Macromill Inc

TSE:3978

Earnings Call Transcript 2023-Q3

[Toru Sasaki, executive]

Thank you very much for watching the video presentation of the financial results for the third quarter of the fiscal year ending June 30, 2023 of Macromill. I am Sasaki, Representative Executive Officer, President and Global CEO. Today's agenda is that we have just made an important announcement regarding our overseas subsidiaries. So first, let me explain about it. After that, I will give an outline of the third quarter and update of our business. Lastly, the CFO, Mr. Hashimoto, will give the financial information.

Please look at Page 4. 100% of the shares of Siebold Intermediate BV and the consolidated subsidiary and intermediary holding company of MetrixLab Group is transferred to Toluna Holdings headquartered in the U.K. In exchange, we will acquire 17.4% stake in Toluna Holdings, and Toluna Holdings will become an equity-method affiliate of our company.

Let me explain the background of the reason for this decision. Please look at Page 5 -- there are 2 backgrounds. One is market change. Globally and in Japan as well already, the research industry is redefined as an insight industry, including digital data analysis and management consulting and a marketing area. The global scale globally has doubled and in Japan increased by 1.5x. Number two is acceleration of industry restructuring. As an insight industry, the top 10 changed. And the big 4 in the research industry, Nielsen, Kantar and GfK were acquired by [indiscernible], and Nielsen was split into Nielsen and IQ and IQ was merged with GfK.

Since these changes in the business environment as an opportunity, after [indiscernible] Macromill's overseas strategy, we decided that it would be best to work with a partner rather than going on our own way and narrow down the list of candidates that could stabilize MetrixLabs business foundation and accelerate its growth. As a result, we made this decision. Now let me talk about the partner Toluna.

Please look at Page 6. Toluna is a global company headquartered in the U.K. with a panel network of 43 million people in 70 countries. Those familiar with industry may recognize Toluna as a panel company, but it has evolved into a company with an advanced platform using innovative technology.

Please look at Page 7. This merger will strengthen the firm's human resources, client base and locations, creating a highly competitive global firm that can provide wealth solutions on an advanced platform based on one of the world's largest panels. This was the explanation of a change of overseas subsidiaries that was announced today, including the fact that the overseas business, excluding Korea, will become a discontinued business. I will now provide an overview of our revisions to this fiscal year's forecast and the Macromill Group's strategy going forward.

Please look at Page 8. Overseas businesses, excluding Korea, will be separately disclosed as discontinued business. Based on international financial reporting standards, discontinued business is retroactively excluded from revenue, EBITDA, operating profit and profit before tax from the beginning of the fiscal year only profit for the period will be affected by the discontinued business. Due to this transaction and the performance of Japan and Korea business segments, the full year forecast has been revised downward. However, profit for the period has been revised upward due to the recording of gains on the transfer of shares. The details of the Japan and Korea business [ and for ] revisions to full year forecasts will be described later.

Now let me introduce our strategy going forward. Please look at Page 9. First, overseas strategy. Outside of Asia business will be developed under a strong partnership with Toluna. On top of that, we will concentrate all resources in Asia where we are more competitive. In Japan, also new business areas, including data consulting, are showing solid growth. So we will accelerate growth and transform our business model in Japan ahead of other regions. At the same time, we will aim once again to improve the profitability of the business -- research business by improving its stability and productivity. While efforts to improve the profit margin of a domestic research business are already underway, the Macromill Group intends to focus more on profits in the future since the overseas business, which is highly volatile and makes only a minor contribution to profits will no longer be included in scope of consolidation as a result of this transaction.

In light of today's announcement, the assumptions of the plan will change significantly, the current medium-term management plan will be updated 1 year ahead of schedule, and the new medium-term management plan will be announced at the time of our full year financial results in August.

Please look at Page 10. As a result of this transaction, the stability of our business will improve based on our confidence in the forecast and the current stock price level, we will implement a share buyback. You can see the outline here buyback period is from tomorrow to the 30th of September, total amount will be JPY 1.2 billion, 1.5 million shares -- ratio to the number of outstanding shares is scheduled to be 3.8%.

Now let me move on to the presentation of the third quarter. Since the overseas business, excluding Korea, will be discontinued. The update will be of Japan and Korea business segments. Please look at Page 12. Revenue in the third quarter was JPY 11.21 billion, up 6% year-on-year. Excluding Korean exchange rate effects, it is up 6%. Operating profit was JPY 2.01 billion down 13% year-on-year. Excluding the exchange rate effect, it is down 14%. Year-to-date of Q3, revenue is JPY 31.7 billion, up 8% year-on-year. Excluding exchange rate effect, is up 7%. Operating profit is JPY 4.65 billion, down 16% year-on-year, excluding exchange rate effects, it is down 17%. As we are unable to fully capture demand in March, which is the busiest season in Japan, revenue did not reach expectations, greatly affecting profits.

The factors are that there was slow recovery of disengaged clients due to the previous refusals and sales of high-margin products, such as online research and digital products were sluggish. On the other hand, operational capacity recovered smoothly. Going forward, we expect to reduce outsourcing costs and improve productivity by increasing the ratio of in-house production.

The next page shows the full year guidance revision of Japan and Korea business. Please look at Page 13. Revenue is expected to be JPY 2.2 billion below initial forecast and operating profit below by JPY 1.5 billion. As for operating profit, as was explained, expenses related to changes of overseas subsidiaries is about [indiscernible]. Excluding these expenses, operating profit will underachieve by JPY 1 billion.

Let me explain the reason for the revision. Please look at Page 14. The underachievement of JPY 2.2 billion in revenue is because we are not able to fully capture the demand for online research in March, which was a peak reason. Let me explain the factors for that. As far as external environment, demand exceeded operational capacity, so we refrained from conducting active sales activities and made refusals, recognition and preference among particularly long-tail potential customers declined. Since the beginning of the third quarter, when in-house production capacity was fully established, we have focused on expanding outbound sales, but we have not yet been able to fully leverage our capabilities. Also, we have maintained business with major clients as a priority despite capacity shortages, demand during the peak season in March has shrunk due to deteriorating business confidence, and there has not been a large surge this year as we had expected.

Despite the impact of external environment, we believe that demand itself is still on upward trend as companies that have not used research in the past are starting to conduct new research and research to find out how customers are thinking and behavior have changed post-COVID is becoming more active. Therefore, as you can see on the bottom part of the page, content measures against internal environment changes are important. As changes in internal environment. First, we have made significant progress in building up our operational capacity, mainly for online business, and we have resolved the issues. The key point is how much demand we can capture, and we have been actively holding seminars and other events. And the number of attendees of the seminars reached a record high. However, the most important thing is the transformation of our sales style from inbound to outbound.

We are in process of regaining our sales capabilities, which are one of Macromill's strength by reviewing how to approach customers, we have not been able to approach in the past on an organizational basis. Next, I will explain profit in more detail.

Please turn to Page 15. The initial plan assumed a profit to increase significantly by generating a large revenue in the second half and whereby reducing total employee expense ratio that is fixed cost. However, with lower than expected revenue, total employee expense ratio remains high without leverage effect. We were able to control our sourcing expenses with lower revenue and it declined half-on-half, but we believe it can be reduced a little more. On the cost side, we have already invested adequately to develop operational capacity transitioning to the harvest phase from the upfront investment phase. We believe we are now ready to generate large profits once revenue [ goal ] is achieved.

Please turn to Page 16. Based on steps for OP margin expansion that we have illustrated before, we were not able to transition to the second step at this timing -- due to lower revenue in the second half. However, we are now adequately structured and revenue growth acceleration is the key for profit improvement. We will be able to transition to the third step once revenue growth is achieved, we will aim to grow the top line and to maximize profit through top line growth in the next fiscal year.

Please turn to Page 17 for specific initiatives to maximize profit. Questioning revenue expansion. Firstly, we will continue strengthening outbound sales activity quantitatively and qualitatively. Secondly, we will expand revenues of high-margin online in the digital research. And thirdly, we will pursue value-added pricing. Concerning productivity improvement, we will focus on online research. But as explained before, we have already built the foundation to a certain extent. We believe we can maximize operating profit by improving productivity, along with improved proficiency of in-house talent and by controlling outsourcing -- this concludes my explanation on the business. Next, Mr. Hashimoto will offer updates on financials.

[Shintaro Hashimoto, executive]

Thank you, Mr. Sasaki. I will now update you on financials for the third quarter FY 2023. Please turn to Page 19. As Mr. Sasaki already covered the content on this page in the key takeaways, let me just touch you on key points. Revenue of the Japan and the Korea business segment for the first 9 months was up 8% year-on-year or up 7% with constant FX for Korea. Segment profit was down 16% year-on-year or down 17% with constant FX due to an increase in total employee expenses in Japan.

Page 20 shows a breakdown of operating expenses. Q3 year-to-date total operating expenses were JPY 27 billion, up 13%. Excluding the cost associated with overseas subsidiary changes, Mr. Sasaki explained at the beginning. Roughly half of the increase in operating expenses was due to an increase in total employee expenses, which increased by 15%. Outsourcing expenses were up 16% due to operational capacity expansion. Other expenses increased 16% due mainly to system and M&A related expenses other than overseas subsidiaries changes. The increase in these 3 items was much greater than revenue growth.

Next, the waterfall chart on Page 21 shows the factors behind the change in operating profit. Although the first 9 months revenue grew by about JPY 1.6 billion. It was not enough to absorb previously explained increases in total employee expenses, outsourcing and other operating expenses, resulting in a profit decline.

Page 22 shows quarterly trend of segment revenue and segment profit. As per the left graph, Q3 in Japan and Q2 in Korea at the busiest periods. The current fiscal year also observed the same trend. Q3 segment revenue was expected to exceed Q2, but actually, it declined Q-on-Q. Although the segment profit margin is improving as per the right graph. It is trending below the plan due to slow revenue growth.

Please turn to Page 23 for Japan business performance. The first 9-month revenue for the Japan business grew 7% year-on-year. Research business consisting of online and off-line research was up 6% and digital and other new business consisting of digital data consulting, life sciences, et cetera, was up 14%. Revenue growth was flattish Q-on-Q in the research business due to slow online usage growth in stand-alone Q3. On the other hand, digital and other new business grew double digit and continues to expand.

Next, let me elaborate on research business, digital and other new business. Please turn to Page 24. Operational capacity issues in the research business has been resolved. But as Mr. Sasaki explained, due to delayed recovery in disengaged accounts, we were unable to capture potential demand adequately. Demand in overall market continues to expand. Therefore, we will focus on capturing it by strengthening outbound sales activities going forward. In digital and other new business, data utilization support continues to be strong, driving revenue growth. Digital continues to see revenue decline due to the ongoing transition to a measurement method replacing third-party cookies and due to a decline in branding advertising and other market conditions. On the other hand, the use of the platform data [indiscernible] is growing and the favorable changes for our company are happening.

We will continue to develop new services by developing our unique positioning with [ panel ] data access.

Next, please turn to Page 25 for the Korea business. The first 9-month revenue increased by 13% or 5% with constant FX. On the other hand, stand-alone Q3 revenue was up 1% or down 7% with constant FX. Although double-digit growth continues in the first half, thanks to the demand switching from off-line research to online, Q3 stand-alone revenue decreased with constant FX due to the decrease in research demand because of the economic downturn. In particular, budget cuts in the public sector impacted hugely. Macromill Group is, however, the only research company that owns a proprietary consumer panel in Korea. Data related business using such panel has a big potential, ensuring our competitive advantage in Korea. We believe we will return to the growth trajectory seen in the first half with economic recovery. That is all on continuing business.

Next, I will explain consolidated statement of operations for the first 9 months. I mentioned that continuing business revenue for the first 9 months increased by 8% year-on-year. On an actual value, it increased just under JPY 2.4 billion year-on-year. I also mentioned that operating profit of a continuing business decreased by 15% year-on-year. Excluding the cost of overseas subsidiaries exchanges. On an actual value, it declined slightly more than JPY 0.8 billion year-on-year. We plan to post about JPY 5 billion gain on the transfer of overseas subsidiaries [ changes ] in discontinued business in net income in Q4.

Page 27 is the balance sheet. The year-on-year profit declined in Q3, resulting in higher net debt-to-EBITDA ratio and a lower ROE.

Page 28 is the cash flow statement. Cash flow from operating activities is negative year-on-year due to lower profits. Cash flow from financing activities has improved compared to last year. This is due to the absence of the JPY 5 billion growing redemption conducted last fiscal year. So that scheduled loan repayment decreased as a result of refinancing in March.

On Page 29, I will supplement on full year guidance revision. Profit for the year from discontinued business includes gain on the transaction of about JPY 5 billion. And the profit attributable to owners of the parent will increase significantly. EPS is also expected to increase [ significantly ].

Lastly, on Page 30. I will explain our capital allocation policy again. Growth investment remains our top priority going forward, followed by both debt repayment and shareholder return with the same priority level. For growth investment, we will consider M&A strategic IT investment and the investment in new business areas for [ modern era ]. For debt repayment, JPY 5 billion in 5-year bond is due at the end of July 2023, which will be refinanced by issuing new bonds towards the end of this fiscal year. For shareholder return, we will maintain the dividend increase momentum, aiming for 20% to 30% dividend payout ratio at the consolidated level. And as in the case of JPY 1.2 billion share buyback to be conducted, we will buyback shares in a timely manner based on the stock price level and the cash surpluses. This concludes my explanation. Thank you very much for staying with us to the end.