Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2020-Q2

[Koki Sato, executive]

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

Now let me start my explanation on our business results for the second quarter. But before I start, as you all know, external environment is substantially changed by the pandemic of COVID-19. This is affecting our business significantly as well. So I will cover the changes in business environment and the impact on our management with pandemic at the beginning. Then I will explain earnings overview for the first half as usual, followed by the overview of each business segment.

First, the impact of COVID-19 on business environment. We have finished the second quarter or the first half of the fiscal year. The impact of COVID-19 was minor and had a limited impact on the first half financial results. There are no apparent problems in the first half and each segment progress is planned. However, from March 2020, we started to see a decreasing trend in the demand of advertisements due to COVID-19. After the declaration of the state of emergency in April, the decrease has become obvious, especially for the demand of advertisements.

I said there was only a limited negative impact for the first half. And to be more specific, non-GAAP operating profit declined by about JPY 50 million in March, which include minus JPY 40 million for Digital Marketing Business and minus JPY 10 million for Media Platform Business. That is the impact on the results over the first half.

In April, after the declaration of the state of emergency, we started to see a significant impact. Based on the situation in April, we adopt the most pessimistic scenario about the impact of COVID-19 for the second half. That is from April to September. The scenario is this negative impact of COVID-19 will continue until the end of this fiscal year, which is the end of September 2020, and we have reviewed our management plan conservatively based on this assumption.

With that, we currently estimate this negative impact is about 20% in terms of sales in the second half earnings estimates. Please note that this is based on the most pessimistic scenario we developed with information as of today. That is, the same impact in April will continue for 6 months as I said earlier. The amount of estimated negative impact is as follows: about JPY 9.8 billion for sales; about JPY 2 billion for revenue; about JPY 1.4 billion for non-GAAP operating profit; and about JPY 800 million for net profit.

Next page summarizes the impact on each segment. The major one is negative impact. However, we also see that the significant environmental change by COVID-19 is drastically changing many other things among the general public as well, such as living conditions, values and promoting digital technologies. Here, I would like to explain about each segment for the negative impact it is seeing right now as well as positive effect, which has started to show some signs.

First, as for negative impact in Digital Marketing Business, demand for ads is reducing. This is mainly because the advertisers in off-line-based industries have slowed down their business activities. And it is obvious, the advertising budget is reduced mainly by large advertisers. As for the positive effects, we see accelerating digital transformation, or DX, and the demand is expanding by management transformation with focus on digital. Also, as people are spending more time at home, so-called stay-at-home demand is growing. This is changing the demand style and accelerating the growth of EC market.

In Media Platform Business, advertisement revenue is declining in media business, same as Digital Marketing Business. On the other hand, traffic in media such as news and media and entertainment services is increasing. Revenue from charges on consumers such as subscription and EC services remains steady under such a circumstance. These are the impact we feel for each segment.

Based on this understanding, Septeni Group has set the following future management policy. For the short term, as we recognize a significant impact in April, we will minimize the negative impact by reviewing business portfolio and target customers. We are also seeing new opportunities to gain profit are coming up as a result of this environmental change, so we will pursue such new opportunities. We will apply strict cost management as well. We will make efforts to improve our operating performance for the short term by these measures.

For the midterm, as this environmental change is expected to promote DX further, we will promptly build a management model which is compatible with the society of post-COVID-19, mainly by DX support for our customers so that we can make this an opportunity for innovation. That is all for the environmental change by COVID-19 and our measures to adjust this change.

Now let me go back to the earnings presentation. I'll explain about the earnings overview of the first half of fiscal year ending September 2020. Next page shows the first half consolidated earnings highlights. Revenue was JPY 8,805,000,000, up 5.2% year-on-year, and non-GAAP operating profit was JPY 1,168,000,000, up 14.3% year-on-year. Revenue and profit continued to increase year-on-year.

By segment, Digital Marketing Business increased revenue by about 1% and non-GAAP operating profit by slightly less than 3%. As I said, the performance in March was partially affected by COVID-19. Still, we could secure increase in both revenue and profit. Media Platform Business increased revenue by 43.9% year-on-year, and non-GAAP operating loss decreased by about JPY 50 million year-on-year. Growth in each business of this segment significantly increased revenue and decreased the deficit.

Next slide shows details of consolidated income statement. Both revenue and profit increased year-on-year, as earlier mentioned, and making a good progress in the full year estimate. Net profit made a substantial recovery year-on-year partly due to the sharp decline in the previous fiscal year. Next page shows a graph for the year-on-year changes by segment for the first half. As you can tell, revenue and profit increased year-on-year in both segments.

That is all for the overview of the first half earnings results. Now let me move on to the quarterly consolidated earnings overview. This page shows the consolidated income statement from January to March. Revenue increased year-on-year, while non-GAAP operating profit leveled off. This reflects the impact of COVID-19 in March. Quarterly consolidated earnings trend is as shown on this page. Revenue achieved a record high to indicate strong growth, and non-GAAP operating profit remained firm.

Next page shows constitution of consolidated expenses. Cost of sales increased due to expansion of Media Platform Business. Page 16 is about quarterly consolidated SG&A trend. SG&A expenses remained stable as well. In the first half, performance-linked bonuses were paid and this was recognized as additional expense of about JPY 100 million in the second quarter.

Next, I would like to cover the overview of each segment. First, Digital Marketing Business. Its earnings overview is as shown on the slide. While revenue decreased slightly year-on-year, being partially affected by COVID-19, it made a steady progress in the forecast with 47% for revenue and 48% for non-GAAP operating profit. Next page shows quarterly earnings trend. It is not described in the graph, but revenue increased year-on-year in Japan, while decreased overseas due to slight changes in geographical sales distribution.

Next page describes domestic brand advertising transactions trend, which is our area of focus. The business grew steadily to achieve increase of about 12% quarter-on-quarter and 8.4% year-on-year. Next page is about the business alliance with Dentsu Group. This is the same material we shared previously. We are enhancing proposals to our client for integrated marketing of online and off-line advertising through the utilization of the 2 companies' client bases.

Next page is about the progress on the business alliance with Dentsu Group. We started to disclose quarterly changes in the number of clients in the alliance from the previous briefing. It has increased steadily to 27 in the second quarter under review. Next page describes a topic in Digital Marketing Business. In order to create more synergy in creatives, Septeni, Dentsu and Dentsu Digital have developed and started to operate creative workflow of integrated marketing of online and off-line, maximizing multiple effects of digital ads and mass ads. So far, creatives for TV commercials and creatives for digital ads have been set, planned and targeted separately. Now we decided to establish a workflow to integrate these online and off-line ads from the planning stage to maximize the effect. We expect this will improve the value offered to our clients further.

That is all for the overview of Digital Marketing Business. Next, I will explain segment overview of Media Platform Business. Revenue recorded a significant growth of over 40%. The growth of brand advertising and subscription is driving the revenue increase. Next page shows quarterly earnings trend. Revenue grew especially in Manga Content Business. Page 27 shows indices to describe the revenue trend of Manga Content Business, mainly GANMA!. From this briefing, we include the breakdown between advertisement revenue from corporate clients and charge revenue from consumers. In this quarter under review, both revenue of advertisement and charges increased steadily.

Next slide is about subscription revenue. And subscription revenue of GANMA! has been steadily growing to record about 2.2x increase year-on-year, with the growth of charged users as indicated by indices on the graph.

Next crowdfunding result is disclosed this time as a revenue model for consumers. GANMA! has a strength with its original content, and we have been engaged in development of IP for the original content of the creators we assume as our assets. This enables us to increase the revenue from the IP assets. And we are seeing increasing number of products, which are planned, developed and sold through crowdfunding. This promotes strong user engagement, which leads to gradual expansion of crowdfunding projects.

There are some other unique projects which are still ongoing. This is a comic, Judgment Assizes, and we are working on a joint project to create its animated film supported by MARUI GROUP, which operates department store and financial business. This project is still ongoing and making a good progress now, thanks to passionate support from its fans.

That is all for the overview of Media Platform Business. As I explained at the beginning, our business environment is being changed by the impact of COVID-19 pandemic. With that, we substantially changed our business outlook for the next 6 months, and this resulted in the revision of our earnings estimates. In other words, the earnings estimates for this fiscal year were revised downward due to the impact of COVID-19. The table on this page shows specific numbers of the revision to reflect this impact.

From the previous estimates, revenue is decreased by JPY 2 billion, non-GAAP operating profit is down JPY 1.25 billion, and profit for the period attributable to owners of the parent declined JPY 680 million. This downward revision is based on the most pessimistic scenario we developed with available information as of today. We understand it is not clear how long this environmental change will continue. Therefore, we intend to improve management and address the change based on the assumption that the situation in this April will continue for 6 months until the end of this fiscal year.

With this backdrop, we reflected the impact of COVID-19 in this revision. However, a recovery in the external environment may start prior to September 2020 in which economic activities gradually resume and environmental change can positively affect businesses. In this case, we can expect a reasonable increase in earnings according to the strength of the recovery. If we find such a situation becomes a reality, we will disclose information as soon as possible.

Let me repeat that we adopted the most pessimistic possible scenario we can think of now, and we'll work on recovery and improvement of business performance as well as changing the management model based on the scenario. When the external environmental change turns positive, we'll disclose it as soon as we find it. I appreciate your understanding.

Next slide summarizes the revision of estimates by segment for your review. That is all for my explanation. We are facing a significant change in environment and we recognize major damage for the short term. On the other hand, this environmental change by COVID-19, whether it would be after COVID-19 or post COVID-19, will firmly address the change and build a new growth model. In that sense, we are quite confident about our management. Currently, our employees are working remotely and they are performing as usual or even better than usual. I am so grateful for it and that is a source of strong confidence about our medium-term growth. 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.]