Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2020-Q3

[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 third quarter. I'll cover the impact of COVID-19 on our group business at the beginning, as we did in the previous briefing, then explain consolidated earnings overview for the results accumulated in 3 quarters of FY 2020 and the quarterly results for Q3, followed by the business results for each segment. And lastly, revised earnings estimates will be explained.

Now please turn to Page 4 about impact on the group business by COVID-19. In the previous business results briefing at the end of this April, we explained about the impact on our business by COVID-19 pandemic that it had a huge impact on the business environment. I'd like to report on updates of the impact as of the end of Q3. As shown on the slide, after the state of emergency was lifted in the middle of May, economic activities have been slowly recovering. Here we show some numbers to describe changes in monthly net sales.

In April, net sales were down 11% year-on-year, and the impact had become severer in May to record about 21% decline year-on-year. On the other hand, demand hit the bottom in May, and the recovery trend has continued in June and July. Especially the demand for digital advertisement, which is our core business, is showing clear recovery after hitting the bottom in May. In the fourth quarter from July, the recovery is expected to be stronger than June.

On Page 5, we describe more details about the impact on the group business by COVID-19. Both positive and negative impact on each segment are summarized for Digital Marketing Business and Media Platform Business.

In Digital Marketing Business, negative impact in Q3 was felt as a significant decline in advertising demand among offline-based clients with physical outlets, such as fitness clubs and beauty companies. Advertisement spending also decreased in the industries, such as finance, human resources and real estate. As for indirect impact, ad placements decreased mainly among major clients due to economic deterioration.

On the other hand, there were some positive factors, especially for clients who can complete their businesses online, for instance, games, manga, video services, et cetera. With higher demand for their services due to growing stay-home demand, some of them increased their promotion or ad placements to address such demand. As a result, the impact on the revenue in Q3 was about minus JPY 540 million in this Digital Marketing Business.

In Media Platform Business, negative impact was observed in advertising revenue decrease due to declined demand. It was felt mainly for manga app, GANMA!.

Regarding positive impact, revenue of consumer business has been increasing steadily in such as subscription fee of GANMA! and sales of media e-commerce sites. As a result, the impact on revenue in Q3 was about minus JPY 40 million. That is the impact on each segment.

Regarding outlook, we revised the earnings estimate as the situation has changed from the previous forecast. Previously, we revised the forecast based on the most pessimistic scenario we estimated at that time. And now, after Q3, we can tell this most pessimistic scenario is avoided. And as I said, the advertising demand hit the bottom in May to start the gradual recovery, and we expect this trend will continue.

Regarding costs, our employees continue to work from home. And as a result, cost control has progressed mainly for operational activity-related expenses.

Under such a circumstance, we revised the business outlook to expect higher earnings than the last estimate. And in the business results announcement for Q3, we made an upward revision for the full year earnings estimates. The amount of increase from the previous estimate is as follows: JPY 500 million for revenue; JPY 750 million for non-GAAP operating profit; and JPY 380 million for profit for the period.

Also the amount of impact by COVID-19 is estimated for 9 months from March to September and provided as an outlook. That is minus JPY 2.9 billion for net sales; minus JPY 700 million for revenue; minus JPY 580 million for non-GAAP operating profit. For more details of the revision of earnings estimates, it will be explained in the last part of this presentation.

Now let me move on to consolidated earnings overview in 3 quarters of fiscal year 2020. Please turn to Page 7. This slide shows consolidated earnings highlights for the 9 months from October to June. Revenue was about JPY 12.9 billion, up 2.2% year-on-year. Non-GAAP operating profit was JPY 1.428 billion, down 12.1% year-on-year to record increased revenue and decreased profit year-on-year.

Next page shows earnings highlights by segment. In Digital Marketing Business, revenue was JPY 11.327 billion, down about 1% year-on-year, and non-GAAP operating profit was JPY 3.503 billion, down about 4.7% year-on-year, to record a slight decrease both in revenue and profit due to severe impact of COVID-19 in Q3.

Next, Page 9 shows earnings highlights for Media Platform business. Revenue was JPY 1.868 billion, up about 32% year-on-year, and non-GAAP operating loss was about JPY 704 million, with deficit increased by about JPY 18 million year-on-year. Revenue continued to increase year-on-year due to growth in respective media-related business with a slight increase in deficit.

Next, Page 10 is about the details of consolidated income statement. Please refer to the table for performance results. Previous forecast is provided on the right, and the progress rate for the forecast is 76% for revenue, about 114% for non-GAAP operating profit and about 108% for profit for the period. As non-GAAP operating profit and profit for the period achieved higher than the forecast, or they exceeded the full year forecast with results in 9 months, we decided to revise the forecast upward.

Page 11 shows a graph about segment achievements. As I mentioned earlier, the graph clearly shows the trend that Digital Marketing Business recorded a slight decrease in revenue and profit, with decline advertising demand, while Media Platform Business grew substantially.

Now let me move on to Page 13 to explain quarterly consolidated earnings overview from April to June. Page 13 shows the consolidated income statement. Revenue decreased 3.7% year-on-year, and non-GAAP operating profit was down 56% year-on-year. COVID-19 significantly affected Q3, with the largest impact in May, but the results were slightly better than the forecast provided in the previous business results announcement to post over JPY 200 million operating profit.

Page 14 is about quarterly consolidated earnings trend. I already explained these numbers earlier, and both revenue and non-GAAP operating profit have softened.

Page 15 shows constitution of consolidated expenses. As I said at the beginning, cost control has progressed mainly with operation activity-related expenses as we implemented measures against COVID-19. Also the number of personnel is usually increased in Q3 as we recruit employees, mainly for new graduates. This resulted in a slight increase in the total SG&A.

Page 16 is a graph to show quarterly consolidated SG&A trend. You can tell labor costs increased quarter-on-quarter due to recruitment of new employees. In this April, about 110 new graduates joined the group.

From next page, I will explain the overview of each segment. Page 18 is about Digital Marketing Business. As I explained in the overview of consolidated results, there was a significant impact of COVID-19. But at the same time, compared to the previous forecast based on the most pessimistic scenario, the actual results of Q3 were slightly better. In Q3, the impact of COVID-19 on revenue was about minus JPY 540 million. However, with some recovery made during the quarter, the negative impact was controlled, and revenue decreased 5% year-on-year in this segment.

Quarterly earnings trend is as shown on Page 19. Regarding the distribution between Japan and overseas, revenue decreased slightly in Japan year-on-year, but overseas business suffered more negative impact, and this resulted in a slight year-on-year decrease of overall revenue.

Next page describes the trend in domestic brand advertising transactions, which is our area of focus. Compared to the direct response advertising, you can tell that the brand ads are severely affected by COVID-19. Its decrease was about 38% quarter-on-quarter and about 29% year-on-year to recognize the substantial negative impact in Q3.

Next page is about the business alliance with Dentsu Group. This is one of our strategies of focus we regularly share with you. We are offering proposals of integrated marketing of online and offline advertising through the utilization of the 2 companies' client bases.

Next page is about the progress on the business alliance with Dentsu Group, which is reported on a quarterly basis. In Q3, projects have steadily increased, and the volume of clients in the alliance has considerably increased, especially through proposals of integrated marketing of online and offline advertising as a midterm collaboration. The number of such clients in Q3 was 47, which indicates a rapid growth.

Next, I will explain segment overview of Media Platform Business. Please turn Page 24. In Q3, revenue increased almost 15%, and the deficit increased slightly. As I explained at the beginning, impact of declined advertising revenue was considerably felt in this segment, but we could maintain overall revenue increase, thanks to significant growth of charges on individual users. This indicates the difference in revenue trend between corporate, clients and consumers.

Page 25 shows quarterly earnings trend. Specifically, charges on individual users, such as subscription fees or sales on e-commerce sites have driven net revenue growth. As a result, overall revenue made a steady growth, despite the decline in advertising revenue.

The graph on Page 26 shows the revenue trend of Manga Content Business, mainly GANMA!. We disclosed this by indices, and they indicate that advertising revenue decreased significantly both quarter-on-quarter and year-on-year. On the other hand, charge revenue increased steadily. In the previous briefing, we started to disclose the breakdown between advertisement revenue and charge revenue. And in this Q3, charge revenue from individual users exceeded advertising revenue for the first time to account for more than half of the total revenue. This is because it has strong resistance to the slow economy, and it could record strong growth, even with the downward pressure of the economy.

Next slide is about subscription revenue of GANMA!, and its quarterly trend are disclosed by indices as well. The number of charge users had steadily grown, and subscription revenue maintained a significant increase of about 1.6x year-on-year.

Page 28 shows crowdfunding trend by actual amount. In Q3, an anime project was executed for a GANMA!'s popular work Judgment Assizes, and this has contributed to the substantial growth of the total amount of the support fund.

This is another topic of Manga Content Business. COMICSMART, a subsidiary, dealing with manga business, signed the business association agreement with Gaudiy, a blockchain startup. This is to make a fan community based on blockchain technology. To be more specific, based on our intellectual properties, Manga Content, we create a fan community for each manga work, where fans can communicate with each other. This community can be used for various events or sell goods to form a highly energetic community. With blockchain technology, events can be planned by autonomous and distributed network for users. In addition to establishment of the fan communities, we plan to offer data ownership type e-book utilizing public blockchain technology. So far, users only have a right to browse e-books, and it was difficult for the consumers to resell or transfer the e-books. By utilizing blockchain technology, we can clarify the ownership of the data to make it transferable. This is the characteristics of our new business. That is all for the overview of each segment.

Lastly, I'll explain revised earnings estimates. Please turn to Page 31. We decided to revise the consolidated estimates. As shown on the slide, revenue, non-GAAP operating profit and profit for the period are all revised upward. Recovery of advertising demand and progress in cost management made recovery stronger than the forecast in April. Revised consolidated estimates are as follows: JPY 17.5 billion for revenue; JPY 2 billion for non-GAAP operating profit; and JPY 1.1 billion for profit for the period attributable to owners of the parent. Reason of revision is because the estimates are expected to exceed the last revised estimates due to the recovery of demand for advertising as economic activities resumed and progress of cost management mainly for operation activity-related expenses. Downward revision was made in the previous time, and this time is an upward revision according as the changes in business environment.

Page 32 summarizes the revision of estimates by segment. Revenue estimates are revised upward slightly for each segment. And regarding non-GAAP operating profit, Digital Marketing segment made a large contribution in this revision. That is the revision made for each segment.

That is all for my explanation on the business results for Q3. I appreciate your participation, sparing your time. Thank you.

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