Macromill Inc

TSE:3978

Earnings Call Transcript 2022-Q3

[Toru Sasaki, executive]

Thank you for taking time out of your busy schedule today to watch the video presentation of Macromill for the fiscal year 2022 third quarter results. I am Sasaki, Representative Executive Officer and Global CEO.

Here is today's agenda. I will start with a summary of the financial results for the third quarter of fiscal year 2022, followed by financial information presentation from Mr. Takahashi, the Head of IR. And then I will explain the situation of Japan and the Korea Business segment and Overseas Business segment, excluding Korea. And lastly, I will give some updates on the current midterm business plan.

Please turn to Page 3. Third quarter revenue was JPY 13.52 billion, up 12% year-on-year and also up 12% with constant FX. The third quarter has renewed the new record-high revenue clocked in the second quarter. However, the pace of headcount increase was less than expected and operational capacity remains tight. Accordingly, expenses, including total employee expenses and outsourcing expenses increased, which in turn limited operating profit at JPY 2.4 billion, up 5% year-on-year and also up 5% with constant FX.

Although the third quarter year-to-date revenue and profit have grown double digits, profit growth is slowing down. We expect this slowdown trend will probably continue in the fourth quarter. However, we have revised up the initial guidance. And accordingly, the year-end dividend may be increased to JPY 9 per share.

We positioned the current fiscal year as a transition period from the recovery from the impact of the pandemic to the growth phase. And we feel very positive about the revenue reaching record highs, both in Q2 and Q3, driven by expanding client demands. On the other hand, capacity remains tight, and we recognize that most opportunities to meet client demands, especially in terms of profit, will continue to be an issue going forward. We will take firm measures to hire, train and retain human resources and work to resolve these issues.

And the establishment of solid management structure, another management issue that we recognized has been completed. As I will explain in details later, we welcome the CTO on January 1 and the COO and the CFO on April 1. We expect them to contribute to the achievement of our midterm business plan.

So much for key takeaways for the third quarter. Now Mr. Takahashi will present financial information.

[Ryo Takahashi, executive]

Please look at Page 5. The left side shows the revenue trend. Revenue in Q3 was JPY 13.52 billion or up almost JPY 1.5 billion year-on-year. In terms of year-on-year growth rate, revenue increased by 12%. Both in terms of actual amount and growth, Q3 was about the same level as Q2. The third quarter year-to-date revenue was JPY 37.95 billion, up 15% year-on-year.

As Mr. Sasaki mentioned, gross Q3 quarterly result and Q3 year-to-date results were record highs. We expect the revenue momentum to continue basically through the end of the fiscal year. The details of the revised guidance will be provided later. But for the full year, we expect a 14% increase to JPY 49 billion.

The right-hand side shows the trend of operating profit. The operating profit of Q3 was JPY 2.4 billion, about JPY 0.1 billion higher than the previous year. The year-on-year growth was limited to 5%, about JPY 0.2 billion less than that of Q2. We think this trend will continue due to cost increase for the future and expect a deficit of about JPY 0.5 billion in Q4 according to the revised plan.

The Q3 year-to-date operating profit was JPY 6.11 billion, up 19% year-on-year. However, we expect the full year growth to remain at around 4% year-on-year. As we have been saying, we are currently spending money to increase operational capacity with strong demand expected to continue. In the following pages, I'd like to explain the progress in more detail.

On Page 6, I will explain revenue trends by segment. Due to the seasonality of our business, it is the second and the third quarters, which has the largest revenue. The graph on the right shows the quarterly revenue trend, which has remained the same, despite the COVID-19 pandemic. The first quarter of last year and the fourth quarter before that were particularly affected by the pandemic and recovery trend since the second quarter of last year is becoming clearer.

We are satisfied with the double-digit growth in both Q2 and Q3 compared to not only last year but also to the pre-COVID year ended in June 2020. Against this backdrop, we say that we have returned to the growth trend from the recovery phase from the pandemic. The graph on the left shows Q3 year-to-date revenue and it's breakdown. Most business segments grew by double-digit year-on-year and by around 15% on a consolidated basis. Mr. Sasaki will explain the details of each segment later.

Next, using the waterfall chart on Page 7, I will explain in more detail the factors behind the change in operating profit by segment. The Q3 year-to-date 19% increase over the previous year shown on Page 5 can be broken down into a 7% increase in Japan and Korea Business and 12% increase in overseas business, excluding Korea. As you can see, both business segments have seen total employee expenses increase. And for Japan and Korea Business, outsourcing expenses have also increased. The increase in revenue in both segments was strong enough to offset these cost increases, resulting in profit growth in both segments.

Page 8 shows operating cost trend. The left graph shows the growth of Q3 year-to-date operating costs, and the right graph summarizes the quarterly operating cost trend. The left graph shows 14% increase in Q3 year-to-date operating cost. The right graph shows 14% increase in Q3 quarterly operating cost year-on-year.

The table above the right graph shows the growth rate of each cost item compared to the last fiscal year. The panel expenses grew at a slightly higher rate in Q3, but basically moved in tandem with revenue. The 4 irregularities highlighted this time are depreciation and amortization, others, outsourcing expenses and total employee expenses.

First, depreciation and amortization in Q3 was down 10% year-on-year due to the continued impact of last year's partial return of office space. Next, one line up, others remained flat year-on-year into Q2 but increased 9% year-on-year in Q3. As impact of the COVID has been fading, expenses such as commuting, traveling utilities, among others, began to rise and M&A-related expenses and systems investments for the next fiscal year are also added.

And the outsourcing expenses show clearly that we continue to utilize outsourcing to respond to inquiries, which exceed our in-house operational capacity as client demands continue to grow. Specifically, encircled in red, the growth rate of outsourcing expenses continues to be high. And in absolute terms, the amount of outsourcing expenses in Q3 exceeded JPY 2 billion, renewing the record high marked in Q2.

The last item line shows the increase in total employee expenses. This increase is to expand in-house operational capacity, given the outlook for strong demand to continue in the future. In other words, this increase in outsourcing and total employee expenses is a deliberate move, the details of which are summarized on Page 9.

The medium-term business plan has set a goal of achieving an operating profit margin of 15%. As we explained in the previous earnings announcement, we intend to achieve this goal by taking the steps shown on the right side of the page. We are currently in the first step, and as shown in the graph on the upper left, we have accelerated the pace of hiring since Q4 of the last fiscal year.

As of the end of the third quarter, the number of employees reached 2,788, an increase of about 151 from the end of the last fiscal year. However, in Japan and the Korea Business segment, the number of employees decreased slightly compared to Q2. This was due to staff turnover, although hiring continues. The total employee expenses in Q3 were lower than those in Q2 as shown in the bottom left graph.

Some existing employees are replaced by new hires. Even though the number of employees remains almost the same, the value of the workforce has decreased compared to Q2. As a result, the number of deals that we had to decline increased in Q3. This is very unfortunate as we would have been able to earn a larger profit through some add-on revenue.

Looking ahead, we will maintain the current pace of mid-career hiring, with the aim of expanding to just under 3,000 employees by the end of this fiscal year. In addition, in Q4, we will add about 60 new graduates as usual, so we expect the starting level at the end of the fiscal year to be one step higher than that at the end of Q3.

At the same time, we have positioned measures to prevent further job turnover as a top priority and are working on them. In light of the current situation and the clients' demand likely to remain strong, we need to make full use of outsourcing. As a result, the transition to step 2, shown on the right-hand side, in which outsourcing expense is to be significantly reduced, will come later than expected, probably in the second half of the next fiscal year at the earliest.

Pages 10 to 12 show the PL, balance sheet and the cash flow statements. Please refer to these documents as needed. I'd like to make one small comment about the balance sheet on Page 11. First of all, there has been no major change in the working capital situation and our balance sheet remains very healthy.

At the end of March, the lump sum repayment portion of a bank loan, which was originally an LBO loan reached its seventh year maturity. We have refinanced this bullet repayment portion of close to JPY 12 billion or almost the same amount with a syndicated loan arranged by Mizuho Bank and the Bank of Mitsubishi UFJ.

While market interest rates are entering a rising phase, we believe we were able to achieve a good refinancing by fixing and reducing funding costs. With this refinancing reflected, the current net debt EBITDA multiple is 2.2x, which is within the target range set in the medium-term business plan.

Finally, on Page 13, I will explain the revisions to the earnings and dividend guidance. As I have mentioned, Q3 year-to-date results have exceeded our initial expectations. And we expect strong client demand to continue, so we are revising our initial guidance as shown here.

Accordingly, we will increase the year-end dividend by JPY 1 per share. As I have already mentioned, the pace of revenue growth will not change significantly in Q4. But due to the seasonal nature of our business, actual revenue in Q4 will naturally be lower than that in Q3.

And on the side of expenses, as we have been saying since the announcement of Q2 results, we will continue to spend, [ eyeing ] the next fiscal year. This could result in the red ink for Q4, which is why we have revised the guidance as shown here. Of course, there is a possibility that the deficit in Q4 is avoided with a better-than-expected revenue. However, we would like to keep surprises only to positive ones. So at this stage, this is the revised guidance that we have decided to present.

Now Mr. Sasaki will give a detailed explanation of the business.

[Toru Sasaki, executive]

Thank you, Mr. Takahashi. I will now give an update on the Japan and Korea Business segment.

Please turn to Page 15. The upper right-hand side shows that the third quarter actual revenue was up by 8% year-on-year. And adjusting for FX impact from the Korea business, it was also up by 8%. The segment profit shown on the lower right-hand side was up 1% compared to last year and 2% on a constant FX basis.

Top left is a 9-month year-to-date revenue up to Q3. It was up by 10% year-on-year, both on actual and constant FX basis. Segment profit on the global left-hand side was up by 7% year-on-year and up 6% on a constant FX basis. As Mr. Takahashi explained, the pace of profit growth slowed down in the third quarter due to the increase in total employee and outsourcing expenses in Japan caused by the capacity shortage.

Now let me move on to the Japan business on Page 16. The disclosure on the Japan business breakdown has been changed from this fiscal year, so let me remind you once again. Until last fiscal year, Japan business had 2 subsegments: nondigital service, including online, off-line and others; and digital.

As unveiled in the midterm business plan, we have reclassified the Japan business into research business, which includes online and off-line research; and the digital and other new business, which covers the digital service, data consulting, Life Science, ad distribution and business in Southeast Asia. For more information on the other new business, please refer to Page 38 in the appendix.

The third quarter revenue in Japan, indicated on the right-hand side, grew by 6% year-on-year, with the research business growing by 3%; and the digital and other new business by 16%. On the left, you can see that revenue from Japan operations was up 9% year-on-year for the first 9 months of the year, with research at 5%; and digital and other new business up by 27%.

Please turn to Page 17 for a detailed explanation of each subsegment. We have set growth rate targets for respective subsegments and the numerical performance is on track. In the research business, our core offering, the online research is performing well. growing even compared against 2 years ago. However, tight capacity continues to cause more opportunity losses in Q3.

On the other hand, COVID-19 countermeasures such as the state of emergency and cross-state emergency hindered the provision of stable service for off-line research. Although the service has now resumed, it has not fully recovered. But we take this positively, because in addition to growing customer demand, there is room to capture the lost opportunities and to benefit from further recovery in the off-line research service.

In digital and other new business, in absolute yen terms, the Q3 revenue growth outpaced that of the research business. Digital, however, had a very difficult time, mainly due to tight capacity, and the revenue was down compared to last year. Although we expect revenue to increase in the fourth quarter, returning to our previous double-digit growth trend definitely requires the capacity shortage to be resolved. This is a company-wide issue not just for digital, and we will continue to address this challenge.

Today, we are also pleased to announce our initiative with Amazon, eyeing the cookieless era. I will explain the details later. In other new business, data consulting and Life Science Business had enjoyed steady growth since the first quarter, and I will elaborate on this point later as well.

Next, please turn to Page 18 for our Korea business. As shown on the right, revenue for the third quarter was up by 30% year-on-year and by 29%, excluding the FX impact. On the left, you can see that the revenue for the first 9 months of the year was up by 21% and by 16% on constant FX. Online research grew by 23% year-to-date up to Q3, driven by the digital service suite with 81% growth.

Our Korea business has been renewing record high sales to date, but in the challenging trends for the market and the peers. The market is now finally starting to recover, and we expect the strong growth momentum to continue. This concludes my explanation on the Korean business.

Let's move on to the Overseas ex-Korea business segment on Page 20. The upper right-hand section shows that third quarter revenue was up 30% from the previous year or up 28% on constant CapEx. As indicated at the bottom right, the segment profit for the third quarter was up sharply from last year's new breakeven level.

The top left is the third quarter year-to-date revenue, which was up 32% year-on-year and up 27% on constant FX. Q3 year-to-date segment profit at bottom left rose sharply from the previous year's loss, but the growth was somewhat muted as costs were spent as investment for the future. The challenge today to leverage this business excluding Korea was the high business volatility, but the uninterrupted revenue momentum is something that we take as a positive sign.

On Page 21, let me share the geographical breakdown. As you can see, Europe, U.S. and the rest of world all achieved double-digit revenue growth compared to last year. We opened new offices in South Africa, Poland and the Philippines. Sector-wise, FMCG, media and advertising and alcoholic beverages are performing well, while the travel and entertainment industries continue to underperform.

With the clients that we have identified the strategic relationship for global key accounts, simple strategy of taking more of the wallet share has been successful, resulting in winning global projects and new client orders, especially in Europe. As in Japan, the challenge is the tight capacity, so we continue to invest aggressively in talent. That's all on the segment update.

Lastly, I would like to give you an update on the midterm business plan. Please turn to Page 23. We have shown this slide before, but I would like to reiterate that the main focus of the midterm business plan is the business model transformation of our core Japan business, transforming from a marketing research company to a professional marketing services company.

As part of our progress in promoting this transformation, we have made a press release for the digital service and data consulting service today. We have also built some use cases in the Life Science Business, so I will briefly explain on all of them. And at the end of the presentation, I would like to also give you the most recent changes made to the management structure.

Please turn to Page 24. For the digital field, we believe that it is important to take steps to prepare for the cookieless era. Please refer to our financial results presentation video and materials from November last year to get more insights on our thoughts and positioning on the cookieless era. Under these circumstances, we announced our collaboration with Amazon for the development of a new ad effectiveness measurement solution and the plan for the service launch.

Unlike the conventional methods using tags for measurement, our solution allows server-side collaboration with Amazon Ads, enabling us to determine the ratio of ads without the tag and verify the brand-lifting effects by conducting surveys. We expect Amazon Ads sales to expand in the future and the sales of this solution to grow accordingly.

In addition, as another initiative for the cookieless era, we have agreed to use jointly-developed technologies that utilize Amazon's data clean room. We believe these are extremely positive for our business.

Next is the Life Science Business on Page 25. Life science is a growing market, and many companies from various industries are entering the market. We provide development support in the nonpharmaceutical domain by acquiring blood, saliva and other health-related data from our panels. This is an untapped market for us, and we expect extremely high growth.

Today, I would like to introduce our collaboration with POLA Chemical Industries. To date, we have supported the development of apps for various companies, mainly in the area of verification research to improve UI and UX. For this project, we also offer support for technology development by providing skin and saliva data, collecting facial motion video data and measuring the autonomic nerve system to verify if the app could acquire the data correctly. We believe the development of apps in this domain will increase and that this project was a positive step for us.

Next is data consulting business on Page 26. The market size, even if we just carve out the [ deaccelerated ] market, is expected to be about JPY 800 billion. We continue to study the market more closely, but we already believe there is a market where we can exert our competitive advantage of making full use of our data. [indiscernible] in our view, is roughly JPY 20 billion to JPY 30 billion, and we aim to capture about 10% of that market as an immediate target.

On that note, we issued a press release today regarding company split and turning the succeeding company into a subsidiary. The press release outlines a plan to transfer our data consulting business to South Inc., which manages the marketing consulting business through an absorption-type company split, and then transact with the newly integrated business into a consolidated subsidiary. The date of company split is scheduled for July 1.

There are 2 intentions: the first is to accelerate the pace of growth in this business domain; and the second is to deliberately offer a different brand than Macromill, even though the entity will be our consolidated subsidiary. We plan to rebrand the company to Eight Hundred, Inc. without using the Macromill brand. The growth trajectory will also be different.

Lastly, management structure update on Page 27. First, we're happy to announce that we have brought in professionals in their respective specialty fields. Although they have different experiences and capabilities, they all share the will and determination to commit to the Macromill Group's growth with a sense of responsibility and hands-on approach. Let me briefly introduce each of them.

First, I'd like to introduce Taro Dohi, our new Chief Corporate Officer, CCO. He is a professional in the HR area with many years of global experience. As a business person, he is growth-minded and understanding. We expect him to oversee the overall corporate affairs as CCO and to bring stability to the company.

Next is Shintaro Hashimoto, our new CFO. He previously served as the Vice President and Head of Corporate Strategy, so he has been promoted from the internal pool of talent. Although he does not have an experience working as a CFO, he has the necessary knowledge and a deep understanding of the Macromill Group's business, so we expect him to serve as a CFO with deep business insights.

Last but not least, we have Ken Inoue, our new CTO. He has worked at Microsoft, Amazon. And at Microsoft, we also worked in the U.S. headquarter. Recently, he was also involved in an IPO transaction of an early-stage company. His insights go beyond technology, and he is well-versed in security as well. We look forward to his contribution in accelerating the technology-driven nature of the Macromill Group.

Let me wrap up. Revenue has continued to be very strong as was the case in the first half, so we have revised our portfolio guidance and decided to hike dividend. However, the capacity crunch that has persisted since last year has not been resolved, and we recognize that it remains a management issue that must be dealt with.

We have also solidified our management structure, which has been another management issue that we were addressing. We're committed to resolving the capacity constraint and achieving the ambitious goals of our midterm business plan.

To that end, we would like to continue to seek your generous support. Thank you very much for your kind attention.

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