Macromill Inc

TSE:3978

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Toru Sasaki, executive]

Thank you for joining us today, even though it is Friday evening. I am Sasaki, Representative Executive Officer, CEO. Today's agenda has 2 parts. First, I will cover the Q3 results an update of business situation and the positioning of Toluna and equity method affiliate. Next, CFO Hashimoto, will present consolidated financial results and the business segment details.

Please look at Page 3. Continuing the strong trend of the first half, our business results were very good. For the first 9 months, revenue increased by 8% and the business profit was up 13%, a double-digit increase. We were able to break the revenue record in Japan by reviewing the customer base and capturing demand.

Business profit exceeded the initial plan driven by high earnings contributed Japan Business in which profit grew more than 20%. The strategy set forth at the beginning of the fiscal year to focus on profit is making solid progress and the results were very good. Equity method loss of Toluna was JPY 800 million plus, but our cash flow isn't affected and our source of dividend is expanding. In light of the strong performance of our core business, we have also announced an upward revision of year-end dividend forecast for this fiscal year.

I will now explain our consolidated results. Please look at Page 4. Q3 consolidated revenue grew by 8% year-on-year. As in the first 9 months, Q1 and Q2, thanks to successful efforts to rebuild the customer base and capture demand.

Please look at Page 5. Consolidated business profit grew by 22%. The profit momentum accelerated achieving year-to-date double-digit growth of 13%, exceeding the initial guidance. Solid growth of the Japan business, high earnings contributor and our focused efforts to improve productivity have paid off.

Please look at Page 6 for consolidated employee expenses and outsourcing expenses. Both total employee and outsourcing expenses were controlled below plan. In particular, outsourcing expenses were controlled below the previous year's level, while revenue increased. This was driven by increased in-house production as we have resolved the capacity issues in Japan and with better turnover control, productivity improved through improved individual proficiency and organizational strength.

Employee expenses increased due to efforts to generate future profits such as M&A, new businesses, human resources, enhancement ensuring IT investments. But in Japan, the rate of increase have been kept below the rate of sales growth since Q2. As I stated in the last earnings briefing, the ratio of total employee and outsourcing expenses to revenue have been improving every quarter, and it was also the case with Q3 results.

Now let me explain segment details. First, Japan Business segment. Please look at Page 8. This is the slide that we showed before. Starting from the current fiscal year, segments were divided into Japan Business segment and the Korea Business segment. And the Japan Business consists of 3 business areas and we set KPIs for each. For details of business areas and the KPIs, please refer to the results presentation materials announced in August of last year.

Let's look at Focus Business of the Japan Business segment on Page 9. Efforts to strengthen outbound sales are progressing well, and online research performed particularly well, resulting in 7% growth in Q3, Japan's peak season, exceeding the initial plan.

Now I will explain how we are strengthening outbound sales on Page 10. Up until the previous fiscal year, the number of clients and the projects were decreasing because we had to decline some projects due to insufficient capacity. But in this fiscal year, with our focus on strengthening outbound sales, the number of clients and the projects increased.

In the first half, were able to have stronger client relationship by recapturing these disengaged clients. We started to win leisure project in Q3 and unit price also increased. We focused on outbound sales enhancement as an important agenda and we're able to translate this to revenue in the peak quarter of Q3.

This is the last slide on Focus Business. Please look at Page 11 for employee and outsourcing expenses. The current midterm business plan sets a policy of placing more emphasis on profit. The Focus Business of the Japan segment greatly contributes to Macromill's profit. Improving productivity in this area is our priority. So we have the ratio of operational employee expenses plus outsourcing expenses to revenue as KPI.

In Q3, it improved by 3 percentage points year-on-year. In particular, outsourcing expenses dropped significantly by 26% year-on-year and also decreasing on an actual amount basis. The increase in operating employee expenses was headcount increase in the second half of the previous fiscal year, and although it was up 3% year-on-year, it was kept below the rate of revenue growth. So much for Focus Business, which is positioned very well as well as its results.

Next, let's look at the Future Business on Page 12. The Future Business is highly volatile because while its revenue size is low compared to that of our other business areas, each project is relatively large. Q3 revenue growth slowed down to 8% year-on-year due to a timing coincided with a period of demand interruption between large projects in consulting area but double-digit growth of 12% was realized for the first 9 months. Q4 revenue growth is forecasted to return to double digit as well as for the full year.

For topics in Future Business, please look at Page 13. As mentioned, the Consulting business experienced a period of demand interruption between those projects in Q3, but cumulatively double-digit revenue growth was maintained. The second half of the current fiscal year will slow down a bit, but the pipeline for new project orders is increasing.

By accelerating cross-sending of clients with research projects, we will continue focusing on generating results of a business model transformation. Global research is up 7% year-on-year. But with some project delays, we assume for a strong Q4. We continue to aim for double-digit growth for the year.

New business was also up 23% year-on-year, with Life Science recovering and other businesses performing well. Despite volatility, Future Business is positioned as the area that contributes to double-digit revenue growth and future profit in the midterm business plan. By developing it as a new business pillar, we will pursue higher revenue growth than other business areas.

Please look at Page 14 for Foundation Business. In Foundation Business, subsidiaries such as Monitas, which became a wholly owned subsidiary in January this year, joint ventures such as DMI with Dentsu and HMM with Hakuhodo, as well as Macromill Carenet which provides marketing research to pharmaceutical and medical industries performed well. Q3 revenue increased by 9% and the cumulative growth was 10%, exceeding our expectations.

Please look at Page 15. As in Focus Business, KPI for Foundation Business is the ratio of outsourcing expenses and employee expenses to revenue improved 2 percentage points year-on-year, and both outsourcing and employee expenses are being kept below revenue growth rate.

That is all for 3 business areas of Japan business segment. Please look at Page 16. We have set productivity per salesperson as KPI for the Japan segment as a whole. Revenue per salesperson increased by JPY 2.5 million, and the sales productivity has improved. In addition, the number of salespeople increased by 22. It was due to Monitas' M&A in the new business.

To summarize the Q3 Japan segment, whilst the Future Business was a bit slow due to temporary factors but the main focus area exceeded the plan as a result of the sales activities since the first half. The Foundation Business also continued to perform well. Above all, since profit improvement was our top priority this fiscal year, we feel very good about solid results of high-profile focus areas and high profit focus areas in the peak quarter of Q3. It was also helped to improve the profitability, resulting in a very strong performance of the Japan segment. That is all for the Japan segment.

Please look at Page 17 for the Korea segment. Up until the previous fiscal year, it has been growing solidly despite struggling market and competition. But given further business confidence deterioration, we set a growth target of 2% for the current fiscal year. Q3 revenue grew 12%, a double-digit growth, due to a favorable foreign exchange and cycling out of a business confidence decline and a small M&A. The cumulative increase was 3%, in line with our expectation. That is all for the Korea business segment.

Next, I will talk about Toluna, an equity method affiliate. Please look at Page 18. First, Toluna has been greatly affected by the business climate and its equity loss has exceeded our initial guidance. PMI is progressing well despite weak revenue. As a result, cost reduction has progressed and the restructuring for higher profitability is steadily progressing.

In the next fiscal year, with a negative impact on business confidence cycling out and with reduced PMI cost burden, effect of lower fixed costs and the start of full-scale sales activities and as a new integrated organization, we will begin preparing for an exit along with revenue and profit growth.

One year has passed since the deal announcement. Let me elucidate the positioning of Toluna as an investment for us. Accordingly, we assume to sell it in an exit event case. As a side info, Toluna's free cash flow has turned from negative to positive during this fiscal year, and EBITDA is also positive. So we consider we are making good progress with exit preparations. I also wanted to inform you of this point.

The last slide for my part is on upward revision of the year-end dividend on Page 19. Since our IPO in 2017, have increased dividend for 7 consecutive fiscal years. As explained so far, given the strength of our core business, we will revise up the dividend increase from the initial JPY 4 to JPY 6 per share by strengthening its momentum. In the midterm plan, starting from the current fiscal year, we are aiming for a turnaround in profit after the bottom in the prior fiscal year and to realize a steady profit-generating structure. We are getting confident for profit recovery and regrowth in Year 1 this fiscal year.

In line with these factors, we will review our capital allocation and further strengthen shareholder return. We will cover the details in the August earnings announcement. Currently, we do not see major negatives and the conditions are good. We hope to achieve solid revenue and profit growth. That is all for my part.

Next, CFO Hashimoto will present consolidated financial results and the business segment details.

[Shintaro Hashimoto, executive]

Thank you, Mr. Sasaki. I will now walk through the financials and business update by segment.

Please turn to Page 21. Japan Business continued to perform well in Q3 with March year-to-date revenue totaling JPY 34.26 billion, up JPY 2.56 billion or 8% year-on-year. Business profit year-to-date was JPY 5.51 billion, up JPY 650 million or 13% from last year due in part to improved productivity, both exceeded initial guidance. Although quarterly profit decreased year-on-year due to an equity method loss from Toluna, cash flow was unaffected. We will continue to focus on steady growth of our business.

Page 22, breakdown of operating expenses. We were able to control costs the initial guidance with total operating expenses rising by 7% year-on-year to JPY 28.69 billion, which is lower than the rate of revenue growth. Year-on-year, panel expenses rose by 8%, outsourcing expenses down by 2%, total employee expenses higher by 10%, D&A and other expenses up by 8%.

Q3, in particular, was very positive as we were able to reduce outsourcing expenses through improved productivity. Total employee expenses, which accounts for the majority of operating expenses are higher due to increased headcount since the second half of last year, but is contained below the initial guidance. The rise in D&A and other expenses to the upfront investments, such as the renewal research core system, which was a planned investment.

Next, I will use the waterfall on Page 23 to explain the change factors in operating profit. In addition to the impact of higher revenue of Japan Business, continued reductions in outsourcing ratios from the first half had a substantial effect, absorbing higher employee and other expenses, resulting in growth in business profit. Korea Business was affected by higher total employee and outsourcing expenses due to new business and M&A resulting in lower profit.

On Page 24, I will explain the quarterly revenue and business profit trends in Japan Business. Due to the seasonality of our business and the fact that revenue in Japan peaks in March, revenue is higher every Q2 and Q3. We see similar trends in this year as well. Revenue in Q3, our busy season, was strong with an increase of 8% year-on-year.

As shown on the right graph, business profit increased significantly by 24% and business profit margin in Q3 improved by more than 3 percentage points year-on-year. I will now discuss performance by area this time as remarks for the CEO's explanation. For details, please refer to Appendix as necessary.

Next, on Korea Business. Please turn to Page 25. Unlike Japan Business, the busy season for Korea Business is Q2 so quarter 3 is relatively quiet. Q3 revenue, as shown on the left graph, was up 12% over last year. In addition to the softness of the previous year, the impact of foreign exchange and M&A at the end of Q2 pushed up the year-on-year revenue increase. Q3 business profit was less than last year due to lower than expected revenue of the existing business and the impact of one-off expenses are shown on the right graph. We will continue to focus on cost control as the impact of deteriorating business confidence persists.

Page 26 is the quarterly revenue trend on Korea Business, including values on a constant foreign exchange basis. Due to the positive impact of FX, year-to-date revenue was up 3% year-on-year but down 4% excluding foreign exchange effect. In anticipating the contribution to our new business, Purchase Data Provision Service, we acquired an advertising business at the end of Q2. Revenue has been soft because South Korea is more commonly affected by business sentiment, but we will continue to control cost and aim to secure profits through revenue growth from the new business.

Next, on Page 27, I will walk through the balance sheet. Major changes from the end of previous fiscal year is that both assets and liabilities decreased by JPY 5 billion due to the redemption of bonds in July. Also, as a result of consolidating Monitas in Japan Business and M&A in advertising business in Korea Business, goodwill increased by several hundreds of millions of yen.

Net debt to EBITDA multiple has been recovering since the end of last year as well as the previous quarter. In connection with the leverage buyout or LBO we carried out in the past, the company's own goodwill, which is now commonly recorded, is booked in our balance sheet. This, as a result, affects various financial KPIs, and thus, for your reference, the amount is shown here once again.

With regards to the breakdown of our balance sheet and capital efficiency, I will use Page 28 to make some supplementary comments. As I said earlier, we exclude the impact of LBO related goodwill which is uncommon amongst companies that have not done LBOs in the past to calculate the return on invested capital or ROIC from the assets related to our business. ROIC is calculated using invested capital excluding net business profit after tax and the effect of LBO-related goodwill. It is over 25%, and we believe that we have achieved capital-efficient management.

We plan to explain our capital allocation policy, et cetera, going forward when we announced our full year results in August. However, given that many companies close their accounts in March, I wanted to take this opportunity to add a few words about our company's situation.

On Page 29, you will find the statement of cash flows. Free cash flow has improved significantly due to the strong trend and growing business profit. Cash flow from operating activities improved compared to last year, thanks to strong business, timing of expense payments and the impact of refunds and income tax. Cash flow from financing activities decreased compared to last year due to the redemption of bonds and additional acquisition of subsidiary shares.

Finally, on Page 30, we will explain the percentage of achievement versus our initial guidance. The business strategy for Japan Business set forth in the midterm business plan is progressing well. Thanks to the strengthened sales structure and improved productivity, revenue and business profit in the first 3 quarters exceeded initial guidance.

Meanwhile, operating profit and profit attributable to owners of the parent are below the guidance due to equity method losses of Toluna. However, as our CEO explained earlier, the effect of PMI will begin to play out as we anticipate market share expansion phase from next fiscal year. In addition, there is no impact of Toluna on our cash flow. We have sufficient retained earnings to fund dividends business profit, which indicates the performance of our core businesses is assumed to remain strong.

We thus made an upward revision of our annual dividend forecast from a year-on-year increase of JPY 4 per share to JPY 6 per share. With only fourth quarter remaining, in order to carry out the -- carry on this favorable trend in next fiscal year, we will continue our offensive to grow our revenue and market share and aim to improve our profit.

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