Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2019-Q2

[Koki Sato, executive]

I am Sato. Thank you very much for participating to our business results briefing despite your busy schedule today.

I will explain business results for the second quarter of fiscal year ending September 2019. I'll start with consolidated earnings overview for the first half, followed by quarterly consolidated earnings overview, then explanation by segment for Internet Marketing Business and Media Content Business. And finally, I will report the progress on earnings estimates.

First, consolidated earnings overview for the first half of fiscal year ending September 2019. Page 4 shows the consolidated earnings highlights. Revenue was JPY 8,366 million, up 4.9% year-on-year. And non-GAAP operating profit was JPY 1,022 million, up 0.4% year-on-year to post increased revenue and profit year-on-year. This is just a continuing recovery trend of our business. Our first quarter starts in October and second quarter is from January to March. And top line and profit gradually accelerated growth in these 2 quarters.

Next page is about earnings highlights by segment. First one is Internet Marketing Business. This segment recorded revenue of JPY 7,678 million, up 2.4% year-on-year. And non-GAAP operating profit was JPY 2,486 million, down 6.3% year-on-year. We recognized increased revenue and declined profit in the first half under review. I will explain about this later for quarterly results, but in addition to its organic growth, Internet Marketing Business started an alliance with the Dentsu group in January 2019, our second quarter, in line with the plan.

Next page is about Media Content Business. Revenue was JPY 843 million and non-GAAP operating loss was JPY 514 million. Revenue was up about 34% year-on-year and non-GAAP operating loss decreased JPY 94 million year-on-year. Overall, cost increase was offset by increasing revenue and deficit decline year-on-year.

This page shows consolidated income statement for the first half under review. I have already explained the numbers earlier in highlights and overall, we could record increased revenue and profit. One thing I need to point out for net income is AXEL MARK. It was a group company for mobile game business, but as announced earlier, they are excluded from the scope of equity method. This resulted in decreased net income.

This bar chart describes the overall PL status. You can refer to earnings by segment as well. Revenue increased year-on-year in both segments.

Here I'd like to mention one thing about expenses. We have performance-linked bonus system and additional payment for the bonus was made as we could record better results than our original plan. In total, about JPY 173 million was posted as labor cost of the second quarter. This is a temporary expense by this onetime bonus increase. Despite the impact of such an increase of expenses, we could secure total profit growth.

Next I'd like to explain quarterly consolidated earnings overview for the second quarter from January to March. In this quarter, revenue was JPY 4,219 million, up about 8.7% year-on-year; non-GAAP operating profit was JPY 563 million, up about 78% year-on-year. As such, we could record increase both in revenue and operating profit. Revenue growth as well as appropriate control of SG&A contributed to the significant increase of operating profit.

This page describes quarterly consolidated earnings trend. As you can tell, we struggled to grow top line and the third quarter of previous fiscal year from April to June 2018. We hit the bottom in that quarter and since then, we have made steady recovery quarter-on-quarter in a V shape. Operating profit followed a similar trend and grew quarter-by-quarter. Profit grew year-on-year for the first time in 11 quarters. Profitability continued to improve by our management to grow top line with cost control.

This table shows constitution of consolidated expenses. Breakdowns of cost of sales and SG&A are described. Cost of sales includes labor cost and subcontract cost associated with creative content production. We continued cost control and there were no significant fluctuations in labor costs. Please note that additional performance-linked bonus was recognized in the second quarter as a onetime expense.

Next page is about quarterly consolidated SG&A trend. As I said, expenses peaked in the third quarter of FY 2018 as we had continued active investment in human resources until that quarter. That was a prior investment for stronger competitiveness. After that quarter, we have been controlling cost by growing the top line by existing human resources. As a result, costs have been flat or slightly decreased from the third quarter of FY 2018 and now we have a PL structure in which customer service improvement and top line increase are achieved by the current number of human resources.

In addition to the performance-linked bonus mentioned earlier, advertising expenses associated with media business were controlled as planned. That is all for the quarterly consolidated results for the entire group.

Now I'd like to explain some business topics by segment. First one is Internet Marketing Business, which is related to advertisement. Revenue was JPY 3,944 million, non-GAAP operating profit was JPY 1,244 million and revenue and profit increased year-on-year, and revenue, earnings and operating profits all increased quarter-on-quarter. Recovery trend continued from the first quarter.

This graph is about the quarterly earnings trend of Internet Marketing Business. Top line have continued to grow steadily since the first quarter.

In January 2019, the business alliance with the Dentsu group started and it has progressed in line with the plan. Additional performance-linked bonus was posted as one-off labor cost, and excluding this factor, expenses remained almost flat. Therefore, top line growth positively affected the profit, and operating margin excluding the additional performance-linked bonus continued to grow since the third quarter of FY 2018 as a bottom.

This page is about progress on business alliance with Dentsu in Internet Marketing Business. There is no significant change from the material we published before. The alliance was started as planned in the second quarter and short term measures were implemented in line with the plan. Medium term measures are still in the process of execution and we expect to see the results in this April onwards.

This slide shows trends in overseas revenue for Internet Marketing Business. Revenue has continued to be flat and quarterly trends indicate that percentage of overseas revenue is gradually declining. We implemented management reforming January 2019 and we are still in the process of preparation for regrowth. That is the reason for the flat growth.

By region, North America remained strong while Asian countries continued to struggle for growth.

This page describes video advertising transactions trend. Volume remained flat and the percentage in this business was almost unchanged as indicated by numbers on the slide. We prepare various measures for growth to achieve higher performance in the future.

Next page is about transactions trend of domestic brand advertising, which is one of the areas we focus on. It has been making steady growth and we are making progress in acquiring major brand advertisers. Percentage of brand advertising is rising and transactions grew by about 1.6x or up 60% year-on-year. As such, we are steadily progressing and developing brand advertising market, which we position as medium-term growth driver.

That is all for the overview and segment topics of Internet Marketing Business.

Next I'd like to explain Media Content Business. In this quarter under review, we recognized increased revenue and decreased deficit. Revenue was JPY 427 million and operating loss was JPY 223 million. And the top line grew about 30% year-on-year and operating loss decreased.

This graph shows the quarterly earnings trend. Growth in net sales continued due to increase in earnings, particularly for GANMA! Also, decrease of operating loss was accelerated due to the absence of one-off expenses recognized in the previous quarter.

This slide is from the presentation material of the previous quarter to explain revenue model of our manga content business, GANMA! Our revenue model has a layered structure. So far, performance advertisement was used for monetization and we added brand advertisement on top of that. In this fiscal year, we started charging on users for subscription revenue and revenue from IP. And a new revenue stream was added by a major application update. As of the end of March 2019, accumulated application downloads of GANMA! exceeded 12 million. We aim to improve our business model by accumulating multidimensional revenue models.

This page shows application revenue trend of GANMA! described by indices. In this second quarter under review, application revenue increased due to growth both in brand advertising and subscription revenue. The application revenue growth was 15% quarter-on-quarter and about 17% year-on-year.

This is ARPU trend. Revenue per user increased steadily, and you can tell our business model has been strengthened as a monetizing model from this trend.

This slide shows the trend of subscription revenue, which is a monthly-based subscription of manga content we currently focus on. Major application update was implemented in December 2018, our first quarter. As a result, stronger growth was recognized in the second quarter and a steady growth has continued since the application update.

Subscription revenue increased substantially due to a rise in the number of charged users and the amount of monthly charge by this major update. That is all for the overview and business topics of Media Content Business.

Next topic is progress on earnings estimates. In this fiscal year, earnings estimates we use in the briefing has become full year based and this page describes our progress on that full year earnings estimates.

Our full year estimation for revenue is JPY 17.2 billion, non-GAAP operating profit is JPY 2 billion and profit for the period attributable to owners of the parent is estimated as JPY 1.3 billion. Progress rate is about 48% for revenue and about 51% for operating profit, so steady progress is made for revenue and operating profit. On the other hand, profit for the period is slightly behind in its progress at about 27%, and this is because we posted net loss as a result of exclusion of AXEL MARK from the scope of equity method, as I explained at the beginning.

Next page describes progress on earnings estimates by business segment. Internet Marketing Business is making steady progress of over 50% for both revenue and non-GAAP operating profit. As for Media Content Business, progress is yet to come for revenue as we expect more revenue in the second half than the first half, so progress rate is about 37% for revenue. That is all for overall progress and progress by segment on earnings estimates.

This concludes my explanation for today. Thank you very much for your attention.