Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2018-Q2

[Koki Sato, executive]

I am Sato. Thank you very much for your attendance in your busy schedule. Today, I would like to talk about the second quarter business results for fiscal year September 2018, including first half year-to-date earnings results, quarterly January-March period consolidated results, by segment business update. Then finally, full year fiscal year September 2018 earnings estimates.

First, I will cover the highlights of the first half October-March 6 months results. In terms of the consolidated results, revenue was JPY 7.976 billion and non-GAAP operating profit was JPY 1.018 billion. Revenue grew by 9.1% year-on-year and operating profit declined by 24.2%. These results are more or less in line with the first half forecast, and revenue hit record high.

In terms of by segment highlights. For Internet Marketing business, as you see on this page, revenue grew by 7.8% year-on-year and operating profit declined by 12.7%. Media Content business revenue grew by about 27% and operating loss improved by JPY 145 million year-on-year.

To summarize, although 6 months results were in line with the initial guidance, the second quarter was somewhat weaker than expectation. And that is where we find some challenges.

Next are the details of P&L. Numbers are as you saw earlier. Our current particular focus is to strengthen the organizational structure, investing in human resources, including hiring and the HR system reform.

In order to improve competitiveness in midterm perspective, we are trying to enforce organizational foundation. During this 6 months period, increased SG&A impact due to this effort could not be fully recovered by revenue growth. So although top line grew by about 9% year-on-year, SG&A increase was even greater than top line growth.

This page shows the first half year-on-year earnings trend by business segment. Green is Internet Marketing business and red is Media Content business. Looking at the 6 months result. Revenue grew in both segments year-on-year but overall profit is still on decline. On 6 months year-on-year basis, Media Content business loss has become smaller.

This page shows main factors contributing to changes in the second quarter year-to-date non-GAAP operating profit on year-on-year basis. Last year, first half total operating profit was JPY 1.34 billion while it was JPY 1.02 billion this year.

Talking about main factors. First, expense reduction, which is a positive impact. Advertising expenses was down by JPY 0.19 billion year-on-year in the first half due to the absence of GANMA! TV commercial as a part of GANMA! promotion, which was implemented in the previous year but not this year.

On the other hand, labor cost increased by JPY 0.46 billion, giving the largest impact. The change in the HR system, meaning the revision of salary level which started from this fiscal year, and also headcount increase due to active hiring, resulted in labor cost increase. We are also expanding the office floorspace along with headcount increase, and rent has increased accordingly.

To summarize, increased labor cost was the largest negative impact on profit during the first half, and that is not yet fully offset by the top line growth as of today. We are still seeing such time lag as of today.

Next is the quarterly consolidated earnings overview. First is the consolidated P&L for January-March period. As I mentioned in the overall highlight section, top line growth was somewhat weaker than we thought, particularly in the second half of the quarter. On the other hand, for Media Content business, we saw strong trend. And January-March revenue was record high. We also continued to invest in creatives, along with growth of video ad, therefore, cost-to-revenue ratio is on the rise. By the way, accounting-wise, investment in creatives is booked as cost but in reality, majority of this investment is related with people. So we actually regard this as human resource investment. As a result, the second quarter top line revenue grew by 6.1% while SG&A grew by 6.4%. As a result, operating profit declined compared with second quarter last year.

Top line growth has not yet caught up with cost increase. So that is what you can tell as you look at the second quarter results. So this was the second quarter consolidated earnings overview. Next is the quarterly SG&A trend.

First, advertising expense increased slightly Q-on-Q. And the increase of labor cost, which was largest, was attributable to an increase in the number of staff, which was up by 173 year-on-year. Also, there was an impact of revised salary level, therefore, level-on-labor cost increase was rather large. Other costs also increased year-on-year due to office space expansion and improvement of remote work environment. So during the second quarter, we spent rather large amount.

GANMA!-related promotional cost was compressed year-on-year so increase was seen more in the area of people investment.

So much for the consolidated earnings results for the entire group. Now I would like to turn to by segment business overview. First is the Internet Marketing business earnings overview. Revenue increased by 4.9% year-on-year, and non-GAAP operating profit declined by 24% year-on-year. In the previous fiscal year, some of the large clients reduced their ad budgets and that impact still remained in this year. But as for the other project, including new ones, we saw steady growth. However, compared with the first quarter, growth was rather weak, and we still face challenges in terms of top line growth.

Also, we are trying to improve customer and product mix and focus more on profitable projects. And as a result profitability is gradually improving. Revenue to net sales ratio, which is a gross profit margin in general, is on the rising trend.

So this page shows the quarterly earnings trend and numbers are as explained earlier. We are investing in creatives, resulting in cost increase.

Next, I would like to cover progress on our focus areas. This page shows the overseas revenue trend of Internet Marketing business. In the second quarter, we saw steady progress, both in terms of year-on-year and Q-on-Q growth. Year-on-year growth was 57% and overseas revenue ratio is growing gradually, now up to 14.8%. Region-wise, Asia was particularly strong.

Another focus area is video advertising. We are seeing nice growth both in terms of transaction value and video ad ratio. Revenue was JPY 3.26 billion, accounting for 17.2% of Internet Marketing business revenue. Also, calendar year 2017 market share was 9.7%, almost 10% and is growing. Investment in creatives resulted in the growth of video advertising.

Since we shifted our focus to the growth of this area, we are starting to see the benefit in terms of numerical growth. Another focus area of Internet Marketing business is development of brand advertisement market. This page shows the growth trend of this business in terms of percentages basing 2017 first quarter as 100. Revenue growth was 42% year-on-year. And as you see, breakdown between domestic versus overseas, and domestic business grew by 73% year-on-year.

Brand advertisement is growing strongly both in Japan and in total. In the area of brand advertisement as well, we are featuring technology-driven performance advertising offerings to our clients. And our transaction growth comes from this performance advertising rather than pure advertisement or guaranteed buying. Year-on-year growth is about 96%, contributing to top line growth.

Overseas business declined Q-on-Q due to seasonality, while domestic business expanded steadily.

I have 2 more topics for Internet Marketing business to share with you today. One of them is the handling of social advertisements, including Facebook and it's growing nicely. This page shows half-on-half comparison and 13.4% steady growth is achieved. And as for the partnerships, in February 2018, we obtained 2 types of partner certification from 2 partner medias. One of them is, Indeed, a recruit group job search media. And we are certified as sales partner and obtained highest rank, Gold Partner license. We are already seeing positive outcome of this in our Indeed sales activity.

Second is a partnership between our growth company, Tricorn, and LINE through LINE Biz-Solutions Partner Program. We received Gold Certification as their sales partner. Through building and strengthening relationships with these major media partners, we hope to improve our services to clients. So that was the business update for Internet Marketing business.

Now I would like to turn to Media Content business. Revenue was JPY 328 million, up by 13.3% year-on-year, and non-GAAP operating loss was JPY 305 million. In the second quarter last year, cost has increased due to TV commercial but in this fiscal year, there was no such commercial leading to reduction in loss. And non-GAAP operating loss decreased by JPY 255 million. On the other hand, top line increased, reflecting an expansion in the sales of GANMA! ads.

This page shows a quarterly earnings trend. Top line is on growing trend, both in terms of year-on-year as well as Q-on-Q. Non-GAAP operating loss was almost flattish Q-on-Q but on year-on-year basis, loss has become smaller.

This page shows GANMA! product status. The number of users continues to grow steadily. Without relying on large-scale promotion, we are able to grow user count. As of April 12, the number of accumulated downloads has exceeded 10 million. As of the end of March, the number was 9.91 million, 1.7x increase year-on-year.

GANMA! application revenue grew by approximately 36% year-on-year and grew slightly Q-on-Q. We are seeing a steady growth of application revenue both in terms of advertising and in-app billing.

This page shows a main example of brand advertisement. We are trying to develop brand advertising market, targeting large national clients. This is an example of inserted ad for NTT DOCOMO. Tie-up advertisements leveraging Manga contents, which is our strength, is well received.

In Manga content business, we are investing to enhance and enrich contents, and our applications with unique characteristics are quite popular among users. Since the end of last year, we started distributing anime, and the first release was in-house produced Yakinikuten Sengoku animation and cumulative views are now over 1 million.

Also, as a way of multi-faceted development of in-house IPs, we have adopted some IPs for theater performances or for merchandises. This business model allows developing enthusiastic fan base through application services. We often use the term engagement, which is an important index to measure the service performance indicating how many fans are using our service with enthusiasm. One of the examples is a number of heart posted by users, showing the level of support for a certain title or artist. Since we have added this functionality to the application, within a little over 12 months period, total number of hearts posted exceeded 1 billion. Users who are actively using this service strongly engaged with our content or platform.

So that was the overview of each business segment. From this point on, I would like to talk about fiscal year September 2018's earnings estimates. Full year revenue forecast for this fiscal year is JPY 16.376 billion, and non-GAAP operating profit, JPY 1.718 billion. Profit for the period attributable to owners of the parent is JPY 1.2 billion. Expected growth rate is plus 11.4% for revenue and minus 26% for profit. Other numbers are as you see on this page. Key point here is that we expect a revenue growth in both business segments. We view the Internet's advertisement market as growing market. And we need to improve competitiveness, especially in case of ad agency business, where human resources are important part of the service, organizational capability is essential. Therefore, we will be making upfront investment in human resources in order to build such strong organizational foundation. As a result, in this fiscal year, we forecast decrease in operating profit. Right now, we are making good progress in hiring both in terms of new graduates, who started from April, and mid-hires. We are able to hire high-quality talents and such cost will be booked in this fiscal year.

On the other hand, for top line, it will take some more time for such investment to be materialized as top line growth. So we are expecting rather a slow ramp up. So that is why we are guiding for year-on-year profit decline.

Full year earnings estimates by segment are as you see on this page. On a full year base, we expect Internet Marketing business to grow by about 9% and Media Content business by about 32%. In terms of profit growth, we expect 13% reduction for Internet Marketing business. And for Media Content business, we expect loss to become smaller by close to JPY 300 million, with top line growth level of loss is expected to shrink gradually.

Next is a dividend estimates. Since our company has announced full year numerical guidance, accordingly, we also announced dividend estimates as of today. Based on the idea to distribute profit appropriately corresponding to earnings growth, we would like to consider continuous and stable dividend payout. In principle, the minimum amount of the annual dividend per share is set at JPY 2, and dividends will be determined with a payout ratio of approximately 15% for profit attributable to owners of parent. Therefore, the current estimated dividend is JPY 2, the minimum level, which will make the payout ratio to be around 21%. Again, the current estimates are JPY 2 per share and 21% payout ratio.

Lastly, this page shows our policies for fiscal year September 2018, which was set at the beginning of the year. For Internet Marketing business, we focus on growing overseas business and new areas such as brand and video ads. For Media Content business, we will build user base steadily, mainly with GANMA!, while aggressively developing product and market for monetization. We will particularly focus on brand advertising market.

Also, as its foundation, as I had been saying from the beginning of the year, we will strengthen competitiveness through continuous investments in human resources. We believe that this effort will bring a source of midterm growth opportunity. From short-term perspective, cost will increase but this is essential to realize midterm growth. With that belief, we are actively investing in human resources, including revision of the HR system. This cost increase is already incorporated in this year's guidance.

That is all for my presentation. So thank you very much for your attention. I appreciate your continued support on your company.