Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2019-Q3

[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 our current business status, including the results for the third quarter of fiscal year ending September 2019. We concluded our third quarter from April to June. So I'll start with consolidated earnings overview from first to third quarter, followed by quarterly consolidated earnings overview, then overview and topics of each segment. And finally, I will explain about revision of earnings estimates and dividend estimates.

First, I will explain consolidated earnings overview for the accumulated results from first to third quarter of FY 2019. This slide describes the 3-quarter accumulated consolidated earnings. Revenue was JPY 12,648 million, up 9.7% year-on-year, and non-GAAP operating profit was JPY 1,624 million, up 94.1% year-on-year to post increased revenue and significantly increased profit year-on-year.

Regarding earnings highlights by segment, Internet Marketing business recorded growth in both revenue and profit. Revenue was up 6.4% year-on-year, and non-GAAP operating profit was up 16.2% year-on-year. This growth is owing to organic growth of the segment as well as progress of alliance with Dentsu started in the second quarter of this fiscal year.

Next page is about Media Content business. This segment recognized revenue increase by 42% year-on-year, and non-GAAP operating loss decreased about JPY 134 million year-on-year. With a steady increase in revenue, the deficit continued to decline year-on-year.

We announced posting of temporary losses due to impairment losses on goodwill, et cetera, related to Lion & Lion, which joined our group through M&A. Its official name is Lion Digital Global Limited, and it is commonly called Lion & Lion. They are a group company, which was consolidated about 3 years ago, and they are engaged in Internet advertising business, mainly in Southeast Asia.

As we use IFRS, we do not amortize goodwill every year. Instead, we conduct regular impairment assessment. We recognized the delay in progress of business plan developed at the time of the acquisition. And due to these diversions from the projection, we decided to post an impairment loss of 100%. As we posted such a large amount of impairment losses, we'll take measures to make up for the delay.

For the future improvement, as described on the slide, a new management team was formed, including a local CEO. At the same time, its operation bases, which were distributed throughout Southeast Asia so far, will be reviewed through selection and concentration. And we will review its business strategy with appropriate cost control and improved top line with competitiveness in the region. We will maintain the policy to become a leading digital marketing company in Southeast Asia. And we'll rebuild its business to strive for that goal.

The amount of this temporary impairment losses on goodwill, et cetera, was JPY 1,812 million including asset impairment. This affected the consolidated income statement. Top line and non-GAAP operating profit were as reported in the highlights at the beginning of this presentation. They are progressing steadily against the full year estimates, and the progress rate for revenue is 73% and for non-GAAP operating profit is 81% to show steady progress in this 9-month period. The impairment loss on goodwill is recognized in adjustments indicated as #2 on the table. As a result, this affected other items directly and we regrettably posted a deficit for the period.

Next page shows charts for earnings by business segment. We are making organic business growth steadily. Blue part is for Internet Marketing and red part is for Media Content Business, respectively. And both segments recorded increased revenue and non-GAAP operating profit year-on-year. That is all for consolidated financial results accumulated for 3 quarters. Next, I'd like to explain consolidated earnings overview for the quarter we just concluded.

In this quarter under review, revenue was JPY 4,282 million and non-GAAP operating profit was JPY 602 million. Please refer to the numbers on the table for other items such as net profit for the period. Overall, top line growth was obvious on the P&L. For your reference, we provide net sales according to the conventional Japanese accounting standard that was JPY 19,410 million. That was an increase of 16.3% year-on-year. And this rate of increase is relatively high compared to quarters in the past.

This top line growth supported operating profit. In the third quarter of the previous fiscal year, we posted operating loss due to weak top line. But in this third quarter under review, we could significantly increase profit from minus JPY 181 million to JPY 602 million. That is described by a graph on the next page. Revenue was up about 20%. Operating profit grew about JPY 780 million year-on-year. I assume you can tell top line recovery and profitability improvement progress quarter-by-quarter.

According to this trend, operating profit and operating profit margin were at the bottom in the third quarter of the previous fiscal year. As we implemented cost control since then, expenses were at the highest in the third quarter of FY 2018. With our efforts to improve top line with controlled SG&A in the past 4 quarters, top line has been recovering steadily and investment in the organization, including human resources and products has started to bear fruit in the form of growth.

This table shows constitution of consolidated expenses. Consolidated SG&A and cost of sales are described by quarter. Cost of sales includes labor costs associated with creative content production and advertisement business. This is described on the table as well for your reference. We continued controlling both cost of sales and SG&A. In this third quarter under review, the total SG&A was a little less than JPY 3 billion and this is almost on par with past quarters.

The graph on the next page shows quarterly consolidated SG&A trend. SG&A peaked in the third quarter of FY 2018 and profitability started to improve since then. Third quarter is the period including new hires in April and every year, the structure of human resources is changed in this month. In this third quarter of FY 2019, 83 new employees joined the company and the increase of personnel expenses was in line with the plan. That is all for the quarterly consolidated results for the entire group.

Now I'd like to explain the overview of each segment. First one is Internet Marketing Business, which is for digital advertisement. Its top line growth and profit improvement were almost in line with the consolidated results. Net sales were up about 15% year-on-year, and revenue improved by 15.8% as well. Operating profit recorded a significant increase from JPY 512 million to JPY 1,190 million.

This graph is about the quarterly earnings trend. As I mentioned, this highlights, at the beginning, combined effect of organic segment growth and alliance with Dentsu accelerated the earnings growth. The rate of revenue increase also improved to 15.8% and profit recorded a significant improvement of 2.3x year-on-year. In the second quarter, we posted additional performance-linked bonus for employees indicated by orange for about JPY 140 million in this segment. In this third quarter under review, we are back to normal without this expense.

Now I'd like to explain about progress on business alliance with Dentsu in Internet Marketing Business. We started this alliance in January this year, and 6 months have passed since then. Initiatives are listed on this page. And both companies are working closely to promote business cooperation for short and medium-term initiatives. Progress of each initiative are described on the table, and please refer to it for details. All in all, short-term initiatives are progressing steadily in line with the plan. And as a medium-term initiative, we are working on integrated marketing proposals of online and off-line advertisement utilizing the client bases of both companies, mainly for large customers. Although its contribution to operating results have not been recognized yet, the number of projects in process is increasing steadily, and we are feeling strong growth potential in it.

Now I will touch upon some topics about our areas of focus. This graph shows overseas revenue. Overseas revenue continued to be flat and no change for stagnant growth. Especially performance of Asian countries is not favorable. With the impact of the impairment loss of Lion & Lion explained earlier, overseas revenue did not grow as we had expected.

As explained in the previous quarter briefing, we are implementing fundamental review of its organization including the directors to restore its structure. We are rebuilding a firm foundation of the company by changing the management structure and prioritize to build a human resource system and an organization with which we can expect exponential growth. As described here, we'll support Lion & Lion to grow again by changing the management structure and facilitating selection and concentration of operation bases.

Next page is about video advertising transactions trend. This part of business also remained flat, and its share in Internet Marketing Business has been settled at 16% level. The overall top line of advertisement business has been growing and it seems video advertising transactions doesn't catch up with that growth. We intend to increase the transactions of video advertising as we develop brand advertisement market I will explain later. Currently, this business results remain unchanged.

This slide shows our area of focus, domestic brand advertising transactions. We have not materialized the effects of alliance with Dentsu yet, and the business growth mainly came from organic growth. Transaction volume of the third quarter decreased slightly from the previous quarter due to seasonality. However, compared to the same quarter of the previous fiscal year, we could record substantial growth of about 72% year-on-year. As such, we recognized healthy business in this area.

I'd like to report on one business topic here. This is about enhanced relationship with a new partner. We concluded the capital and business Alliance agreement with One Media, Inc, which has strengths in production and expression of unique video content as well as their own creator network. The photo on the slide shows Mr. Akashi, CEO of One Media, who has an impressive look and will create strong impression by our products and services. This alliance will contribute to the growth of the brand advertisement with our focus including development of new solutions and enhanced video solutions. That is all for the overview and segment topics of Internet Marketing Business.

Next, I'd like to explain the progress in Media Content Business, which is business for consumers. First, earnings overview of this segment. In this third quarter under review, revenue was JPY 570 million and non-GAAP operating loss was about JPY 170 million. Revenue grew 56% year-on-year, and operating loss was reduced by about JPY 40 million. Currently, we are striving for growth of each product with continuously controlled SG&A. In this quarter, there was a significant effect of revenue increase, and this contributed to reduce the deficit.

This graph shows the quarterly earnings trend of the segment. For Manga content business, mainly with GANMA!, the previous second quarter was the period of high demand for advertisement in general. This seasonality affected the result of Manga content business in the third quarter. On the other hand, earnings in other businesses in this segment grew significantly and contributed to top line.

This slide describes the revenue model of GANMA! And there is no major change in it. Performance advertisement was the main growth driver in the past, but now we are developing brand advertisement market and starting this fiscal year, subscription revenue is added as a new revenue source from users. IT revenue from the content we own is also included in this layered structure.

This page shows application revenue mainly from GANMA! We had seasonality impact in this quarter. Especially, earnings decreased for performance ads, which are mainly run by game companies. We assume it was affected by declined demand from clients in mobile game business in the market and seasonality. On the other hand, earnings from brand advertisement and subscription with our focus remained solid and increased steadily.

This is ARPU trend in Manga content business to show the revenue per user. Due to seasonality, it declined slightly quarter-on-quarter, but it recognized a significant growth year-on-year. This indicates a good progress in improvement of revenue per user. As we contain costs, we intend to invest in product improvement internally rather than spending for external promotions, and it has started to bear fruit.

This slide shows the trend of subscription revenue, which account for the major part of revenue from users. Steady growth has continued since the application update in December 2018. It had been gradually growing before that, but the growth was accelerated after this update. The number of members billed is increasing and the amount of monthly charge grew as well. With the multiplying effect of these factors, subscription revenue increase is accelerated further. That is all for the overview and business topics of Media Content Business.

This is the last part of my presentation. Revision of business estimate and dividend estimate. On July 30, we announced revision of the estimates of full year consolidated business results. And I'd like to report on it. We revised the profit for the period attributable to owners of the parent. We considered impact from the impairment loss on goodwill of Lion & Lion, and the estimate for profit for the period was revised downward. Please refer to the table for the specific amount of the revision.

As for the third quarter, as I said, each business is progressing steadily, especially the progress rate of operating profit is over 80%, which is better than the original plan. On the other hand, for the fourth quarter, we need to rebuild Lion & Lion as soon as possible. Therefore, we plan to post one-off expenses for structural reforms for the change of organization and closure or integration of operation bases. With that expectation, estimate for non-GAAP operating profit will remain unchanged despite its steady progress. As a result, revenue and operating profit are not revised, and profit for the period is revised downward to reflect impact of the impairment loss.

Next is about dividend estimate. As I said, estimate of profit for the period was revised downward, but this is a onetime impairment of goodwill. So there is no impact on the free cash flows in our business operations. Please understand this as a tentative decrease of profit for the period. As cash flows for the current fiscal year is not affected and in consideration of the consistent and stable payment of dividends, we plan to pay the annual dividend of JPY 2 for this fiscal year. This is the amount we set as the lower limit and the same amount we paid in the previous fiscal year.

That is all for revision of business estimate and dividend estimate.

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

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