Macromill Inc

TSE:3978

Earnings Call Transcript 2021-Q3

[Toru Sasaki, executive]

Thank you very much for watching this video presentation of Macromill for fiscal year 2021 third 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 third quarter results.

Here is today's agenda. First, I will summarize the third quarter, followed by Shimizu, CFO, who will present financial information. And then I will explain about Japan and Korea Business segment and Overseas Business segment excluding Korea. Today, I will also explain about the future growth strategy of our Japan business as a part of an update on the midterm business plan.

Please look at Page 3. The third quarter revenue was JPY 12.06 billion, up 2% year-on-year and up 1% in constant FX. The operating profit was JPY 2.3 billion, down 6% year-on-year and down 6% in constant FX as well. Although there was some clear negative impact from COVID-19, the revenue of the other overseas business segment also increased following the suit of Japan and Korea business.

Year-to-date revenue was JPY 33.1 billion, down 1% year-on-year and down 2% in constant FX. Operating profit was JPY 5.14 billion, down 15% year-on-year and down also 15% in constant FX. We closed the third quarter successfully with both revenue and profit outpacing the initial guidance.

Although the state of emergency in Japan has been extended and some negative impact from COVID-19 remains, we revised the revenue guidance of this fiscal year to JPY 42.5 billion and the operating profit guidance to JPY 4.7 billion. The guidance for dividend is also to be revised upward from JPY 11 per share to JPY 13 per share. Now that recovery from the pandemic is more certain and that we have decided that this is the timing to go back to growth path, we will buy back our shares up to JPY 0.8 billion. For future growth, we will also update our 3-year midterm business plan.

Today, I explain how we will transform ourselves from a marketing research company to a professional marketing services company. Such transformation, which requires more investment, will give some impact on profit margin. However, we are poised to proceed with it to improve our enterprise value. To seek understanding of the investors, we will strengthen our shareholders' return policy during the period of transformation. In August, as we announce full year results, we will present the updated version of the midterm business plan, including group-wide strategies and numerical targets for the 3 years.

That is the summary of the third quarter. Now Shimizu, CFO, gives you a financial update.

[Masahiro Shimizu, executive]

Thank you, Sasaki-san. Please turn to Page 5. Revenue in Q3 was JPY 12 billion. We saw an increase of JPY 283 million year-on-year. Revenue from April to June last year declined by 23% year-on-year, and Q1 revenue was down 8%. Q2 revenue recovered, and we saw a strong momentum in Q3. Q3 revenue exceeded prior year. Year-to-date revenue was JPY 33.1 billion. The negative variance from prior year has shrunk to 1.3%. The attainment in Q3 is ahead of our original plan.

We still see adverse impacts 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. Also, we have continued to provide off-line research services to our clients when they need product testing by preparing safe environments for both panels and clients.

Our business is seasonal. The highest revenue in the overseas markets is generated in December. The peak for the Japanese market is March. Off-line research projects in January was canceled or postponed due to the second state of emergency in Japan, but demand for online research continued and generated higher revenue than prior year.

As to operating profit, it was JPY 5.1 billion. We saw a decrease of 14.9% year-on-year. This is primarily because of the revenue decline, 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 have completed moving research systems and ERP systems onto cloud. We believe that these investments were worth making.

We'd like to walk you through P&L in more detail, so please turn to Page 6. Year-to-date revenue in Japan and Korea segment declined by 0.4%. We still see adverse impact from COVID-19 in both countries, but we've confirmed recovery in clients' demand. Revenue in other overseas segment declined by 4.6%. 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 expenses by JPY 310 million and saw an increase of 2.6%. The total number of employees increased by 68. As to panel expenses, it declined by 0.1%, in line with revenue.

Regarding outsourcing expenses, we increased outsourcing in certain projects and saw an increase of 4.5%. Both employee expenses and outsourcing expenses are spent on human resources. We monitor the sum of both expenses, and we'll continue to optimize them to generate revenue in the future. In the short run, we will continue to rely on outside partners. But in the long run, we aim to internalize tasks and functions in order to enhance quality for clients and generate higher revenue.

Depreciation expenses grew by JPY 200 million, and we saw an increase of 9.8%. This includes an increase of JPY 130 million due to IT investments. Our decision to cancel part of our office lease contract increased depreciation expenses from the capitalized asset retirement cost by JPY 47 million. As to depreciation expenses related to IT investments, we should start to see a slower growth in the future.

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%.

As we have decided to allow most of our employees to work from home, as announced in the last earnings announcement, we have decided to cancel part of our office lease, as much as 60% of the total floor space used for the Japanese business. We will incur around JPY 200 million of onetime restoration costs. But from the next financial year, we will enjoy savings of JPY 230 million annually. So the payback is less than a year.

Year-to-date operating profit margin was 15.5%. EBITDA margin was 22.8%.

Please turn to Page 7 for segment profits. Operating profit was down 15% year-on-year mainly due to revenue decline. Out of 15%, 9% came from Japan and Korea segment. This is mainly due to an increase in employee expenses. The remainder came from other overseas segment. This is due to an increase in panel and outsourcing expenses. Otherwise, cost structure has not changed very much.

Please turn to Page 8. We'd like to show you historical revenue trend. As you can see on the left chart, year-to-date revenue was down by 1.3% in actual currency. As shown on the right, revenue in Japan and Korea segment turned to positive from Q2. Revenue in other overseas segment turned to positive from Q3.

We'd like to share with you historical cost trend. Please turn to Page 9. As you can see on the left chart, total operating expenses were flat compared to previous year. You can find quarterly cost trend on the right. Panel expenses moved in line with revenue. Combined employee expenses and outsourcing expenses exceeded prior year as we saw stronger recovery in revenue than expected. In Q3 stand-alone, we saw an increase of 5% in employee expenses.

We saw an increase in depreciation expenses at a similar pace to Q2. Travel expenses and utility costs declined. This offset the increase in IT-related expenses. We saw a decline of 5% year-on-year in other operating expenses. As a result, total operating expenses in Q3 stand-alone increased by 5%.

Then we'd like to share with you historical head count trend. Please turn to Page 10. Total head count increased by 68 year-on-year. Under the pandemic, we used our capital to maintain the workforce to be ready for the revenue recovery. We have now started to invest in people to generate growth in revenue.

Looking back, we have grown online research business by replacing analog and handmade research and data analysis with 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 41.6 billion. JPY 39.1 billion of total goodwill was attributed from Japan and Korea segment. The remainder, JPY 2.5 billion, was attributed from other overseas segments. You can find more information on our valuation of goodwill in appendix.

The annualized finance cost was 0.84%, 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 2.83x. This is above our target of 2 to 2.5x, which we set prior to the COVID-19 pandemic. We aim to improve it as we start to grow our revenue. Interest coverage ratio was negative 1.3x due to the impairment loss in FY '20. But without it, the coverage ratio should have been 12.65x. We have no solvency issues. Our return on equity was also negative due to the impairment. But without it, it should have been 7.1%. We intend to improve these numbers as we grow our revenue.

Next, we'd like to explain where and how we generated cash and spend it. Please turn to Page 12. Operating cash flow was JPY 2.7 billion. We decreased investments this year. Investment cash flow was minus JPY 950 million. Our free cash flow was JPY 2 billion. Finance cash flow was minus JPY 3.2 billion as we repaid part of bank loans and canceled certain lease. As a result, we increased cash by JPY 3.1 billion from a year ago. We have JPY 12 billion in cash and feel comfortable with this position.

Today, we have announced the upward revision of revenue and profit guidance. Let us explain it in more detail. Please turn to Page 13. When we plan our original guidance, we expected that we would continue to see adverse 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 online research.

Compared to these assumptions, we still see a lot of confusions. Off-line research projects are canceled or postponed today. However, we see strong recovery in online research projects since clients need to know how consumer behaviors change during such difficult times. As we have enabled us to work safely and smoothly on cloud, revenue in online research rebounded more strongly than expected.

It was fortunate that we could recognize higher revenue in Q3 than prior year when we saw much less adverse impact from COVID-19. Thanks to such revenue recovery, profit attainment also exceeded the pace we set for the initial annual guidance. We see strong recovery in Japan and Korea segment. Other overseas segment turned to black from Q2.

On a consolidated basis, we have invested in outsourcing and employee expenses but have been able to absorb them by controlling other expenses. As a result, actual revenue and profit outperformed the original annual guidance. We also saw a positive impact from foreign exchange translation.

Based upon such business environment and financial performance, we have decided to make an upward revision on our revenue and profit guidance. We expect that revenue will be JPY 42.5 billion, EBITDA will be JPY 7.9 billion, operating profit will be JPY 4.7 billion, and net income will be JPY 2.3 billion. Please note that our outlook is based upon our conservative assumptions that we will continue to see adverse impact from COVID-19 in Q4. Please also note that we will continue to invest in outsourcing and employee expenses more strongly than the pace we set at the initial annual guidance. As we have confirmed strong recovery from the pandemic, we have decided to revise our capital allocation policy.

Please turn to Page 14. As mentioned earlier, we will continue to invest in people and research systems to generate revenue and profits. We used to prioritize debt repayment over shareholder return. But from now, we'd like to treat both of them equally. As to debt repayment in July this year, a JPY 5 billion bond will mature. We plan to refinance this by cash, bank loan and bond issue.

As to shareholders' return, we'd like to take 2 initiatives. First, we will increase annual dividend to JPY 13 per share from JPY 11 per share. As you recall, we used to increase dividend per share every year. It was JPY 7 in FY '18, JPY 9 in FY '19 and JPY 11 in FY '20. While our initial plan was to maintain it at JPY 11 as the future outlook was uncertain, but now that we have confirmed strong recovery, we have decided to go back to the original path and maintain the pace in increase in dividend. This will result in around 23% dividend payout ratio when we meet the revised net income target.

The second initiative is share buyback. We have decided to buy back our common stock up to JPY 0.8 billion. We intend to use share buyback programs actively in order to continue to improve shareholders' return in the future.

Now I'd like to hand the microphone back to Sasaki-san regarding business update. Thank you.

[Toru Sasaki, executive]

Thank you, Shimizu-san. Now let me give you business update, starting with Japan and Korea Business segment. Please look at Page 16. Top right, the third quarter revenue was up 1% year-on-year and up 1% also in constant Korean currency. Bottom right, the operating profit was down 6% year-on-year and down 6% in constant FX as well. Top left, year-to-date revenue was flat year-on-year and down 1% in constant FX. Bottom left, operating profit was down 9% year-on-year and also down 9% in constant FX. Third quarter revenue increased slightly year-on-year.

The recovery on profit side, however, was slower due to mainly increased total employee expenses as resources were short vis-à-vis demand recovery. As I said, at the second quarter earnings announcement, this trend is likely to continue.

Now I explain Japan and Korea, respectively. Please look at Page 17 for Japan business. As shown on the right-hand side, the third quarter revenue was up 1% year-on-year. By area, digital was up 3% year-on-year, and online and off-line other than digital was flat. As shown on the left, year-to-date revenue was down 2% year-on-year. Digital increased by 2%, while online and off-line research decreased by 3%.

Although the third quarter is usually the busiest quarter, we did not take up off-line research projects with another state of emergency declared. There has been some impact coming from missed opportunities due to chronic shortage of resources since the beginning of the year. However, recovery of digital and online research was greater than such negative impact, and we are looking positively at increased revenue of Japan business as a whole. So much for Japan business.

Please look at Page 18 for Korea business. As shown on the right-hand side, the third quarter revenue was up 6% year-on-year and was flat in constant FX. On the left-hand side, year-to-date revenue was up 14% year-on-year and up 13% in constant FX. Due to reduced project size of our key accounts and timing lag of booking, the third quarter revenue turned out to be on a similar level as the previous year. That said, online research revenue grew more than 20% year-on-year and remain predominant vis-à-vis market and competition, expecting to achieve double-digit growth for the full year.

Furthermore, a new purchase data service, which has been in development since last year, is to be launched within this fiscal year, expected to be a new growth driver for next year and beyond. Korea business is showing the fastest recovery in growth in the group, showing a positive outlook. So much for Korea business.

Please turn to Page 20 for other overseas business. As shown top right, the third quarter revenue was up 8% year-on-year and up 1% in constant FX. Moving to bottom right, operating profit was up 83% year-on-year and down 62% in constant FX. As shown top left, year-to-date revenue was down 5% year-on-year and down 8% in constant FX. Bottom left, operating profit was down 111% year-on-year and down 110% in constant FX.

Although some sectors, including alcohol beverage, entertainment and advertisement, are still struggling, our wallet share in strategically important global key accounts is growing. With a stronger performance compared to the first half of the year, the third quarter revenue increased year-on-year. Meanwhile, with clients becoming more demanding about prices and competition trying to compete with prices, profit recovery is slower than that of revenue. To deal with this issue, we are reviewing our offer prices, but the first priority is to have a firm grip on demand and expand our account base.

Now let me walk you through each region. Please turn to Page 21 for the U.S. As shown on the right, the third quarter revenue was up 4% year-on-year and down 2% in constant FX. On the left, year-to-date revenue was down 5% year-on-year and down 9% in constant FX. It is in the U.S. market that we are faced with the hardest price competition. And at this moment, we can't expect significant growth. However, as talks with the world's #1 FMCG client and a large alcohol beverage company client are being resumed, we can expect a steady recovery.

Next, please turn to Page 22 for Europe business. As shown on the right, the third quarter revenue was up 17% and up 10% in constant FX. On the left, year-to-date revenue was down 5% and down 9% in constant FX. This very strong performance was driven by the U.K., which had struggled due to COVID-19 in the first half of the year.

We have been commissioned by global key accounts in robust food and FMCG sectors for their global projects. We also received orders for new and large global projects from OTC health care company and application service company.

Lastly, please look at Page 23 for Latin America, Middle East and Asia, excluding Japan and Korea. Right-hand side of the page, the third quarter revenue was down 2% year-on-year and down 7% in constant FX. On the left, year-to-date revenue was down 2% year-on-year and down 6% in constant FX. Another surge of the pandemic in Latin America, in particular in Brazil, drove down revenue. Struggle continues for most of the year, and this highly volatile situation is likely to remain unchanged. So much for business update by segment.

Lastly, as partial update of the midterm business plan, I walk you through growth strategy for Japan business, the largest business segment of the group. Please turn to Page 25. First, I'd like to touch upon strengths of Japan business. As a marketing research company, Macromill has been helping more than 2,800 blue-chip companies in Japan to solve their marketing issues with our proprietary panel and more than 1,200 talented people. Our proprietary panel is very active. Research data and other marketing data acquisition and offering is based on a rigorous process of getting permission for it.

We are also equipped with our proprietary know-how to improve accuracy of panels' responses as well as data quality. Client first, that is the DNA of our employees, working closely with clients to find solution. They have been working with data since the foundation of the company. We have many so-called data-native talent. And as client needs change, we also have been changing ourselves from a marketing research company to a professional marketing services company, improving overseas capabilities and exploring digital area. We believe that such strength and flexible adoption to change have given us a unique position in the research industry and a high opinion of our ability among the clients. And now we feel a new and big change in needs is coming again.

Please turn to Page 26. Smartphone and digital devices have changed customer behavior. With increasing number of touch points, to understand consumer behavior is becoming a more complex exercise. In such a changing marketing environment, not only experience and intuition but also data are important as our clients make new business investment, build internal systems or promote digital transformation. Clients need a partner who can present or lead them to solutions when they have to change their marketing activities. We believe that the current marketing research is not enough to meet such client needs. And that's why we will be transforming our business model.

Please turn to Page 27. For the transformation of business model, we will strengthen data utilization as well as data consulting areas. We will also strengthen our own solution development to be well linked with clients' marketing action and enhance our capabilities. While leveraging our so-called data-native talent and proprietary panel was highly appreciated by our clients, we are set to transform ourselves from a marketing research company to a professional marketing services company. We don't need to start from scratch. We have already started the process with some promising results.

Please turn to Page 28. With respect to data utilization and use -- data consulting, we have already started fee business. As to marketing activation support, we have developed a proprietary solution using data from Internet ads. It is time to move up this transformational process from a pilot status to a full-fledged business expansion process.

Page 29, please. To offer and process marketing data, including proprietary panel-based research data to provide data consulting and data utilization capability for various data in society, data owned by clients included, and ultimately to present the solution well linked with clients' marketing action, since there is no company yet to do all of these things, we believe that our ecosystem to create marketing solutions will give us a unique position in the marketing industry. We will also focus on process automation, tool development and offering and platform building to maximize future revenue and profit.

And here is the timetable. Please turn to Page 30. 3 years from the next fiscal year are positioned as the period of transformation where we invest more than ever in human resources and technology. Increased investment will have some negative impact on profit and margin. We think it is unavoidable to achieve sustainable enterprise value enhancement. On May 10, we issued 2 press releases about new transformational changes.

Please turn to Page 31. One is for the start-up life science business and data utilization support business. Please turn to Page 32 for life science business. Life science here is defined as an area of health promotion and disease prevention. The objectives of this area are to support human clinical trials, build health database and provide data utilization support. Target clients in this area are mainly R&D sections, with which our transactions were limited. Liberating the strength of our proprietary panel, we have concluded a business alliance with an optimal partner. We are now poised to embark on this untapped market.

Please turn to Page 33 for data utilization support business. In this area, we already started a fee-based consulting business with several corporations with different monetization approach and a competitive environment from before. Dealing with clients, we could reconfirm our strength and gain confidence for data utilization support business. With definition of required talent completed, we will activate personnel transfer and hiring. It is time to engage in this business in a full-fledged manner and increase the number of clients in this area. For details, please refer to the press releases.

Now wrapping up. At the beginning of this fiscal year, I made promises to you: achieve the figures in the guidance to regain trust from the market, update at an appropriate timing the midterm business plan to create expectation for the future of Macromill Group and review adequate shareholders' return. I also said that I would suit my actions to my words. With that backdrop, we have presented our year-to-date results, increased the dividend payout and also announced share buyback plan, judging it is a good timing to do so as we are on a recovery path out of the pandemic. Today, we announced future growth strategy of Japan business. In August, when we announce full year results, we will present group-level strategy and numerical targets for 3 years.

Thank you for your continuous support, and thank you for staying with us to the end.