Macromill Inc

TSE:3978

Earnings Call Transcript 2022-Q2

[Toru Sasaki, executive]

Thank you for taking time out of your busy schedule to review our presentation on Macromill's financial results for the second quarter of fiscal '22. My name is Toru Sasaki, Representative Executive Officer and Global CEO.

Once again, we have decided to videostream the presentation on our financial results. We'd like to give the following agenda today. First, I'll give a summary of the first half results and the outlook for the second half of fiscal '22 followed by presentation on the financials from Mr. Takahashi, Head of IR. After that, I will share the status of the Japan and Korea Business segment in the Overseas Business segment. Lastly, I will update you on the initiatives on business model transformation of the Japan business under the new midterm business plan announced in August last year.

Please turn to Page 3. Revenue for Q2 was JPY 13.53 billion, up 13% from last year and 12% on a constant currency basis. Operating profit was JPY 2.58 billion, up 19% year-on-year and 18% on a constant currency basis. Revenue as well as OP were strong, both reaching record highs for Q2 on a stand-alone basis. Reflecting the Q2 performance, revenue for the first half reached JPY 24.43 billion, up 16% from last year and 14% excluding the FX impact. Operating profit was JPY 3.71 billion, up 30% from last year and 29% on a constant currency basis. First half reopening was brisk, reaching a new record high as the first half revenue.

For the first 6 months of the year, we achieved double-digit revenue and profit growth, a complete turnaround from the initial forecast of growth in top line but decline in profit. In addition, as announced at the outset of the year, we will pay an interim dividend of JPY 8 per share for the first time ever. The pace of headcount growth was slower than expected due to hiring delays in the second quarter and the lack of capacity to meet customer demand remained an issue as in the previous fiscal year. Having said that, first half results were undoubtedly very strong; however, the original full year guidance remains unchanged at this point.

The reason for this is our outlook for the second half of the fiscal year. We expect the momentum for the first half to continue in terms of revenue. although we need to keep a close eye on the impact of Omicron variant. On the other hand, we are conservative in our profit guidance as we expect an increase in expenses such as outsourcing costs to alleviate the operational capacity shortage and personnel expenses to compensate for the delay in hiring in Q2 and for future growth beyond next year.

Lastly, a few words on the progress of the new midterm business plan. The existing resource business in Japan is performing as expected. Although there were some opportunity losses due to insufficient capacity to meet demand in the digital and other new businesses are growing faster than expected. These are the key takeaways on our second quarter results.

I will now hand over to Mr. Takahashi, and he will update you on the financial information.

[Ryo Takahashi, executive]

Please turn to Page 5. Let me walk you through our financials. As Mr. Sasaki stated, in a nutshell, we had another strong result. The graph on the left shows the revenue trend. Revenue in Q2 was JPY 13.53 billion, a growth of JPY 1.6 billion from the previous year. Year-on-year growth was 13%, which seems a bit muted compared to the previous 2 quarters, Q1 and Q4, when year-on-year comp was easy with the previous year being extremely weak.

Year-to-date first half revenue was JPY 24.43 billion, up 16% year-on-year, achieving a record high as the first half revenue, as explained by Mr. Sasaki. The graph on the right illustrates a trend of operating profit. Operating profit in Q2 was JPY 2.58 billion, roughly JPY 400 million higher than the previous year. This is equivalent to a 19% year-on-year increase, growing faster than revenue. So despite some slowdown from Q1, we believe that we achieved sufficient growth. For the first 6 months of the year, revenue grew by 30% year-on-year to JPY 3.71 billion, which is sufficient in terms of growth rate. But unfortunately, it did not reach JPY 4 billion achieved in FY ended in June 2019. In our view, this implies that we are still halfway to reach our goals, and we'll continue to move forward to ensure that we achieve our target under the midterm business plan, which aims to realize a new record high profit.

On Page 6, I will cover the revenue trend in more details. There is seasonality in our business. And every year, the third quarter followed by the second quarter generates the largest sales. The graph on the right shows the quarterly trend, which did not change even with COVID-19. The graph also illustrates that the Q1 in FY 2021 and Q4 in FY 2020, were particularly affected by COVID-19. And from the subsequent second quarter, we started to observe clear recovery trend.

Against this backdrop, we are encouraged that the second quarter that just ended has shown double-digit growth, not only compared to last year, but also compared to FY June 2020 before COVID-19. As such, we are stating that the business has returned to the growth trend from the recovery phase from COVID-19. The graph on the left shows year-to-date sales in the first half and the breakdown. Both segments delivered double-digit year-on-year growth, achieving consolidated growth of around 15%. Mr. Sasaki will offer you more details by segment later on.

Next, on Page 7, let me elaborate on the factors that caused fluctuations in OP by segment using the waterfall chart. The 30% year-on-year increase in operating profit in the first half year-to-date indicated on Page 5 can be broken down into 11% growth in the Japan and Korea Business segment and 19% growth in the overseas segment. In both segments, we have been spending more on total employee expenses and outsourcing expenses have also gone up in the Japan and Korea Business segment. However, the revenue growth in both segments was strong enough to offset the higher costs, resulting in double-digit profit growth in both segments.

On Page 8 is the trend of operating cost. The graph on the left shows the year-on-year increase in operating costs in the first half. And the graph on the right summarizes the trend by quarter. The first half year-to-date operating expenses on the left shows a 14% increase. And the standalone second quarter operating expenses were up by 12% year-on-year, shown on the right. Although the rate of increase on the panel expenses was a bit muted in Q2, they basically move in line with the sales growth. Other expenses continue to be flat year-over-year.

In this environment, there are 3 irregularities that should be highlighted. D&A, employee expenses and outsourcing costs. First, depreciation in Q2 was down 5% year-on-year due to the lingering impact of returning some office space completed last year, among other factors. Secondly, as customer demand continues to grow, we are currently receiving inquiries that exceed our internal capacity. So we continue to use outsourcing to respond to these needs. Although the growth rate of outsourcing expenses seems to have declined slightly compared to Q4 and Q1, the absolute amount in Q2 exceeded JPY 2 billion, the largest amount ever spent. This is because Q2 and Q3 are normally the quarters in which outsourcing expenses are quite sizable. As we have been communicating, this trend is expected to continue.

We anticipate demand to exceed last year's level in the third and fourth quarters. and this view remains unchanged. Accordingly, we continue to spend on employee expenses in order to cope with the situation. In other words, the increase in outsourcing and employee expenses is intentional. And the details are summarized on Page 9. In the midterm business plan, we aim to recover the operating margin to 15%. As we presented in the full year results last fiscal year, we plan to achieve this goal by taking the recovery steps shown on the right side of the page. Currently, we are in the first step. And as shown by the graph on the upper left, the hiring for the busy third quarter started in earnest in the fourth quarter last fiscal year.

As of the end of the second quarter, headcount reached 2,774, an increase of about 140 from the end of last fiscal year. However, the pace of this increase is below our expectations as we plan to expand our workforce to nearly 3,000 by the end of this fiscal year. While revenue growth is expected to remain strong, we will accelerate the pace of hiring in the second half eyeing the opportunities for next fiscal year and beyond. Please refer to the Appendix section as needed for more detailed headcount information, which we have been disclosing on a quarterly basis.

In any case, as a result of the recent hiring progress as shown by the graph at bottom left, employee expenses have continued to grow at a double-digit rate since fourth quarter of last fiscal year. Currently, we are also making full use of outsourcing. Having said all that, the revenue growth was better than expected as it was a happy surprise that we were able to grow both sales and profits in the first half instead of seeing a profit decline. However, at the current pace of head count increase, it will be difficult to significantly reduce outsourcing costs during the current fiscal year. Therefore, the transition to step 2 indicated by the right diagram may have to wait until next fiscal year.

From Page 10 to 12, you will find the P&L, balance sheet and cash flow statement. Please have a closer look as necessary. There are no major points to highlight. But if I were to make some comments, I would like to say a few words on the balance sheet on Page 11. First, the balance sheet remains to be healthy, and there have been no major changes in the working capital situation, among others. At the end of this March, the bank borrowing originally extended as an LBO loan will reach maturity after 7 years, and we are negotiating with the bank to refinance the outstanding book balance of JPY 12 billion. We should be able to report on the outcome of these negotiations in the next third quarter results announcement.

As such, the pay down of the interest-bearing debt is being carried out in line with the scheduled repayment. Although the balance of the debt has not come down substantially at the end of Q2, thanks to the increase in the last 12-month equivalent EBITDA, net debt to EBITDA stood at 2.19x, which is within the range of our target under the midterm business plan. ROE was 11.63%, also within the target range set in the midterm business plan.

Lastly, for myself, is the progress against the full year guidance on Page 13. As we have mentioned so far and as stated on the slide, the first half results outperformed the initial forecast. Profits have been significantly higher than our initial guidance as we had expected on year-on-year profit decline for the first half. While we expect strong sales momentum to continue into the second half of the fiscal year, revenue may be affected by the possibility of a state of emergency being declared due to the spread of the Omicron variant.

In terms of profit, we expect operating expenses to increase in the second half compared to the first half due to the timing of some system costs being delayed to the second half and the continued increase in employee and outsourcing expenses. That's something we should bear in mind. And under these circumstances, we have decided to maintain our initial earnings guidance for the current fiscal year.

Now I will hand over to Mr. Sasaki for a more detailed presentation on the business.

[Toru Sasaki, executive]

Thank you, Takahashi-san. Now I give update on Japan and Korea segment. Please look at Page 15. Top right, the second quarter revenue was up 11% year-on-year and up 10% with constant FX. Bottom right is operating profit, which went up 9% and up 8% with constant FX. Next top left side, the year-to-date revenue was up 12% year-on-year and up 11% with constant FX. Bottom left is operating profit, which went up 11% year-on-year and up 10% with constant FX.

Now please look at Page 16 for Japan business summary. From the previous quarterly results announcement, we have changed the classification to disclose information of Japan business. Let me explain about this change again. As we announced with our midterm business plan, instead of digital services such as online, offline research versus digital, we now use the following 2 categories, namely, research business and digital and other new business, encompassing digital, data consulting, life science and distribution in Southeast Asia. For the details of other new business, please refer to Page 37 in Appendix.

Going back to the results, as shown on the right-hand side, the second quarter revenue of Japan business was up 10% year-on-year. Research business was up 5% and digital and other new business was up 31%. On the left, we have year-to-date revenue, which went up 11% year-on-year with research business going up 6% and digital and other new business up 35%.

Please look at Page 17 for more details of each category. Growth of research business has been driven by online research, our flagship business, with the second quarter turning around to positive growth compared to the year before last -- before the pandemic, while operational capacity shortage vis-a-vis client demands has led to JPY 650 million worth opportunities lost. Revenue is growing in a stable and strong manner as a result of various measures we have taken.

In the first half of the year, digital and other new business exceeded research business, not only in terms of growth rate but also in terms of gross amount. On digital side, other measurement service, including YouTube, is performing well and negotiations with platformers are progressing smoothly. For other new business, data consulting business and life science business, which grew in the first quarter, continued to grow in the second quarter as well. I will come back on data consulting business data for more details.

Please look at Page 18 for Korea business. On the right-hand side, the second quarter revenue was up 16% year-on-year and up 11% with constant FX. On the left-hand side, the year-to-date revenue was up 18% year-on-year and up 12% with constant FX. Online research was up 22% year-on-year, and digital area was up 101% year-on-year driving Korea business. We have been enjoying a solid winner position in Korea as the market and the competition have been struggling. Some market observers think that the market will go finally into recovery phase, which will bring us further growth opportunities. So much for Korea business.

Please turn to Page 20 for Overseas business segment, excluding Korea. Top right, the second quarter revenue was up 22% year-on-year and up 16% with constant FX. Bottom right, the second quarter operating profit was up 266% year-on-year and up 249% with constant FX. Top left, the year-to-date revenue was up 32% year-on-year and up 26% with constant FX. Bottom left, the year-to-date operating profit boosted by increased revenue and COVID-19 Paycheck Protection Subsidies rose significantly from the red ink results last year. Profit margin also improved. Other overseas business segment also posted a record high revenue in the first half, growing at a faster pace than pre-pandemic period.

Please turn to Page 21 for some regional views. As you can see, Europe, the U.S. and other regions all achieved double-digit growth for revenue in the first half of the year with other region, where China and Singapore are performing well, increasing revenue by 60% and Europe by 49%. Sector-wise, FMCG media advertisement, energy and financial are doing well, while travel and entertainment continue to be in a challenging situation. Our simple strategy to increase our wallet share in strategically important global key accounts remain effective and receiving orders from GKAs for their global projects is one of the drivers for stronger growth.

Challenge is capacity shortage vis-a-vis demand, as is the case for Japan and Korea. Talent resourcing is a key challenge, particularly in the U.S., and we are planning to hire in the second half to meet future demands. So much for segment update. Lastly, let us review the midterm business plan that we announced last August and update new businesses with some topics.

Please look at Page 23. Under the midterm business plan, we aim at transforming our business model from being a marketing research company to a professional marketing services company. We need this transformation to fulfill needs of our clients, and we believe it is a challenge we need to face to continue to grow as a company. In fact, we have learned from voices of clients that it is not only a provisioning of research data that they need, but also DMP utilization or development of new services and KPIs leveraging the data. They need marketing activation support through their marketing activities including development of a digital marketing plan and support for its execution.

In addition to offering research data and various marketing data obtained from 1.3 million consumers in our proprietary panels of strong competitive edge, we have launched data consulting and data utilization support business and ad distribution as marketing activation support business. It is our future vision to build a framework to provide end-to-end marketing support for corporate clients.

Page 24 illustrates initiatives in digital data, in particular, those for upcoming cookie-less era. Please refer to the video of results announcement in November and the reference materials for more details. We believe that the data clean room will be the mainstream for future digital marketing. Global platformers which are also mature media are expected to build individual data clean rooms. They are now in the process of choosing partners for this effort. In this process, Macromill is highly evaluated for the information we can obtain from one of the largest and highly loyal panel of ours. I believe that we will be able to report on specific initiatives as their partner in the near future.

Please turn to Page 25 to discuss data consulting business. Although we'll continue to seek more precise figure, a yard stick [ size ] of its digital transformation-related market alone is expected to be about JPY 800 billion. With that figure in our mind, we think that the market where we can leverage our data, our competitive edge, is to be at least JPY 20 billion to JPY 30 billion. And we will target at taking its 10% share at an early stage. And I'm confident that we can achieve it. Today, we released information about specific progress in the business alliance with the Sumitomo Mitsui card that we launched in September 2020 for data consulting area. Please refer to the press release as well.

Lastly on Page 26. Ad distribution business. Last August, we made a formal announcement of the launch of this business. In December, we issued a press release about the initiative with Otsuka Pharmaceutical. In November, this initiative was covered in magazine as specialized media for marketers.

Is Macromill going to compete with ad agencies, its largest clients? Since we have received such question or concern, let me go over again why we started this business. We believe that we can maximize the value of digital ads through our data offering by clearly presenting where consumers see values. Since data offering for such purpose is the core of our ad distribution business, we will, of course, work with and for ad agencies. At the same time, we are making a direct contact with advertisers because we need to have more corporate clients to grow this business. Such approach or relationship exists for research business as well. And we think there is nothing to worry about.

Now let us wrap up. We made a very good start in the first half of the year. The guidance of the current fiscal year remains unchanged in view of expected increase in investment cost in the second half, but let me assure you that we are making steady progress vis-a-vis the midterm business plan. I'm hoping that progresses we are making are changing your view about our ambitious challenges.

We will continue our efforts to achieve targets for this fiscal year and those in the midterm business plan. Thank you for your continuous support, and thank you for staying with us to the end today.