Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2021-Q1

[Koki Sato, executive]

I am Sato. Thank you very much for participating in our business results briefing despite your busy schedule today. Today, I'm going to explain about our first quarter business results. Page 2 is the content of the presentation today. I'll cover the quarterly consolidated earnings overview for Q1 and the results by business segment. Then progress we have made and expansion into new business segment and progress on earnings estimate.

Now please turn to Page 4 for consolidated earnings highlights for the first quarter. In this first quarter from October to December, both revenue and non-GAAP operating profit increased both quarter-on-quarter and year-on-year. Revenue was up about 20% year-on-year to JPY 5.275 billion, and operating profit rose about 97% to JPY 1.215 billion.

Page 5 is consolidated earnings highlights by business segment. We have 2 segments: Digital Marketing Business and Media Platform Business. Digital Marketing Business continued to perform successfully by meeting the growing demand in online consumption, and its revenue grew 22% year-on-year and operating profit was up 53% year-on-year. In Media Platform Business, while revenue increased to achieve its record high, the deficit increased with a slight increase of operating loss. Its revenue grew almost 9% year-on-year.

Page 6 is consolidated income statements from October to December. As I mentioned for highlights, profit for the period significantly increased year-on-year. For your reference, net sales are indicated on the table, and it was about JPY 23 billion in the first quarter with about 20% growth year-on-year. The progress on the earnings estimate announced at the beginning of the fiscal year is 26% for revenue, 42% for operating profit and 48% for profit for the period, as such, steady progress is made to the earnings estimate as well.

Page 7 shows quarterly consolidated earnings trend. In the previous quarter, we recorded significant year-on-year and quarter-on-quarter growth as a positive rebound from the decline due to COVID-19. And this first quarter under review recorded a slight quarter-on-quarter increase. Both revenue and non-GAAP operating profit achieved the record high. Fixed costs remained unchanged, and this indicates productivity improvement leading to operating margin increase.

Page 8 shows constitution of consolidated expenses. There are no significant changes here, but cost of sales increased mainly for orders of creative content with outside suppliers as sales grow.

Page 9 is quarterly consolidated SG&A trend. This does not have major changes as well. We have been continuing work remotely. And since late February 2020, all employees are supposed to work from home in principle. Such operation has continued almost 1 year, and this suppressed the operating expenses, and the consolidated SG&A remained flat. From this page, I will explain the overview of each segment. Let me start with Digital Marketing Business.

Please turn to Page 11. Digital Marketing Business continued to be successful in this first quarter. Supported by the strong demand from online consumption, both net sales and revenue increased more than 20% year-on-year to make steady progress on the earnings estimate.

Quarterly earnings trend is shown by the graph on Page 12. Digital Marketing Business has high transaction volume in B2B advertisement. And its increased average sales per client considerably improved productivity as well as operating margin.

Page 13 describes the trend in domestic brand advertising transactions, which we regularly disclose as our area of focus. The brand advertising, which the group has been focusing on, achieved 2-digit share or over 10% in Digital Marketing Business for the first time. Despite the temporary decline in Q3 of the previous fiscal year due to COVID-19, it got back on the growth path and has been growing steadily.

Page 14 is about another area of focus, progress on the business alliance with Dentsu Group. Almost 2 years have passed since the start of this alliance. We have been jointly finding new customers and offer proposals of integrated online and off-line marketing as a mid-term alliance. And it is making good progress, and net sales from the mid-term alliance has more than tripled compared to the first year.

The graph shows volume of clients in the collaboration, and it has been steadily increasing in line with our plan. Based on the mid-term management policy, we are strengthening data and solutions domain in Digital Marketing Business and the new intermediate holding company called Septeni Data Solutions, Inc. was established for this purpose. We reorganized associated companies under this intermediate holding company for stronger collaboration.

FLINTERS, Inc., Tricon Corporation and Milogos, Inc. are shown on Page 15. And they are managed in this structure as 3 core operating companies of data and solutions business. With this initiative, we intend to capture the growing demand of DX for wider business opportunities of the group and promote expansion into data and solutions domain as stated in the mid-term policy.

That is all for the progress in Digital Marketing Business. Next, I will explain about Media Platform Business. Page 17 shows earnings overview. Its progress is already mentioned in the highlights at the beginning, but it made steady progress of revenue to the earnings estimate.

Next page is quarterly earnings trend. Operating loss increased slightly in the first quarter. This is because revenue from advertisement with high-margin rate temporarily decreased due to COVID-19. However, we are seeing revenue from advertisement is recovering. So we assume this decrease is just tentative, and we can make a recovery.

Page 19 shows the revenue of Manga Content Business by indices as our regular disclosure. About 2 quarters ago, revenue from advertisement temporarily declined due to COVID-19, but it is gradually recovering, and revenue from charges on users has continued to grow steadily. We have established a structure to accumulate recurring type revenue, mainly with subscription. As such, this segment is performing steadily with recovery in revenue from advertisement and increased revenue from charges on users.

Page 20 is about subscription revenue trend of Manga Content Business. This has been growing continuously as well. Manga applications in general have seasonality in revenue in content sale, such as sale by episode or by book, but our recurring type revenue model is similar to SaaS and subscription revenue accumulate as we enhance continuous relationship and engagement with users. We are regularly updating products and functions, and this also helps our steady growth.

Page 21 shows commerce revenue trend in Manga Content Business. We previously disclosed the total of support fund from crowd funding. And here, we are focusing on business conducted outside of the application, mainly for sale of goods. In addition, e-books business conducted outside of our platform has started to get off the ground, which is to sell our own IPs at other e-book stores. We categorize these businesses as commerce revenue, and we have expanded our scope of disclosure to include it. We will focus on this commerce domain, mainly with crowd funding and e-books to expand revenue from charges on users.

Page 22 describes 2 quarterly topics of Media Platform Business. In Manga Content Business, business opportunities of anime business are expanding as a related business area. Under such a circumstance, in order to strengthen anime business, we established a new company of digital anime studio, Qzil.la, to create and produce anime content. It is spelled as Q-Z-I-L.L-A. For more details, please refer to the press release announced on February 1, 2021.

Second topic is strengthening business development of D2C domain. We established another new company, ALPHABLE, Inc. It is mainly for men's makeup product and has launched men's cosmetic brand, MULC. And some products are already in the market. We'll strengthen D2C business domain through our new brand development. That is all for the overview of Media Platform Business.

Next, I'd like to talk about expansion into new business segment. Page 24 is a summary of our mid-term business policies. Most of them is already covered in the past communication, but there is one update. The overall theme of the policies is domain expansion. And we apply this to our existing business domains, Digital Marketing and Media Platform as well as our new business segment. This is to make both vertical and horizontal expansion of businesses.

For new business segment, commercialization of HR technology domain was added. And this is the major update for this time. More details are provided on Page 25. We established a new company for commercialization of HR technology domain to enable us to offer various customers our IP and knowledge we have developed so far in HR technology domain. This new company is Human Capital Lab, Inc. and we announced a new SaaS-type product and service. This is called a HaKaSe Onboard, and this is an onboarding system to realize early entry into the workforce and retention for new employees. We developed and started sales of this system.

As we have communicated through the integrated report and other means so far, we implement so-called AI-based personnel system, which is to assess and develop human resources by algorithm, utilizing machine learning. We developed this AI-based 360-degree assessment algorithm in HR domain. And based on this system, we will offer various corporate users technology foundation as software.

We have received inquiries by so many company executives about our initiative on AI-based personnel system for their use. With this announcement, we hope our technology foundation will be utilized by various corporate users. That is all for business domain expansion and the mid-term business policies update.

Now let me move on to the last part of the presentation: Progress on earnings estimates. Please turn to Page 27. As of the end of the first quarter, we are progressing steadily on the earnings estimates. In terms of progress rate, revenue is 26%, operating profit is 42% and profit for the period is 48%, respectively. While steady progress is indicated, we continue to closely monitor the changes in external environment. Therefore, the current earnings estimates remain unchanged. Monitoring on the various changes in environment will continue for the state of COVID-19 pandemic and its impact on economy as well as surging motivation to DX among companies.

Page 28 shows progress on earnings estimates by segment. They are also progressing steadily, and we'll continue to work diligently to achieve targets of each segment.

That is all for explanation about the progress on the earnings estimates. This concludes the business results briefing for the first quarter. I appreciate your continued support for our group. Thank you.

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