Macromill Inc

TSE:3978

Earnings Call Transcript 2020-Q3

[Scott Ernst, executive]

Welcome, good afternoon, and greetings from Concord, Massachusetts, which is just outside of Boston, where my family and I have now been sheltering for almost 2 months. Thank you for joining us for today's Q3 earnings announcement.

It feels appropriate that we start today's presentation acknowledging that, over the last few months, the COVID-19 pandemic has changed all of our lives. I want to start today's presentation by thanking our clients, our Macromill Group of employees and all of you for your continued support of Macromill.

First, a thank you to our clients, who are, in many cases, the essential companies that we, as consumers, rely on more than ever. Some of our clients are experiencing significant financial impact as a result of this pandemic, but many have remained open and fully operational to support the essential services that we all rely on around the world. And for that, we are thankful.

I also want to thank our Macromill Group employees who are quickly finding new ways of understanding changing consumer behavior and attitudes to provide our clients with the critical insight that they need more than ever, and our employees who are also devising new ways of working to maintain our research delivery systems in the middle of these very challenging times.

And finally, on behalf of our entire team, I'd like to thank you all for your continued support of Macromill.

We're trying something new today. In response to the state of emergency in Japan, shelter-in-place orders in the U.S. and around the world, we have changed how we deliver our results this quarter, now for the first time using prerecorded content. Thank you in advance for being patient with us as we work through these new processes.

In today's presentation, we'll cover 4 topics: the first is the Q3 and year-to-date consolidated financial update; followed, second, by a description of the impact of COVID-19 in Q3 and how we're anticipating that impact in Q4; then three, a Japan and Korea segment update; and then we'll finish with an update of our Overseas segment.

So let's start with a very high-level summary of Q3. Please go to Slide #3. The following are a few key takeaways that I'd like you to take from today's presentation. As usual, we'll go into more detail on each of these topics, but these are the major points that I'd like you to remember from this presentation.

First, the COVID-19 adverse impact emerged for us in Q3 and has affected all segments of our business. Clearly, the environment that we're working in today is very different from what we experienced in the first half and even as recently as January. As you might imagine, the COVID-19 has had a dramatic impact on all of our clients across the globe.

Let me now provide some context regarding COVID-19 impact that we've been experiencing. In January, we started to see the impact of COVID-19 with the closing of our office in China. But given the size of that business, the impact was relatively limited.

In February, we started to see the impact with our global clients. We saw them slowing their research in Asian markets, then shifting their attention to the health and safety of their own employees as well as looking for opportunities to reduce spend.

Then suddenly in March, much of the world was in lockdown mode, impacting all of our regions, at least through what appears to be the end of May.

The speed of this pandemic has been striking. From January to March, we went from a relatively small impact in a local office in China to a global pandemic and lockdown across all of our 40 offices around the world, with nearly all of our Macromill Group employees working from home to deliver our services and to be a partner for our clients. We are now certainly in unusual and unprecedented times. We are operating our business with the health and safety of our clients, panels and employees as our #1 priority. We need to be agile so that we can continue to deliver the research and insights that our clients rely on more now than ever.

We need to look to control cost and protect profit. And we need to look for new opportunities to provide more value for our clients, including things like our global new normal tracker that's now been deployed across 17 countries. And we need to reaffirm our position as a digital leader and use this disruption that we're experiencing right now to be a long-term advantage for Macromill.

Second, that the momentum that we achieved in the first half did not continue into the second half, with Q3 stand-alone results declining in terms of both revenue and operating profit. Q3 stand-alone revenue was JPY 11.8 billion, which is down 2% year-on-year in reported revenue and down 1% in constant currency. Operating profit of JPY 2.4 billion, which is down negative 13% in both reported and constant currency.

As a reminder, we came into the second half with building momentum where, in Q2, we saw improving sales to our direct clients in Japan, double-digit growth in our Overseas segment, and we were optimistic that we would deliver on our full year targets with particular -- in particular, with -- in terms of profit.

Q3 is typically our largest quarter, but given the impact of COVID-19, we have landed with revenue and profit performance to similar levels as Q2.

Third, as a result of our Q3 performance, year-to-date revenue and operating profit fell short of expectation. Q3 year-to-date revenue was JPY 33.5 billion, which is negative 2% in reported revenue and flat in constant currency. Operating profit was JPY 6 billion or negative 11% year-on-year in both reported and constant currency.

Fourth, that we anticipate the challenges that we are experiencing because of -- the global pandemic will have a material impact on Q4 performance across all of our segments. Unfortunately, even with the efforts of our teams to better serve our clients, the dedication and hard work of Macromill Group employees around the world and new initiatives that we put in place, the impact of COVID-19 will accelerate in the fourth quarter.

Thus, we've made the difficult but inevitable decision to lower our full year guidance for this fiscal year with revised guidance in revenue of JPY 40 billion, which is negative 10% year-on-year, and operating profit of JPY 4.6 billion, which is down 41% year-on-year.

And lastly, given the uncertainty about when the COVID impact will be behind us, we will continue to balance appropriate cost controls while looking for opportunities for growth. As I shared earlier, we'll manage our business with the health and safety of our clients and panelists and employees as our #1 priority.

We'll commit to our planned dividend payment and debt service, but have suspended our share buyback discussions to preserve our liquidity as visibility in COVID remains uncertain.

And we'll look for new opportunities to utilize our strengths in online marketing, research, digital and online qualitative to find growth.

And now let me hand it over to Shimizu-san to take us through our Q3 and year-to-date financial performance.

[Masahiro Shimizu, executive]

[Interpreted] Please turn to Page 5, just as a summary of the results. Graph on the left illustrates the revenue. Year-to-date revenue was down by 2% year-on-year to JPY 33.55 billion. Until February, we could anticipate positive year-on-year revenue growth with a few exceptions, including China. However, coming into March, in all the markets where we are present, we started to feel the impact of COVID-19 on the business. I will give more details later with the pages explaining the segment performance, but overall, in Q3, we estimate the negative impact to have been roughly JPY 700 million. If we strip this out, the revenue was expected to have achieved a level similar to last fiscal year.

Graph on the right is operating profit, and the year-to-date operating profit was down 11% year-on-year to JPY 6 billion. In Q3 alone, profit decline was 13%, reflecting the impact of the sales decline.

I'll dive into more details on the P&L on Page 6. 2% revenue drop was mainly due to the business in Japan and Korea, but other Overseas business also changed its course from the recovery trend we enjoyed until Q2. And with the adverse impact of COVID-19, year-to-date revenue was almost flattish. We were able to moderate the increase in total employee expenses to roughly JPY 43 million as active recruitment to promote work-style reform had ran its course, and we were able to lower the recruiting expenses as well as the sum of the overtime allowances.

Regarding the panel expenses, we unified the accounting categorization for the group from Q2 last year, and part of the other expenses was transferred to the panel expense item. This impact has ran its course by Q1 this year. So adjusting for this factor, the panel expenses were almost flat from last year.

We lowered the outsourcing expenses by 9% year-on-year, thanks to the training programs and enhanced in-house capabilities.

Depreciation was impacted mainly by the implementation of IFRS 16.

Office rental expenses, which were previously booked as other operating expenses were transferred to the depreciation item, and that had the biggest impact of JPY 980 million.

Depreciation stemming from IT investment increased marginally by JPY 23 million. We've been increasing our investment into software assets over the last few years, but with the cost for switching to cloud booked in other operating expenses, depreciation from IT investment was muted to a marginal increase. Financial expenses were down by 27%.

In sum, net profit attributable to owners of the parent was down by 16% year-on-year, and diluted EPS was down 16% as well.

Operating margin declined due to the shortfall to the sales target. EBITDA margin, on the other hand, improved from 22.9% to 24.3%, partially due to the adoption of IFRS 16.

I'd like to walk you through the segment P&L by using the waterfall chart on Page 7. A breakdown of the 11% year-on-year decline in OP was 8% from the Japan and Korea Business segment and 3% from the Overseas segment, excluding Korea. In both segments, the impact of sales decline was partially offset by cost control. The adoption of IFRS 16 also had an impact on the depreciation for both segments. In Q2 last year, we came up with a uniform definition of panel and other operating expenses, and that impact is visualized with the graph on this page.

Next on Page 8, let me walk you through the revenue trend. As shown by the graph on the left, the year-to-date revenue was down by 2%. But on constant currency basis, it was almost flat. Japan and Korea business was down by 2% year-on-year as well as constant currency, whereas the revenue for other Overseas segment was almost flat on reported basis, but increased by 6% on constant currency.

The graph on the right indicates a track record of quarterly revenue. The revenue in Q3 alone was down 2% year-on-year and down 1% on constant currency. We were slightly impacted by the appreciation of the yen against euro and Korean won.

The graph illustrates the seasonality of our business. March is the peak month for revenue, particularly in Japan, but with the adverse impact of COVID-19 emerging from March, we were not able to beat last year's revenue.

Page 9 shows the trend of our costs. Compared against the seasonal fluctuation in revenue, high proportion of our spending is fixed cost, and hence the operating cost is stable to a certain extent.

As indicated by the graph on the left, year-to-date operating cost was flat from last year. And as indicated by the graph on the right, in Q3 alone, operating cost was up by 1% year-on-year.

We have continued our cost control initiative from the first half. Fixed costs, including fixed portion of employee expense; IT maintenance cost; IT investment and depreciation, including leasing costs such as office rent, have remained relatively stable since taking the ownership of the JV with Hakuhodo back in Q4 of fiscal '19.

Next, I'd like to talk about the headcount trend using Page 10. The headcount increased by 155 people compared to last year, out of which 103 was an increase mainly for the business in Japan. This was a result of active recruitment in order to augment talent in your main business department and to advocate work style reform. On the other hand, we kept the total employee expenses nearly unchanged from last year, thanks to lower recruiting expenses and overtime allowances. We have no plan for large-scale recruitment in the near future as we focus on delivering this service with better efficiency.

Next, on Page 11, let me walk you through the balance sheet, starting with the working capital. Accounts receivable turnover is 94 days and accounts payable turnover is 48 days. There is a gap in the cash-in and cash-out cycle, but this gap is consistent and our liquidity management is stable. For contingency, we maintain a cash position worth 2 month of revenue.

As last fiscal year, we are lowering the financing cost, and annualized funding cost in Q3 was down from last year to 1.06% to 0.92%.

Our rating is BBB+ and outlook is stable. We have improved the leverage ratio. And in Q3, leverage was managed as planned, making good progress toward the goal of 2 to 2.5x for net debt-to-EBITDA multiple. ROE was 13.1%.

Now I would like to explain where and how we created and used cash. Please look at cash flow statements on Page 12. The third quarter year-to-date operating cash flow was JPY 3.96 billion, which is plus JPY 1.4 billion or plus 54% year-over-year.

On the investment side, we invested, for example, in IT, posting minus JPY 1.87 billion. Free cash flow before finance cash flow was JPY 2.31 billion.

Booking a similar level of negative cash flow as last year's cash and cash equivalents increased by JPY 1.31 billion to JPY 8.96 billion.

Up until the third quarter, business structure or earnings structure has not changed so much. But in the fourth quarter, we expect a quarterly loss. I would like to explain why on Page 13.

Compared to the initial guidance, as of the end of the third quarter, we were behind by JPY 2 billion. Decrease in revenue due to COVID-19 was JPY 700 million and, due to other factors, JPY 1.3 billion minus.

In the fourth quarter, JPY 4 billion decrease in revenue is expected. COVID-19 impact is assumed to be JPY 3.5 billion, which is 5x the impact in the third quarter. We assumed a big negative impact from a pessimistic view where, in the fourth quarter, lockdown in the U.S. and in Europe as well as the state of emergency in metropolitan areas in Japan will continue.

We revised down our initial revenue guidance for the year of JPY 46 billion by JPY 6 billion to JPY 40 billion.

Next, on Page 14. Given a relatively high fixed cost base, the fourth quarter will be in the red, eroding profits accumulated up until the third quarter. It is disappointing to revise down full year EBITDA guidance to JPY 7.5 billion, operating income to JPY 4.6 billion and profit attributable to owners of the parent to JPY 2.4 billion.

Given the downward revision and the operating environment, we have changed our capital allocation policy, which I will explain on Page 15. As I explained on the page of balance sheet, our liquidity position is strong. We will allocate our capital, first of all, for hiring talents, which are our most important assets as well as for the stable operation of research system. These are our first priority for our capital allocation.

We will continue to make necessary maintenance-related investment while suspending investment in the future. Once economic activity starts to recover, we will operate to the full with the existing force, and we'd like to wait for that time to come.

Next priority in using our capital is debt repayment. We will repay existing loans, as expected. But at the same time, we will continue dialogue with banks and corporate bond markets for new finance as needed.

Next priority is shareholders return. In the initial guidance, we announced that we expect to increase the current JPY 9 per share dividend to JPY 11. We expect to post profit in this fiscal year, too, and see dividend sources increase, so the plan to increase dividends stays unchanged.

As to share buyback, which we have positioned as important as dividend payout, we suspend the review process. Once economic activities turn around and the performance recovery becomes visible, we will think about it again.

Now Sasaki-san will explain about Japan and Korean business segments.

[Toru Sasaki, executive]

[Interpreted] Thank you, Shimizu-san. Now I would like to give you some business update on Japan and the Korean segments. Please look at Page 17.

The third quarter year-to-date revenue was minus 2% year-over-year and also minus 2% in constant Korean currency. Profit was minus 9% year-over-year and minus 9% in constant currency as well. The business was steadily recovering, but due to COVID-19 impact, both revenue and profit declined year-over-year. That is the outline for revenue and profit of Japan and Korean segments.

Now I'd like to give you some details, first of all, for Japan business. Please look at Page 18. The third quarter revenue of Japan segment was down 1% year-over-year, and the third quarter year-to-date was also down 1%. Business area-wise, digital did well. In particular, YouTube-related ad effectiveness measurement we restarted was robust. Revenue grew as much as 20% year-over-year, and the third quarter year-to-date growth was even greater than that at 30% growth. Other areas, including online and off-line went down by 5% year-over-year. The third quarter year-to-date was down 6%.

Due to COVID-19 impact, some face-to-face interviews or customer traffic research at event venues were canceled or delayed from mid-February. In March, when research demand usually increases due to budget consideration, the impact became more acute. Considering safetiness of our employees and to prevent infection to expand, we do not take up any off-line research for the time being. And the impact coming from that policy will continue.

Currently, all of our employees are teleworking. Some offices and sections are not accustomed to it, causing a temporary decline in productivity. But we are accelerating the pace of adoption to the new way of work. And within this fiscal year, we will see productivity recover. Under such circumstances, COVID-19 impact in Japan was JPY 500 million, most of which is with Macromill Japan with JPY 350 million.

Without the COVID-19 impact, the third quarter revenue of Macromill for Japan would have been 104% year-over-year. Initiatives and efforts that we explained in the past presentations were paying off, so it is really disappointing to see these results.

Next, about the Korean business, please look at Page 19. The third quarter revenue of Korean segment was minus 2% year-over-year, but plus 5% in constant currency. Third quarter year-to-date revenue is minus 10%, but in constant currency, decline is limited to minus 2%. COVID-19 impact on the Korean segment was JPY 100 million. Unlike Japan and other areas, the impact in Korea will be limited going forward.

In March, we started election-related research, also data business using a competitive proprietary panel is promising to grow, although there remains negative impact from the currency aspect, future prospect is bright.

Lastly, I touch upon future forecast. Page 20, please. COVID impact in Japan and Korea segments was JPY 600 million. Given gradual recovery in Korea, we can say at least that the impact in the fourth quarter and onward will not exceed the level in the third quarter.

For Japan, we assume far greater impact than the third quarter. The most serious impact will come from the extension of our current policy not to take up any offline research assignment until the end of June.

In the corporate sector, advertising demand is impacted and that will impose significant negative impact on our business with ad agencies. We are assuming the worst possible scenario at this moment, but the number of infected people in Japan could increase and so we need to stay alert.

Now wrapping up. COVID-19 is making it difficult for us to run business, but we are not alone in this disruption. The whole world is suffering. What we can do right now is to look at it from a positive perspective. Actually, there are some new business emerging. For example, there's new data demand for post-COVID-19 era.

We will continue to control cost as much as possible and proceed carefully not to miss out future opportunities. That's all I have. Thank you. I would like to return the microphone to Scott.

[Scott Ernst, executive]

Thank you, Sasaki-san. Let's now look at our Overseas segment performance on Slide #22, please.

In our Overseas segment, the good start that we saw in the first half did not continue in Q3, largely due to the impact of COVID-19 that we are now experiencing across all of our regions.

Looking at the numbers, we see Q3 stand-alone Overseas revenue was JPY 2.1 billion, which is a decline of negative 6% in reported revenue and negative 2% in constant currency. On a year-to-date basis, Overseas revenue was flat in reported revenue and plus 6% in constant currency.

Q3 stand-alone Overseas operating profit was JPY 161 million, which is a decline of 100% in both reported and constant currency, reversing the strong profit growth that we experienced in the first half.

On a year-to-date basis, operating profit growth was negative 3% in reporting operating profit and plus 3% in constant currency.

Let's now look at our regional business summaries for both the U.S., Europe and rest of world. Slide #23, please.

In the U.S., the strong performance in the first half did not continue into Q3. Q3 stand-alone revenue was JPY 1 billion, which is a decrease of negative 5% in constant currency, resulting in year-to-date revenue of JPY 3.3 billion or a growth of 3% in constant currency. The impact of COVID grew during Q3, with all of our U.S. offices shifting to remote work in March.

In Q3, we saw strong individual client growth from a big 4 Internet tech platform, an OTC pharma company and a financial services company.

Precision Sample, our U.S.-based panel subsidiary, continued its strong performance, beating internal budget and delivering year-to-date revenue growth of 16% year-on-year.

Now let's look at Europe. In Europe, similar to the U.S., first half momentum did not continue into Q3. Q3 stand-alone revenue was JPY 769 million, which is a decline of negative 16% in constant currency, with declines in each of our largest 3 countries, the U.K., The Netherlands and France, largely due to COVID. Q3 year-to-date revenue was JPY 2.6 billion, which was flat year-on-year in constant currency.

On a year-to-date basis, we continue to see strong growth from the U.K., slight growth in The Netherlands, but this growth cannot offset the declines that we're seeing in France.

In Europe, we saw good client growth from our largest FMCG client, a large digital ad agency and a multinational electronics company.

Now to rest of world, Slide #25, please. Rest of world includes EMEA, LatAm and rest of world countries. Unlike the U.S., the COVID-19 impact in Q3 was negligible in the rest of world region. Rest of world saw strong Q3 revenue growth, reaching JPY 371 million or plus 66% year-on-year. Q3 year-to-date revenue reached JPY 1 billion or 40% increase year-on-year in constant currency in these emerging and increasingly important markets. We saw particularly strong revenue growth in Brazil, China, the UAE and India. We are also seeing good momentum in Australia, where we opened a new office in Q2 of last year.

In rest of world, we saw good individual client growth from a Chinese multinational consumer electronics company, one of the largest social platform companies in the world and a British household appliance manufacturer. Interestingly, we are seeing our China team returning to a new normal with the government lifting the lockdown, but most other rest of world countries are still under remote work.

Now let's look at our COVID impact moving forward in Slide #26. In this slide, similar to the prior versions, we're looking at the estimated COVID impact in Q3 and our anticipated impact in Q4.

Similar to Japan, COVID-19 impact was limited in Q3, but is having a relatively larger adverse effect in Q4. You will also note that the Overseas segment in the first half was slightly ahead of guidance, and we were expecting to carry that forward into the second half. But as COVID emerged in Q3, we did begin to experience some cancellations and delays in research projects.

And in Q3, these declines were offset by overachieving in the prior quarter, thus mitigating the early term impact. Of course, as the pandemic has become much more acute across virtually all of our clients in all of our regions, we expect inevitably a difficult Q4, which will create an overall full year miss versus prior year with a decline of 13% in reported revenue and 8% in constant currency.

It's disappointing that the pandemic has stalled the growth that we projected for this year in our Overseas segment, but we're confident in our ability to return to growth orientation once the impact of COVID subsides.

So now let's wrap it up on Slide #27. In summary, the COVID-19 adverse impact emerged in Q3 and has affected each of our segments across the globe, with the impact accelerating in Q4 and resulting in our decision to revise our guidance downward for the full year. We are operating our business with the health and safety of our clients, panels and employees as our #1 priority.

We need to be agile and look at opportunities to control cost, protect profit. And given the uncertainty of the COVID recovery, we will commit to our planned dividend payment and debt service, but have suspended our share buyback discussions to preserve liquidity. We also need to reaffirm our position as a digital leader and turn this disruption that we are currently experiencing into a long-term advantage for Macromill.

Again, thank you for your continued support. And have a great day.

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