Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2023-Q1

[Koki Sato, executive]

My name is Sato. Thank you very much for attending our business results meeting. Today, we are announcing our Q1 results. I will start with the quarterly consolidated earnings overview and then discuss the segment-by-segment business results and close with our progress towards earnings estimates.

Let me start with the quarterly consolidated earnings highlights. Please turn to Page 4. The first quarter from October to December saw a revenue increase in all segments. Expenses increased due to the strengthening of human capital investment, mainly in recruitment, and the newly consolidated subsidiary, resulting in a year-on-year decline in non-GAAP operating profit.

Revenue grew 6.1% year-on-year to JPY 6.974 billion. Non-GAAP operating profit fell by 55.6% and was JPY 896 million. EPS quarterly earnings per share was JPY 2.78.

Page 5 shows the highlights of each segment. The Digital Marketing Business increased revenue year-on-year despite some impact of the economic downturn. As I mentioned before, due to promotion of hiring and new consolidation, expenses grew, leading to lower profits. In the Media Platform Business, driven by the IP Platform Business of manga and anime, revenues grew significantly from the previous year. This top line growth contributed to a decline in losses. The numbers are as you see on the slide.

Page 6 is the income statement. The main topic for this quarter is that investment securities were revaluated, resulting in temporary financial expenses of JPY 680 million. On the other hand, income from equity in affiliates increased significantly, a major contributor being Dentsu Digital. With the addition of a unit that did not exist in the previous year, income from equity in affiliates was JPY 644 million, which is significantly higher than last year. As the revaluation of investment securities does not directly impact quarterly cash flow, cash flow remains to be positive.

Page 7 shows the quarterly trend of consolidated profit before tax. As the quarter-to-quarter comparison of the breakdown between equity in earnings of affiliates, financial profit and financial expenses is complex, we added this graph to show the quarterly trend. As Dentsu Digital became an equity-method affiliate in Q2 of last year, you can see that equity in earnings of affiliates increased compared to the previous year.

Page 8 is the quarterly trend of earnings by business segment.

And Page 9 is the consolidated expense breakdown. The numbers are as you see on this slide, but expenses have been constantly rising on a year-on-year basis due to the new consolidation. On the other hand, on a quarter-on-quarter basis, the numbers are mostly flat.

Page 10 is the quarterly trend of consolidated SG&A. Again, due to the promotion of recruitment and the effect of new consolidation, expenses increased significantly. Allowance for doubtful accounts of approximately JPY 50 million related to a business partner of an overseas subsidiary was recorded as other expenses. This is a onetime expense that will not impact future quarters.

So far, I talked about our quarterly results. Next, let me explain the business highlights of each business.

Page 12 is the Digital Marketing Business. Top line growth was weak due to general economic conditions. However, because of progress in DX, we anticipate sustained market growth, although there will be business cycles. Therefore, in order to build a rich reservoir of our most important resource, which is human resources, we are proactively investing in strengthening our personnel structure. This advanced investment is behind the decline in profits.

Page 13 is the Digital Marketing Business quarterly earnings trend.

Page 14 is the progress in the business alliance with the Dentsu Group. As the top line is almost flat, there is no major change to the breakdown. However, we are seeing a solid increase in the number of clients in collaboration with Dentsu. In Q1, the number increased to 109 companies. Unit price will be impacted by the economy, so increasing the number of clients will be the focus in both organic business and alliance business.

Next is the overview of the Media Platform Business from Page 16. Growth in the IP Platform Business, the manga and anime content business, drove year-on-year revenue growth. As the profit mix improved, gross profit growth was higher than revenue growth. We are seeing increasing returns in this business. Growth in SG&A is controlled, and the monetization of our own IP is accelerating. So we are seeing a clear acceleration in reduction of deficits.

Page 17 is the Media Platform Business quarterly business trends. Investments to expand new business domains are gradually decreasing. We are now entering a phase where the product's market fit has progressed and started to contribute to revenue.

Page 18 is the IP Platform Business revenue trend. As always, we show the breakdown between the charge and advertising revenues. In Q1, we had strong growth in charge business, which grew by 1.7x year-on-year. This drove the overall growth of the IP Platform Business. On the advertisement side, the projects are becoming larger, especially in anime, and the anime projects are impacted by seasonality. As Q1 is a low season, charge business growth was higher than that of advertising business.

Page 19 is the IP Platform Business, GANMA! subscription revenue trend. The revenue slightly decreased quarter-on-quarter. On the other hand, the number of subscribers reached a record high. So we are seeing a solid increase in customers. The decline in revenue is due to currency fluctuations. As this is an app store-based business, the store currency adjustments led to quarter-on-quarter revenue decline.

Page 20 is the IP Platform Business commerce revenue trend. Again, revenue growth was significant, particularly in e-books. Revenue grew 3.4x year-on-year. In major e-book stores, our content or IP are constantly on the hit chart. We do not depend on a single title. A broad range of contents are popular. With a rich portfolio, we are now seeing accelerated growth.

Page 21 is a topic from the IP Platform Business. A TV anime of one of GANMA!'s most popular titles, My Love Story with Yamada-kun at Lv.999, will be on air from April 2023. This is already officially announced. And as you see on the slide, this title has received a series of awards, including grand prizes. It is a big hit title. We are also seeing steady growth in circulation, with more than 2 million copies as of end of last year. 2 million was achieved with 6 volumes published.

So far, I talked about the Media Platform Business and the overview by each business segment. Now let me talk about the progress towards the earnings estimates or the guidance.

Page 23 is the update on medium-term business policies, which I explained at the previous results meeting. The medium-term theme since fiscal year 2020 is domain expansion. We plan to expand both vertically and horizontally. In particular, as I explained at the previous meeting, we are planning to update the HR system. In April this year, with the aim of increasing human capital value, human resources investment will be reinforced, including raising salary levels.

Page 25 discusses the expected effects of strengthening human capital. As our medium-term plan is for a 3-year period, we do not talk about our financial performance beyond that period very often. The intent of this slide is to show that through investment in human capital, we expect to maximize financial performance over the medium to long term, in other words, the next 3 to 5 years. The graph shows how much increase in corporate value was achieved after the previous pay increase and how long it took to achieve maximum performance.

In 2018, we increased investments in human capital by raising the base salary. In years 4 and 5, we saw huge returns, as you see here. Productivity improved by 37% in 5 years, and non-GAAP operating profits grew by 14 points in 5 years. This shows that human capital investment has an impact on corporate value and shareholder value. As one of our core values is the HR technology using data and AI infrastructure, we can quantify and visualize human resources. This is another reason why we believe growth in the plan is possible.

The medium-term plan on Page 26 are the same as what we explained last time but is updated to show our progress in the last quarter. To make it easier to understand the breakdown, we added some supplementary data to the updated graph. Over the next 3 years, we aim to increase corporate value and shareholders' value by enhancing the effectiveness of long-term business growth through active investment in human capital.

Page 27 is about acquisition of treasury stock. Today, we adopted a share buyback resolution and announced it. As part of our shareholder return policy, we will acquire our own shares. From February 17 to March 30, 2023, the company will acquire up to 2.2 million shares, spending a maximum amount of JPY 1 billion. 2.2 million shares is 1.05% of the total number of issued shares. Please refer to the slide for other information. As we see the current stock price is undervalued, we decided on this acquisition as a way to return to shareholders.

Page 28 is the fiscal year 2023 full year earnings estimates. The guidance remains unchanged. This is an irregular year with 5 quarters because of the change to the fiscal year-end. As we have 1 additional quarter, we show the actual numbers for Q1, and then the numbers for the remaining 12 months, which is the result of subtracting Q1 actuals from the full year estimate. Results of January to December of the previous year are also shown for comparison.

Page 29 is the progress towards earnings estimates for the 15-month period in revenue, operating profit and profit for the period.

Page 30 is the progress by business segment, as you see on the slide.

This concludes my presentation. Thank you for your attention. We look forward to your continued support to our group.