Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2019-Q1

[Koki Sato, executive]

This slide shows today's agenda. I will first explain the first quarter consolidated earnings results, then the current business status as well as the outlook of each business segment. Then I would like to touch upon the progress of capital and business alliance with Dentsu, which was recently announced. Then the first quarter year-to-date progress versus the guidance.

First, I will cover the first quarter, October-December quarter, group-wide consolidated earnings highlights. Consolidated revenue was JPY 4.075 billion and non-GAAP operating profit was JPY 459 million. Compared with the previous quarter, revenue was up by 8.8% and operating profit increased by approximately 2.6x. Compared with the previous year, revenue was up by 1.2% and operating profit was down by 34.7%.

In terms of Q-on-Q changes, both revenue and operating profit increased. And in terms of year-on-year changes, revenue grew but operating profit decreased. Although operating profit was down year-on-year, we are seeing a steady recovery trend on Q-on-Q basis. This result was much stronger than our initial internal forecast.

Turning our eyes to each segment's highlights. First, as for Internet Marketing business, revenue was JPY 3.734 billion and non-GAAP operating profit was JPY 1.242 billion. Q-on-Q and year-on-year changes are, as you see, on this slide. To summarize, while domestic business was strong, overseas business, mainly in Asia, was somewhat weak. Thus, the first quarter results were below last year's level.

Next is Media Content Business. Revenue was JPY 416 million and non-GAAP operating profit was negative JPY 291 million. Revenue grew strongly both on Q-on-Q and year-on-year basis. Operating loss decreased slightly year-on-year. Strong revenue growth more than offset the increased costs, thus the level of loss became smaller.

This slide shows the consolidated income statement. Looking at year-on-year changes, revenue grew slightly, but operating profit decreased. On the far right you see the progress rate versus fiscal year 2019 estimate. Both in terms of revenue and operating profit, we saw steady progress. This year's full year estimate of operating profit is JPY 2 billion and the first quarter progress rate was 22.9%, a very good start of the year.

I will talk about this a bit more later, but the capital and business alliance with Dentsu, which was announced the other day, was implemented as planned and we expect the alliance benefits will start to show from the second quarter of the ongoing fiscal year. This first quarter results do not include any of alliance benefits. And this is purely the organic business results before the alliance impact starts.

This slide shows the quarterly earnings trend in a graph. As the top line grew, operating profit trend turned positive, showing strong growth. Since the third quarter of last year, we started controlling costs tightly, and SG&A increase is under good control. Overall business is now managed in a way that top line growth can be achieved while costs are controlled. Since hitting the bottom in the third quarter last year, margin has been improved in the fourth quarter and then the first quarter this year as each quarter progressed.

This slide shows the consolidated costs and SG&A. Since we adopt IFRS, labor costs and subcontract costs associated with production are booked under cost of sales. Please note that these labor costs are booked separately from the labor costs booked under SG&A. Overall, SG&A expenses are controlled tightly. Since peaking in the third quarter last year, SG&A has been almost flat, as we have reported in the past.

This slide shows SG&A trend, which I have just explained, in a graph. Since peaking in the third quarter last year, we continued to control costs. In the first quarter this year, we spent GANMA!-related temporary promotion expenses including video production, which I will explain later, but this was onetime expense and will not be repeated from the second quarter onward.

So that was the consolidated earnings results. Now I will move on to the business overview by segment.

First is Internet Marketing Business. As I mentioned earlier, the bottom was in the third quarter of fiscal year 2018, and we are seeing the obvious signs of recovery since then. Since the first quarter last year was rather strong, so in terms of year-on-year changes, still both revenue and operating profit were down. On the other hand, looking at the progress rate on each segment's full year estimate, revenue was 24.4% and operating income was 27.6% as of the first quarter, stronger results than the initial expectation.

This slide shows the quarterly trend in a graph. We saw strong top line growth last year supported by the end-of-the-year demand, which included many spot projects, mainly applications promotions. But now, we are trying to restructure our business mix, and this year we believe that we have established a stable client base. So quality of revenue is different this year compared with last year. In any case, the business has improved significantly since the third quarter last year.

This is the overseas business. As I mentioned at the beginning, the first quarter results of the overseas business was somewhat weak. Looking at the situation by region, North America was quite strong while China, Korea and Southeast Asia started out at rather low level. Also starting from this year, we have reformed management system of our overseas business. We are trying to establish a robust organization structure in order to move to the next growth phase. So this year was started under the new organization.

Next slide shows video advertising transaction trend, which is one of our focus areas. Video advertising continued to show year-on-year growth, demonstrating straight line growth trend.

Another focus area is brand advertising, which is positioned as the next growth driver. From this quarter, we are disclosing the ad transaction in value, not in percentage. We saw approximately 1.7x year-on-year growth, significant growth. And the share on the total Internet Marketing business has been growing steadily. That means that we have been making steady progress in terms of brand advertisement market development.

So that was the overview of Internet Marketing Business segment.

Moving on to Media Content Business. As I said at the beginning, we are seeing strong growth. Revenue was up by 38.1% year-on-year. In this quarter, we spent onetime promotion costs on GANMA! apart from the ordinary user acquisition promotion costs. Due to this, promotion costs were up slightly, but this was more than offset by revenue increase resulting in a decreased operating loss.

This page shows the quarterly trend. As you see on this graph, top line has been growing steadily. Revenue growth of each media business, including GANMA!, cover the increased costs.

Next is the progress status of Manga Content business, GANMA!. This time, we have included a slide to remind you of GANMA!'s revenue model. We started developing GANMA! revenue model about a year ago. Initially, the priority was on growing the number of users and we were focusing on developing manga application, which can be used as many users as possible. So we were making upfront investment on user growth. After doing that, we started monetizing the business slowly since last year. Initially, main source of revenue was advertising, especially performance ad, which is used for promotion. This has grown to be one of the core revenue sources. Then, since the second half of last year, we started offering brand ad products in a full-fledged manner, which are currently showing nice growth. So our model is to grow ad revenue by combining performance ad and brand ad.

Also, this fiscal year, during September 2019, we intend to strengthen our media revenue model further so that we can generate revenue directly from users. To this end, at the end of last year in December, we have done the major application update. Upon that occasion, we have introduced subscription service for our manga app, which is a flat fee and all-you-can-read and -use type service. This was probably the first full-fledged subscription type service for Manga apps offering innovative experience to users.

Also, we are gradually moving into the stage where our own IPs and content are starting to generate new revenue. As you may know, GANMA! is a manga app, mainly providing our original manga titles. Ordinary manga apps are called bookstore or retail type selling manga titles made by the third-party publishers. On the other hand, we are content media. We are clearly positioning ourselves as a content media holding our own content. As a result, our own content can create unique user experiences, which can be enjoyed only on GANMA!, generating new revenue.

Now finally, we are getting into monetizing phase. Therefore, from this fiscal year onward, we will be building a robust revenue model, generating brand ad revenue and subscription revenue and revenue from our own IPs on top of the existing performance ad revenue. The number of downloads and monthly PVs are growing strongly as well. We are now moving into the phase in which we continue to make disciplined investment while balancing with revenue.

Next slide shows quarterly application revenue trend. Application revenue increased both on Q-on-Q and Y-o-Y basis. Especially in this first quarter, client inquiries for brand ad were strong, thus application revenue grew.

Also, we are tracking revenue per user A-R-P-U, ARPU. ARPU is growing nicely. In addition to revenue and MAUs, revenue per user grew as well, reflecting product improvement impact including the major product update we made last time. We intend to realize continuous growth by both growing the number of users as well as revenue per user.

Now turning to the recent business topics. First, in December 2018, we have produced and released the special live-action video of Reset Game, a flagship GANMA! title. Reset Game is amongst our hit title with more than 7.5 million cumulative readers. We were able to release this special live-action video with the support of a number of talented creators who took strong interest in this title. We are proud that we were able to offer something quite different in nature compared with the ordinary application commercials. This work was directed by Yukihiko Tsutsumi and starred by Mackenyu Arata, both are very popular individuals.

Our strength lies in the fact that we are a media who owns contents. Furthermore, our contents are able to generate stock-based revenue. So business does not end when the work is produced, but revenue can be built up continuously. A manga title becomes a series and the number of such series titles and episodes increase. And after a series is concluded, it becomes a stock content, which can be enjoyed for binge reading. Thus, our business model allows us to build up not only flow-based asset but also stock-based asset. Based on the stock assets, we can roll out different contents, which attract interests of wide varieties of people not only within the scope of manga app but even wider audiences. We will continue to strengthen this kind of initiatives going forward.

Next topic is about the major application update of GANMA!. There were 2 main objectives in implementing this update: first is to make the changes of UI design and user experiences with the aim of increasing users time on app; second is the introduction of billing plan, which is a subscription plan that I mentioned earlier with the aim of raising revenue per user. We have implemented this major update in order to improve user experiences while building up revenue.

Next slide shows the quarterly trend of GANMA! subscription revenue. Subscription revenue has been growing in a nice straight-line manner. In the past, we only billed users for using read-ahead functionality of manga series, which is just a part of the overall app's capability. But this time, we started offering new service in which users can read all the concluded titles as much as they want with a flat fee. Since the launch of update, the speed of subscription revenue growth has accelerated further.

That is all for the overview of Media Content business.

Next, I would like to discuss the progress in capital and business alliance with Dentsu. First, talking about capital side, as I explained in the last briefing session, as a result of TOB conducted by Dentsu during the period from October 31, 2018, through December 11, 2018, the number of shares tendered by general shareholders reached 20.99% in terms of the company's voting rights. So TOB was tendered and implemented as planned. In line with this, the allocation of new shares to a third-party, which was considered to be the potential option, was not implemented. The number of shares did not increase due to new share issuance, thus, there was no impact on earnings per share.

As a result of this, as of December 18, 2018, Septeni was converted into an equity-method company of Dentsu. As reported in the past, Septeni will continue to be listed on TSE JASDAQ and we will maintain an independent management and decision-making structure. Also, upon the completion of capital alliance, business alliance will start in the second quarter of this fiscal year as planned.

Next slide shows the goals that we wish to realize through this alliance. This is the same slide that we used in the last announcement. Septeni group and Dentsu group will collaborate with each other with the aim of becoming the largest digital marketing partners in Japan that lead the industry's development by providing the highest-level solutions to clients based on the organizational environment where various talents assemble and work together with strong sense of motivation and satisfaction. This is the main idea of this capital and business alliance.

This slide is also the same slide we used last time. Now that capital and business alliances were implemented as planned, we plan to realize these specific initiatives immediately. Leveraging the different specialities and strength of Septeni group and Dentsu group, we intend to offer higher added values to our clients by generating synergy effects through short-term and midterm initiatives. In a nutshell, we intend to increase our business competitiveness.

Specific short- to midterm initiatives are as you see on this slide. Both companies agreed and are implementing initiatives in a rather wide scope. Today, we are in the end of January, as we have this briefing session, but already, from the beginning of January, many of these initiatives are put into actions. In this manner, alliance with Dentsu is being implemented as planned and the alliance impact is incorporated in this year's guidance.

Next I would like to touch upon the progress on the guidance. From this fiscal year, we disclose the full year forecast, which is shown on this slide. Revenue forecast is JPY 17.2 billion; non-GAAP operating profit, JPY 2 billion; and net profit attributable to owners of the parent, JPY 1.3 billion.

The progress on the guidance as of the first quarter was quite good, and we started out the new year very smoothly. The progress rates are, as you see on this slide, for revenue, 23.7%; non-GAAP operating profit, 22.9%; and net profit, 18.1%. As I mentioned earlier, the first quarter results do not include impact from Dentsu alliance. This is an organic result before the alliance benefits start. We will gradually see the alliance impact from the second quarter onward.

This slide shows the progress on each segment guidance. Again, similar to the consolidated business, we are making nice progress for each business.

That is all for my presentation. Thank you very much for your attention.