Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2018-Q1

[Koki Sato, executive]

I am Sato. Thank you very much for your attendance today. So today, I would like to explain the business results for the first quarter of the fiscal year September 2018.

So what you see here is today's agenda. First, I will cover the overview of quarterly consolidated earnings and then each segment business updates, Internet Marketing business and Media Content business. Also, from this fiscal year, we started communicating the half year earnings estimates as guidance.

So first, I would like to talk about the quarterly consolidated earnings overview. To cover the highlights, the consolidated revenue was JPY 4.028 billion and non-GAAP operating profit was JPY 702 million. The quarterly consolidated revenue exceeded JPY 4 billion, reaching the record high. Revenue was up by 12.3% year-on-year.

In terms of by-segment highlights, Internet Marketing business revenue was JPY 3.805 billion and non-GAAP operating profit was JPY 1.47 billion. So revenue growth improved steadily, reflecting solid performances in Japan and overseas. The key point is that the margin is improving gradually.

Media Content business revenue was JPY 301 million and non-GAAP operating profit was negative JPY 303 million. Revenue was up by about 46% year-on-year, and this is mainly due to the growth of advertisement revenue of Manga application, GANMA! So good progress was seen in the development of the brand advertising market.

This page shows the details of consolidated income statement. Revenue reached the record high and grew by 12.3% year-on-year, and the rest are as you see on this slide.

In terms of the progress against the guidance, again we have changed the period of guidance to 6 months second quarter year-to-date number from this fiscal year. And the progress rate of revenue against that half year estimate was 50.4%; non-GAAP operating profit 70.2%; and the profit for the period attributable to owners of the parent, 92.5%. Solid progress was made in all the numbers in comparison with the earnings estimates for the first half fiscal year September 2018.

This is a graph showing the quarterly consolidated earnings trend. We continue to see the stronger straight-line growth trend. As I have explained in the previous earnings review, we started becoming more aggressive in investing in human resources from this fiscal year. We are working on reforming the way our employees work, including the significant ways in the compensation system and focusing more on investment in human resources. So operating margin continues to improve gradually, while we execute on this people investment.

This page shows the quarterly consolidated SG&A trend. The first quarter result was, as you see, on this page. The advertising expense, mainly for the promotion of GANMA!, was JPY 237 million in the first quarter, slightly down quarter-on-quarter. So we spent less on the promotion. In the first quarter, we gave higher priority on other initiatives, for which I will explain in details later. Let's focus on promotion.

The increase in labor costs was attributable to an increase in the number of staff in addition to a raise in pay as a result of the revision of the HR system.

From the next page onward, I would like to explain by-segment business updates. First is the Internet Marketing business. Top line increased by double digit by 10.8% year-on-year due to more aggressive sales activities. The segment revenue growth was driven particularly by the growth of our focus areas, the video advertisement and overseas business.

Also, the profitability improved through the continuous efforts to enhance client and product mix. As a result, the ratio of revenue to net sales, which is a gross profit margin, rose from 18.6% to 20.4%, close to 2 percentage point improvement year-on-year.

So this is the Internet Marketing business quarterly trend. Revenue increased Q-on-Q and year-over-year. In addition, the operating profit margin improved by 1.5 point Q-on-Q. Both top line and profit growth was quite solid.

One of our focus areas was to improve overseas revenue. Especially in Asia, we saw solid and continuous revenue growth. The ratio of overseas revenue to the segment total revenue increased to 12.7%, the historical high level.

The second focus area is the video advertisement. Here, we also saw solid growth of 37.3% year-over-year. The ratio of video advertisement to the segment total is growing gradually to 16.6%.

The third focus area is brand advertisement. And we started disclosing this subsegment number from this fiscal year. Please note that we are only showing the [ gross ] trend here, not the absolute numbers.

Assuming that the last year first quarter revenue was 100 then 2018 first quarter revenue was 147, approximately 1.5x year-over-year increase. Brand advertisement is a new market for us to develop, in addition to the conventional performance-type advertisement, like direct response, and we are seeing steady growth.

Also, just for your information, you see the breakdown of brand advertisement revenue by client industry for the first quarter. And you can tell that we are able to grow the brand ad revenue in well-balanced manner in terms of customer base -- or client base.

That is all for Internet Marketing business.

Next is Media Content business updates. So the overview is, as I have mentioned at the beginning, in terms of numbers: Advertising revenue increased in the Manga content business, reflecting an expansion in the sales of GANMA! ad. As I said before, increased brand advertising campaigns contributed to an increase in revenue. We are seeing steady increase of ad placements by the national clients to GANMA!

This is a quarterly earnings trend. We continue to post operating loss, which was about the same level with the previous quarter. We posted operating loss because we continued to do upfront investment in GANMA! promotion. On the other hand, due to the sluggishness of other new businesses in the first quarter, the segment revenue decreased Q-on-Q. So the segment top line growth was rather weak.

Next is the updates on GANMA! What you see here is the number of downloads, PVs and user distribution. As you see on the left, the number of downloads was 9.29 million and monthly PV was 3.3 billion as of December 2017. Media scale of GANMA! continues to expand as reflected by around 2x increase both in number of downloads and PVs.

The right-side pie chart shows the customer break down by age and gender. As you see in the chart at the bottom, male was 55%; and female, 44%. Looking at age mix, majority of customers were in teens and 20s.

Next page shows GANMA!'s revenue trend and examples of the brand advertising market development. Here, again, we are only showing quarterly revenue trend in terms of total of advertising and in-app billing. Assuming that the revenue of 2016 first quarter was 100, we are seeing solid increase of 2.5x year-over-year.

Also, here, we are showing one of the examples of brand advertisement, Shiseido, a leading cosmetics and toiletry manufacturer. So this is what's called a sponsored-type Manga and in the actual Manga application, a national brand company is able to advertise their own product, while readers continue to enjoy a story.

As you may already know, most of the contents and characters in our applications are original and developed in-house. In this sponsored content, the very popular Manga characters in our app would talk about client company's products and services in one way or another.

From the users' perspective, through the Manga contents and characters that they are very familiar with, they can learn about and become more interested in buying the advertisers' products in a natural and favorable way.

Unlike the conventional advertisement products, users' engagement can be enhanced in a very positive way with almost no stress of advertisement on users. So this allows us to make users and advertisers both happy. We are trying to build a win-win business model here.

Whenever we do online service to users, we always ask them about their impressions on advertisement. Quite a number of users responded that their experiences were comfortable, meaning that advertisements are not viewed as something -- not negative, either something positive or neutral. So our strength lies in the fact that we are able to create user experiences combining contents and advertisement in a very sophisticated way.

Also, as a new initiative of GANMA!, we are making efforts to improve user experiences through the enrichment of contents. We want to deliver more enriched entertainment experiences to Manga application users.

So recently, we have implemented 2 initiatives: one is in the area of anime, another in music. In the Manga app, users usually have their own favorite characters or stories. While they are in GANMA!, they are able to view an anime version of their favorite Manga. So to this end, we have newly added an anime video distribution function. This was well received by users.

As a first step, we have produced and started distributing a 5-minute long episode of short anime series for the popular comedy cartoon called Sengoku, a Korean barbecue restaurant. This was quite popular among users, and just over a month after release, we achieved 0.61 million total views.

At least for me, this was the first time to see the same anime version of a popular work in a Manga app and probably this was the first effort in this kind in the industry.

At first, we were not 100% sure how users would react to the fact that they are able to view the anime version in a Manga app. But now that we got very positive response from users, we are now more confident about this. So going forward, we would like to further enhance the value of Manga apps and media quality through an in-app distribution of an anime work.

Next is the distribution of music. As you know, Manga content is usually in still image with no sound. But we did a trial to add sound or music to Manga. With collaboration with well-known vocaloid artists, we produced and started distributing original musical numbers. For the 3 popular Manga titles in different genres in GANMA!, Hazureta Minna no Atama no Neji, Catulus syndrome and Reset Game, we asked each vocaloid artist to create an original music. We released these songs on platforms like YouTube or Nico Nico Douga. Many fans like them a lot.

And as of today, the total views reached 1.66 million. And this is the number of views for the official video, but actually there are many other videos uploaded by users. So that is that users video record themselves, singing the song along with karaoke and distribute those videos on their own accounts.

So in this way, we are seeing increasing number of user-generated contents around the original content. We are now able to generate content experiences in which characters and stories originated in Manga can be enjoyed by wider audiences through anime and music.

By the way, users are able to sing the songs in karaoke box, meaning that people can enjoy them in off-line environment in real situations with a lot of people. We would like to continue to create more opportunities, so that users will be able to enjoy Manga contents we create as entertainment in different situations.

So today, I talked about our new initiatives, enriched contents in the form of anime and music. We will continue to focus on enhancing the quality and scale of Manga going forward. So that was the overview of Media Content business.

Lastly, I would like to talk about the progress on earnings estimates. From this fiscal year, we started announcing the earnings estimates for the First Half 6 Months guidance. This page shows the progress on the guidance. As I said at the beginning, we are making solid progress in terms of numbers. We are now proactively investing in human resources, including the improvement of compensation. Also, we continue to make upfront investment in Media Content business, mainly GANMA! While we continue with these investments, we are able to grow revenue and profit in the mainstay Internet Marketing business.

Another key point is that in the first quarter, we have booked equity gains of affiliates due to the sale of some shares of AXEL MARK. And this is a major reason for achieving the upside in the net income versus the planned.

Also, looking to the second quarter, we anticipate a temporary increase in expenses associated with the floor space expansion of the Tokyo headquarter office as well as improvement of remote work environments. So due to these factors, we kept the second quarter year-to-date earnings estimates unchanged.

And this page shows by-segment progress and outlook. Internet Marketing business will continue to be solid in the second quarter. In Media Content business, a certain level of promotion investment will be continued in the second quarter to facilitate the expansion of media scale.

On the other hand, in the second quarter of last year, we have done a large-scale promotion, including TV commercial. So the promotion expense will be lower this year for that much.

This page summarizes our policies for the fiscal year September 2018, which is the same one from the last time. Solid growth of Internet Marketing business, including the overseas and expansion of media scale in the Media Content business. We would like to achieve both.

Also, to strengthen the management base, we will continue to invest in human resources. By doing so, we would like to strengthen the business foundation so that we can improve the competitiveness of each business area.

Starting from the first quarter of this year from October 2017, we revised the HR system, including salary increase. So from this year, we incorporate this cost increase in our guidance. We will do our best in our day-to-day operation so that we can maximize the return for this investment.

That is all for my presentation. Thank you very much for your attention. I appreciate your continued support on our business.