shimizu, our CFO, gives you update on financial information.

[Masahiro Shimizu, executive]

Thank you, Sasaki-san. Please turn to Page 5. Revenue in Q2 was JPY 11.9 billion. We saw an increase of JPY 54 million year-on-year. Revenue from April to June last year declined by 23% year-on-year, and Q1 revenue was down 8%. We recovered revenue in Q2 exceeding prior year. The amount was the highest in our history.

Year-to-date revenue was JPY 21 billion. The negative variance from prior year has shrunk to 3%. The attainment in Q2 is ahead of our annual guidance.

We still see negative impact from COVID-19 in all the markets that we operate. 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 to provide off-line research services to our clients when they need product testing by preparing safe environments for both our monitors and clients.

Our business is seasonal. The highest revenue in the overseas markets is generated in December. Since we exceeded our plan, there is good momentum to generate revenue in March when our Japanese Business receives the highest orders. As to operating profit, it was JPY 2.8 billion. We saw a decrease of 21% year-on-year. This is primarily because of the slow revenue, an increase in depreciation costs and expenses related to IT investments in previous years.

Thanks to the investments, though, we've been able to continue operations by working from home as we had completed moving research systems and ERP systems onto cloud. We believe that these investments were worth making.

The profit attainment in Q2 also exceeded the pace that we set for the annual guidance.

We'd like to walk you through P&L in more details, so please turn to Page 6. Year-to-date revenue in Japan and Korea segment declined by 1.3%. We still see negative impact from COVID-19 in both countries, but we have confirmed recovery in client demand.

Revenue in other Overseas segment declined by 10.1%. We have started to see recovery in this segment.

In terms of major expense items, we are optimizing employee cost to generate revenue recovery. We increased employee cost by JPY 80 million and saw an increase of 1.1%. The total number of employees was unchanged.

As to panel expenses, it declined by 6.1%, in line with revenue.

Regarding outsourcing expenses, we increased outsourcing in certain projects and saw an increase of 7.4%. Both employee expenses and outsourcing expenses are spent on human resources.

We monitor the total of both expenses and will continue to optimize them to generate revenue in the future.

Depreciation expenses grew mainly due to IT investments. It increased by 8.6%.

Shift to cloud increased subscription fees paid to cloud operators, which are accounted for in other operating expenses. The move to cloud has enabled us to work from home and provide services to clients very smoothly.

We saw savings in office utility costs and travel expenses, which absorbed the increase in IT expenses.

Other operating expenses declined by 6.7%.

As we have started to allow most of employees to work from home, we have decided to cancel part of our office lease as much as 16% of the total floor space used for the Japanese business. We will incur around JPY 200 million of onetime restoration cost. But from the next financial year, we will enjoy savings of JPY 230 million annually. So the payback is less than a year. This project was not planned at the time of the annual guidance.

Year-to-date operating profit margin was 13.5%. The EBITDA margin was 20.6%.

Please turn to Page 7 for segment profit. Operating profit was down 21% year-on-year, mainly due to a revenue decline. Out of 21%, 11% came from Japan and Korea segment and the remainder came from the other Overseas segment. While we increased employee expenses in Japan and Korea, it was offset by decreased employee expenses in other Overseas segment. Aside from increased panel and outsourcing expenses in Overseas segment, cost structure has not changed very much.

Please then turn to Page 8. We'd like to show you historical revenue trend. As you can see on the left, year-to-date revenue was down by 3% in actual currency.

As shown on the right chart, revenue growth in Q2 stand-alone in Japan and Korea segment turned to positive.

We'd like to share with you historical cost trend. So please turn to Page 9. As you can see on the left, total operating expenses were flat compared to previous year. Panel expenses moved in line with revenue. Combined employee expenses and outsourcing expenses exceeded previous year as we saw strong recovery in revenue than expected. In Q2 stand-alone, we saw an increase of 23% in outsourcing expenses and an increase of 3% in employee expenses.

We saw an increase in depreciation expenses at a similar pace to Q1.

Travel expenses and utility costs declined. This offset the increase in IT-related expenses.

We saw a decline of 13% year-on-year in other operating expenses.

Then we'd like to share with you historical head count trend. Please turn to Page 10. Total head count decreased by 23 year-on-year. We have used our capital to maintain the current workforce to be ready for the future revenue recovery. Looking back, we have grown our online research business by replacing analog and handmade research and data analysis by Internet and technology. Our clients wish to meet and exceed consumers' expectations, which become more and more complicated than ever. Our clients expect us to deliver more sophisticated services than ever. We need more skilled and diversified people to meet our clients' needs. We intend to continue investments in people to generate future returns.

Then we'd like to explain balance sheet on Page 11. Starting with working capital, our cash position and liquidity is stable. Goodwill on our balance sheet was JPY 41.5 billion. JPY 39.1 billion of total goodwill was attributed from Japan and Korea segment. The remainder JPY 2.4 billion was attributed from other Overseas segment.

The annualized finance cost was 0.87%, unchanged from a year ago.

Rating agency has confirmed our credit rating as BBB+. Its outlook is stable. We can continue to enjoy access to capital markets, and we are very delighted with this news.

Net debt-to-EBITDA was 2.99x. This is above our target of 2.0 to 2.5x, which we set prior to the COVID-19 confusions. We intend to improve it as we start to grow our revenue.

Interest coverage ratio was negative 0.9x due to the impairment loss in FY '20. But without it, the coverage ratio should have been 12.7x. We have no solvency issues.

Our return on equity was also negative due to the impairment, but without it, it should have been 7.4%.

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 Japan and Korea segment. The value is JPY 39.1 billion. 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 other Overseas segment. The 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. Please turn to Page 13. Operating cash flow was JPY 980 million. We decreased investments this year. Investment cash flow was minus JPY 610 million. Our free cash flow was JPY 470 million.

Finance cash flow was minus JPY 2.1 billion as we repaid part of our bank loans. As a result, we increased cash by JPY 2.8 billion from a year ago.

We have JPY 11.7 billion in cash and feel comfortable with this position.

Then let us explain how we did against our revenue and profit guidance. Please turn to Page 14. When we planned our annual guidance, we expected that we would continue to see negative impact from COVID-19 throughout this financial year. The impact would be strong in the first half and we expected lower impact in the second half. We also expected solid recovery in our online research.

Compared to these assumptions, recovery in revenue in Japan and Korea is faster. Other Overseas segment became profitable.

We managed expenses by investing in employees and outsourcing and by saving other expenses. Impact from foreign exchange translation was also positive.

Compared to the pace that we set in revenue and profit guidance, we believe that we had a positive start so far. However, the state of emergency has been extended in Japan. Major cities are locked down. Off-line research projects are postponed or canceled.

We would like to maintain our annual guidance. Based on such business environment and financial performance, let us explain our capital allocation policy. Please turn to Page 15.

The policy is not changed. We will continue to invest in people and research systems to generate revenue and profits, then we allocate our capital to repay debt. In July this year, a 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 strong recovery.

Now I'd 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 starting with Japan and the Korea Business segment. Please look at Page 17. Please look at top right. The second quarter revenue was up 2% year-on-year and also up 2% in constant Korean currency rate.

Next, please look at bottom right. Operating profit was down 6% year-on-year and down 5% in constant FX.

Next, please look at top left. The revenue of the first half of the year was down 1% year-on-year and also down 1% in constant FX.

Lastly, please look at bottom left. The operating profit in the first half was down 12% year-on-year and also down 12% in constant FX. As I mentioned in the summary presentation earlier, compared to the first quarter, there was a clear recovery and the second quarter revenue exceeded that of the previous year.

From the next page on, I give more details about Japan and Korea Business, respectively. Please look at Page 18 for Japan Business. Please look at the right-hand side of the page. The second quarter revenue was down 1% year-over-year. By area, digital was up 5%, and the rest was down 2%.

Next, please look at the left-hand side of the page. The revenue of the first half of the year was down 4%. By area, digital was up 1%, and the rest was down 5%.

Please move on to Page 19. Let me present to you the status of off-line and online research. First, off-line research. The result remains lower than that of the previous year, but the second quarter saw the negative gap halved showing a steady recovery. That said, since the state of emergency was redeclared in January, our off-line services are partially suspended. With the declaration period extended till March, off-line research remains in a challenging environment.

Meanwhile, the growth of online area as well as digital rebound to positive after going down year-on-year in the first quarter. With increasing data demand in the pandemic, we successfully captured and fulfilled the needs of clients through initiatives, such as developing a new consumer value segment. Of course, we are not satisfied with the current level, but we are looking positively at online and digital doing better than last year.

We are also making good progress with the business alliance that we already announced and communicated to you. We are receiving new inquiries and references for data utilization and usage.

So much for looking back the first half of the year. Now I'd like to explain about our actions for Japan Business going forward. Please move on to Page 20. While the recovery in the first half was greater than we had first expected, we can't be optimistic about the forecast for the second half. At present, our off-line service is at halt due to the state of emergency, which has already been extended. That will give impact on our revenue, and expected increase in total employee expenses will impact profit.

As to the increase in total employee expenses, as Shimizu explained, we are promoting work-from-home, which is now more adapted than when we reported the first quarter results with about 90% of the employees working remotely.

It has a very positive effect to realize diverse ways of work, to secure safety-ness for the employees and to prevent the spread of the virus.

But unfortunately, some negative effects are emerging as well: productivity decline, miscommunication due to lack of coordination among the employees and some impact also on current deliverables to our clients. In addition, we are making transitions to an entity with integrated production and sale to prioritize better service quality than efficiency vis-à-vis a our key accounts.

Given the circumstances where our employees have more workflows than before, we have decided that we need to increase manpower. It is important for us to do so to comply with law, to promote work style reform and to create a sustainable work environment for the future.

Integration of production and sales has brought significant positive impact, which are reflected in better results, in regular client satisfaction surveys and greater wallet share.

We are also taking specific measures to reduce cost. Within this fiscal year, we will partially cancel the office lease contract reducing 16% of the current office space.

As digital transformation is underway, digital area is showing a clear sign of recovery with a stronger demand for data utilization and usage. We think it is time to resume investment for mid- to long-term growth. We would take an appropriate time to explain details of our growth strategy.

So much for our Japan Business. Please turn to Page 21 for Korea Business. As shown on the right-hand side of the page, the second quarter revenue of Korea Business was up 18% year-on-year and also up 18% in constant FX. Double-digit growth continued in the second quarter and its growth exceeded that in the first quarter.

As shown on the left-hand side of the page, revenue of the first half of the year was up 17% year-over-year and up 18% increase in constant FX. While the market and the competition have seen revenue shrink, our online revenue of the first half increased by 28% year-on-year, reflecting our firm grip of the demand shift from off-line to online.

Of course, we cannot drop our guard, but we believe that our Korea Business is in very good shape. We are the only research company owning a big proprietary panel in Korea, and our panel big data service is growing, leveraging this asset. This fiscal year, we will launch a new purchase data service, too. We expect continuous high growth of Korea Business with attractive and competitive services next year and onward as well.

So much for Korea Business. Please look at Page 23 for other Overseas Business. As shown in the top right graph, the second quarter revenue was down 3% year-on-year and down 6% in constant FX. Bottom right of the page, operating profit was down to 55% year-on-year and down 56% in constant FX.

Meanwhile, top left of the page. The revenue of the first half was down 10% year-on-year and down 13% in constant FX.

Bottom left of the page, operating profit was down 111% and also down 111% in constant FX. As is the case for Japan and Korea segment, here, again, recovery is more evident than in the first quarter.

As I mentioned for the first quarter results, our strategy is to increase business with GKA, global key accounts or strategically important clients, and it is working in terms of revenues. And for us, it's good news that the segment profit has turned positive.

Compared to revenue recovery, profit is showing slow recovery. This is because clients are cutting their budgets due to the pandemic and becoming more demanding for prices. From the second half of the year, we are planning to take some measures, including price review. We think that the current trend might continue for a while.

Now let us look briefly at each region. Page 24, please. On the right-hand side of the page, the second quarter revenue of the U.S. business was up 1% year-on-year and down 1% in constant FX. As shown on the left, the revenue in the first half of the year was down 9% and down 11% in constant FX. Although it is showing steady recovery, alcohol and advertisement sectors are still slow.

Page 25, please. Right-hand side of the page, the second quarter revenue of Europe business was down 10% year-on-year and down 12% in constant FX. Left-hand side of the page, the revenue of the first half of the year was down 15% year-on-year and down 17% in constant FX. The lockdown in the U.K. drove down the results.

Lastly, please look at Page 26. Right-hand side of the page. The second quarter revenue of Latin America, Middle East and Asia, excluding Japan and Korea, was down 1% year-on-year and down 4% in constant FX. Left-hand side of the page, the revenue in the first half of the year was down 2% year-on-year and down 5% in constant FX. While revenue increased in India and Australia compared to the previous year, a large project was postponed in Singapore, and client activities being at halt due to the pandemic impacted.

Now wrap-up. The impact of COVID-19 is still being felt. But compared to the first quarter, recovery is more evident. That said, in the second half of the year, uncertainty remains partly due to deteriorating operating environment in Japan and Europe. Still even in this situation, we think that the demand from clients will continue to recover on the midterm basis. We are set to resume necessary investment mainly for additional hires to achieve the targets in the guidance, to address changing work style due to the pandemic, to create sustainable work environment and to realize growth next year and on.

We'd appreciate your continuous understanding and support.

That's all we have for today. Thank you very much for staying with us till the end.

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