Macromill Inc

TSE:3978

Earnings Call Transcript 2023-Q2

[Toru Sasaki, executive]

Thank you for taking time out of your busy schedule to view our presentation on Macromill financial results for the second quarter of fiscal year ending in June 2023. My name is Toru Sasaki, Representative Executive Officer and Global CEO.

We'd like to cover the following agenda today. First, I'll give a summary of the first half results, which will be followed by a presentation on the financials from our CFO, Mr. Hashimoto. After that, I'll update on the status of the Japan and Korea business and the Overseas ex-Korea business.

Please turn to Page 3. 3 months revenue for Q2 was JPY 15.73 billion, up 16% from last year and 12% on a constant currency basis. Operating profit was JPY 2.08 billion, down 19% year-on-year and 22% on a constant currency basis. For the first 6 months of the year, revenue was JPY 28.17 billion, up 15% from last year or up 12%, excluding the currency impact. Operating profit was JPY 2.89 billion, down 22% year-on-year or down 24% on a constant currency basis, amid continued growth of client demand. We achieved double-digit revenue growth, both in the second quarter as well as for the first half of the year.

On the other hand, total employee expenses and outsourcing expenses increased, as we expanded the operational capacity, resulting in a decline in operating profit for the first half, as we had expected. We have been communicating that first half would be marked by revenue growth, but profit decline. Therefore, deposits performance to date is in line with our full year earnings forecast.

Measures to improve productivity and operational capacity are progressing as planned, which we will discuss later. I will make a summary of the second quarter and the first half results. And I will now hand over to Mr. Hashimoto for more details on the financial information.

[Shintaro Hashimoto, executive]

Now please turn to Page 5. The graph on the left shows the revenue trend. Revenue for the 3 months in Q2 was slightly over JPY 15.7 billion. That's up by about JPY 2.2 billion or 16% year-on-year. Double-digit revenue growth was achieved on the back of growing client demand. The graph on the right is the operating profit trends. OP for the second quarter alone was just under JPY 2.1 billion, down by roughly JPY 500 million or 19% from last year.

Profit was down year-on-year due to higher expenses associated with operational capacity expansion, but Q2 had improved from the first quarter. In our view, the first half progress was in line with the full year guidance, including the fact that profit was down despite the revenue growth in Q2. Next on Page 6, I'll walk you through the second quarter 3-month revenue and operating profit by segment.

Q2 revenue from Japan and Korea Business segment was just under JPY 11.6 billion, and revenue from Overseas ex-Korea business segment was slightly over JPY 4.2 billion. Revenue for both segments was up roughly JPY 0.9 billion and JPY 1.3 billion, respectively, were up by 9% and 43%. Second quarter OP in the Japan and Korea business segment was just over JPY 1.8 billion. And in the Overseas ex-Korea business, OP marked JPY 250 million. Compared to last year, profit was down by slightly over JPY [ 400 ] million or 19% for the Japan and Korea business and down by slightly less than JPY 100 million or 22% for the Overseas ex-Korea business.

Although the Overseas ex-Korea business segments drove revenue in the second quarter, operating profit declined due to a rising operating expenses, as we strove to expand operational capacity. Page 7 illustrates the Q2 year-to-date revenue and operating profit by segment. In the first half, revenue from Japan and Korea Business segment was just under JPY 20.5 billion, up by just over JPY 1.7 billion or 9% year-on-year. Revenue from Overseas ex-Korea business was just under JPY 7.8 billion, up by slightly less than JPY 2.1 billion or 36% from last year.

The first half operating profit in the Japan and Korea business was just over JPY 2.6 billion. And in the Overseas ex-Korea business, OP marked JPY 250 million. Year-on-year, OP was down by slightly less than JPY 600 million or 18% for the Japan and Korea business. And for the Overseas ex-Korea business, OP was down by roughly JPY 250 million or by 49%.

In sum, the revenue and OP for the first half and the second quarter alone trended in a similar way. Next is in the waterfall chart on Page 8. Let me elaborate on the factors behind the change in operating profit for respective segments. The 22% year-on-year decline in consolidated OP can be broken down into negative 15% in the Japan and Korea business and negative 7% in the Overseas ex-Korea business.

The significant top line growth in both segments during the first half was not enough to absorb the higher costs, such as the total employee expenses and profit was down. In addition, other expenses increased due to more sales activities on the back of ease travel restrictions from COVID as well as higher system-related expenses.

Page 9 shows the breakdown of operating expenses. Total operating expenses for the first half were up 22% year-on-year to just under JPY 25.3 billion, which roughly half for JPY 12.1 billion was the total employee expenses. The total employee expenses were up 25% with more hiring for operational capacity expansion conducted from last fiscal year and the recent active hiring for the Overseas ex-Korea business.

Other expenses and outsourcing expenses also increased by more than 20% year-on-year due to increased sales activities and expansion of operational capacity. Page 10 shows the trend of operating expenses. Q2 operating expenses rose from Q1, mainly due to higher costs incurred with higher revenue as well as increase in total employee and outsourcing expenses for expanded operational capacity, as reported on the previous page.

Page 11 illustrates the trend of total employee and outsourcing expenses as well as the headcount. As planned, we made steady progress in improving productivity and expanding operational capacity. Our key focus is fiscal year for improving the OP margin. As a result, total employee and outsourcing expenses increased significantly year-on-year, as shown by the left graph. Consolidated headcount grew year-on-year by roughly 290 in Q2, as shown by the right graph with the headcount going up substantially for the overseas business.

Page 12 shows measures and outlook for OP margin improvement for this fiscal year. We expected both outsourcing and employee expenses to increase faster than the revenue growth in the first half of this fiscal year. All total employee expenses were materially higher due to increased headcount in the previous year. The focus for this fiscal year is to improve productivity by enhancing the proficiency of new employees and to expand the internal capacity.

Therefore, we expect the pace of new hiring to slow down compared to last year. We also plan to leverage on outsourcing until internal capacity is augmented. In the second half, we plan to manage the rise in employee expenses to be below revenue growth over time to mitigate the dependency on outsourcing. Page 13 is our balance sheet. Profit in Q1 and Q2 declined year-on-year, resulting in higher net debt to EBITDA and lower ROE.

The decline in cash and cash equivalents and writing that from the end of the previous fiscal year to the end of Q2 is normal seasonality. Page 14 is the cash flow statement. Well, cash flow from operating activities is negative due to lower profit. Cash flow from financing activities has improved compared to last year.

This is due to a decrease in scheduled loan repayment as a result of refinancing in March and the absence of the JPY 5 billion bond redemption conducted last fiscal year. On Page 15, let me go over the progress right against your full year guidance. The first half results progressed in line with expectations. You can see that our full year guidance, especially the profit is back-end loaded in the second half.

This is because we expect the improvement in profit margin with revenue growth and productivity gains. We will aim for double-digit revenue and profit growth for the full year by making steady progress in our results for Q2 and beyond. On Page 16, I'd like to reiterate our capital allocation policy. Growth investment remains our top priority going forward, followed by debt repayment and shareholder return, both positioned at the same priority levels.

So growth investment will give more consideration for M&A, strategic system investment and investment in new businesses compared to before. Regarding debt repayment, we are considering to refinance the debt as corporate bond is due for redemption at the end of July 2023, but within the targeted range of leverage.

In terms of shareholder return, we'll maintain our dividend hike momentum, aiming for a consolidated dividend payout ratio of 20% to 30%, while flexibly implementing share buybacks, if we have excess cash and depending on the stock price. This concludes my explanation. Next, Mr. Sasaki will offer more details on the business.

[Toru Sasaki, executive]

Thank you, Hashimoto. I will now update you on the status of the Japan and Korea segment. Please refer to Page 18. In the second quarter, revenue in the Japan and Korea segment was up 9% year-on-year or up 8% with constant FX. Operating profit was down 18% year-on-year or down 19% with constant FX, mainly due to higher total employee expenses in the Japan business.

Please turn to Page 19. As shown in the graph on the left, the third quarter in Japan and the second quarter in Korea are the busiest periods. The same trend is observed for the current fiscal year and revenue is growing steadily year-on-year. On the other hand, as shown in the graph on the right, profits decreased mainly due to an increase in total employee expenses in Japan.

As we enter the busy season in the third quarter and beyond, we plan to increase profits by further increasing revenue, enhancing productivity and improving profit margin. Please refer to Page 20 for more information on our Japan business. Overall, the second quarter revenue in Japan was up 8% year-on-year. Research business, which consists in online and off-line research, was up 6% and digital and other new business, which covers digital data consulting and life science was up 12%.

As I mentioned at the beginning of this presentation, the expansion of our online research capacity, which is our top priority this fiscal year, is proceeding as planned and revenue in the Research segment is growing steadily, since capacity was expanded to some extent in the first half of the year. In the second half of the year, we plan to strengthen our outbound sales activities to expand revenue.

On the other hand, the 12% growth in digital and other new business was a little short of our expectations. On the next page, I will explain the details and outlook of these 2 businesses. Please look at Page 21. First, in the Research business, revenue is growing steadily, thanks to the expansion of demand for global research and the functioning of the integrated sales and research operations, which we have been working on from this fiscal year to provide fundamental solutions for clients.

In the second quarter, the online research business, in particular, continued to experience opportunity losses when we had to decline client offers, but the scale of these losses has become significantly smaller. There are 2 factors behind this development. The first is that we are steadily expanding our order capacity, which we consider to be a very positive development. On the other hand, the second point is a bit negative. The volume of inquiries is gradually decreasing. In other words, we may be experiencing client defection.

Since we continue to face capacity issues, we were not able to accept orders. And as a result, we were unable to conduct aggressive sales activities. However, Macromill's true strength lies in its sales force's ability to work closely with clients to solve their marketing issues. Since research order capacity was expanded as planned in the first half of the year, we will fully leverage our sales capability, which is our strength, so that clients whom we have lost will choose us again.

Some of our clients are reducing their marketing budgets due to the impact of macroeconomic factors such as the rising cost of raw materials, but we are confident that we will be able to capture demand by strengthening our sales activities. Next, I will discuss digital and other new businesses.

First, digital business has turned negative since the first quarter, which still has remaining impact. Specifically, revenue of DMP Sync service, which decreased in the past quarter, continued to decrease in Q2. In addition, in the second quarter, market conditions, including sluggish advertising demand and slowdown in advertising revenue affected the ad effectiveness measurement business, including access mail and other mainstay of the digital domain.

Since it is a business susceptible to fluctuations caused by the economy, it is difficult to see a short-term recovery in this area as well. And together with the DMP Sync service, we see a downtrend this fiscal year. On the other hand, other new business is doing well. In the consulting area, new clients are increasing and existing clients are increasing the number and scale of the project.

Significant revenue growth continues. In the life science business, revenue growth in the first quarter, temporarily slowed in the year due to a timing difference in revenue booking. But in the second quarter, revenue growth was strong again. Although the digital and other new business as a whole will struggle in the current fiscal year due to the difficult situation in the digital business. We believe that there will be no change in the growth expectations set in the midterm business plan. So much for Japan business.

Next is Korea business on Page 22. In the second quarter, revenue was up 17%, up 8% with constant FX. In Korea, our revenue continued to be strong despite the struggling market and competition. In particular, the scale of transactions with a major electronics manufacturer, which we have positioned as a strategic client expanded. In addition, sales activities for purchase data, QPR, for which we plan to launch a full-scale service in the second half of the current fiscal year are progressing well.

This concludes my explanation of the Japan and Korea Business segment. Now please turn to Page 24 for the other Overseas business segment. Second quarter revenue was up 36% year-on-year or up 25% with constant FX. We continued our strong growth from the last fiscal year with double-digit revenue growth in the U.S., Europe and all other regions. We are continuing to see strong client demand.

As this trend is expected to continue, it is necessary to improve the supply structure by expanding order capacity as was the case in Japan. As a result, profits decreased significantly due to higher total employee expenses resulting from increased hiring and retention measures. Please refer to Page 25. The quarterly trends from last fiscal year show that we are continuing to grow as a result of the recovery from the pandemic.

Our Overseas business is usually busy in the second quarter. And revenue in the second quarter of this fiscal year also grew significantly. Profits continued to decline, but the second quarter saw an improvement in line with the increase in revenue. Although total employee expenses have increased significantly, partly due to inflation, negotiations with clients on unit prices will continue from the third quarter onwards, as productivity improvement gains momentum.

Therefore, we expect revenue to remain strong and the profits to increase in the second half of the year. The next page, Page 26, shows the changes excluding the effect of foreign exchange rates. As you can see, even with constant FX, revenue in Europe, U.S. and all other regions grew by double digits year-on-year. Our simple strategy of increasing our share in the wallet of global key accounts, our strategic clients has been successful leading to an increased number of clients and market presence and as a result, the acquisition of new clients, sector wise; FMCG, health care, especially OTC health care and energy industries are performing well.

That's all for the segment updates. Now for the wrap-up. The second quarter did not see any major changes in trend from the first quarter and the first half of the year progressed in line with the full year guidance. In Japan, we have built up order capacity and are well prepared for revenue growth in the second half and beyond. Overseas business is also expected to remain strong. We aim to achieve our full year guidance by continuing to expand revenue and improved productivity.

Thank you very much for staying with us to the end.

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