Septeni Holdings Co Ltd

TSE:4293

Earnings Call Transcript 2021-Q4

[Koki Sato, executive]

I'm Sato. Thank you very much for participating in our business results briefing despite your busy schedule today. As announced at the beginning, today, before the regular business results briefing, I'll explain the deepening of the capital and business alliance with the Dentsu Group, which was announced earlier.

Now let me start my presentation. This is the table of contents for the first part of my presentation. First, I will provide the overall summary and then explain background and purpose of deepening the capital and business alliance. In addition, as this involves corporate acquisition, I'll cover the outline of the company to acquire its shares and the structure of this capital and business alliance.

Let me begin with the executive summary. This slide is about what we are aiming for this time. We have been promoting a cooperative relationship with the Dentsu Group based on a common philosophy for collaboration since the capital and business alliance was formed about 3 years ago. The philosophy this time is to deepen and expand this relationship. That is by maximizing the collaboration between the 2 groups in the areas of digital marketing and data solutions, we aim to be #1 in the domestic digital marketing domain. The 2 groups studied this plan with this philosophy in mind.

The background to deepening capital and business alliance is also described here. We started discussions on further deepening capital and business alliances with the Dentsu Group, with the aim of enhancing our corporate value through business growth. I'll explain more details later, but the alliance between the 2 companies, which has been underway since 2018 has produced dramatic results of the collaboration.

In addition, with the recent rapid development of DX, we can see a rapid acceleration of digitization in the advertising industry and the advertising market in response to the digitization of society as a whole. Considering such an environment, the 2 companies agreed that strengthening the capital relationship would be an effective means in order to strengthen the alliance and to promote business collaboration further.

We are carefully examining the scheme to achieve sustainable and long-term enhancement of corporate value and value for shareholders by deepening this alliance. This time, we will acquire a portion of the core business of the Dentsu Group's digital domain using funds raised through a third-party allotment of shares. Both companies and our Board of Directors have repeatedly discussed the validity of the scheme. As a result of the discussions, we are convinced that this alliance would lead to the sustainable and long-term enhancement of our corporate value and maximization of shareholder value. The 2 companies agreed that this is an effective means and have reached an agreement on the implementation of this alliance.

This is the overview of the scheme. We plan to take 3 major steps. First, Dentsu Direct Inc., a subsidiary of the Dentsu Group Inc., will become a wholly owned subsidiary through a share exchange. The exchange ratio and other details are as described on the slide.

Next, we will issue new shares and implement third-party allotment of shares to Dentsu Group Inc., as underwriter. The total amount to be paid is expected to be approximately JPY 32.6 billion, as described on the slide. Third, by utilizing this fund, we will acquire 25% of the shares of Dentsu Digital Inc. and make it an equity method affiliate. Its acquisition cost will be about JPY 31.2 billion. The conceptual diagrams are provided at the bottom.

Next, I will explain the background and purpose of deepening the capital and business alliance with the Dentsu Group. First of all, let me show you the summary of the trend in the global and Japanese advertising market and the progress of their digitization. As you can see from the graph, the digitization of the global advertising market is already close to 50%. And in developed countries, it is already over 50%. And this means the majority of the market is already digitized.

On the other hand, in the Japanese market, the percentage of digitization is still low at around 30%. However, as we are addressing the COVID-19 pandemic, society is rapidly moving in the direction of digitization in this environment.

We believe that the ratio of digitization in the Japanese market will approach that of the global market going forward. Under such a circumstance, what can we expect for a growth potential with this alliance? The digital advertising market in Japan is expected to grow to a scale close to JPY 1 trillion in the near future.

The graph shows that non-digital part has decreased a little due to the impact of COVID-19, but this trend seems to have reversed and to be recovering now, and the ratio of digital is expected to increase further from 2021 and onward.

In this environment, we entered into the current capital and business alliance with the Dentsu Group in 2018. 3 years have passed since the announcement. In December of this year, it will be 3 full years since the business alliance started. Our profitability and productivity have dramatically improved due to the capital and business alliance implemented in 2018.

In the fourth quarter of fiscal year 2021, the number of cooperative clients has increased to about 80 clients. The quarterly sales generated by this collaboration have almost tripled in the past year and are growing very fast. Average spend per client almost doubled since the start of the business alliance. Driven by this increase in the average spend per client, sales per employee, a key indicator of our business rose by about 35%, resulting in a significant improvement in productivity.

With these achievements, we have come to the philosophy for deepening the capital and business alliance, as I explained at the beginning. That is to be #1 in the domestic digital marketing domain by maximizing the collaboration between the 2 groups in the areas of digital marketing and data solutions.

In addition, we aim to achieve significant business results through the deeper cooperation. They are summarized in 4 points. Acquisition of new collaborations and large-scale clients by expanding the commercial distribution from the Dentsu Group, contribution to results from the consolidation of Dentsu Direct Inc. and the acquisition of capabilities in the direct marketing area, strengthen solutions and development areas and capture equity in earnings of affiliates by making Dentsu Digital Inc. an equity method affiliate, achieve synergies by sharing BPO domains, joint development and improving procurement capabilities through the promotion of integration of business foundations. This is how we expect the collaboration to develop.

Now I would like to explain the results to date, including the disclosure of more in-depth data. This slide comes from our presentation deck I shared with you before. And the previously announced capital and business alliance scheme in 2018, the voting right was a little more than 20%. The business alliance started in the second quarter of FY 2019, and it will be 3 full years at the end of December 2021.

This page describes details of the previous capital and business alliance we have been working on, and we could achieve significant results. This time, we will work toward more midterm growth based on the short-term results. We have worked on integrated marketing proposals for online and off-line advertising, and we'll promote them in the larger scale for our clients. And this led to deepening collaboration this time.

This chart shows the distribution and degree of sales contribution on an actual value basis since the start of the collaboration. The gray part shows our organic sales, and the blue part shows the sales generated by the collaboration with Dentsu, and the line graph indicates the ratio of the collaboration. Both the actual sales and the ratio of the collaboration are growing quite rapidly. And the effect of expanding our business and promoting business growth is clearly evident.

Looking at the growth rate of quarterly sales, organic sales are also growing steadily, thanks to the strengthening of our business structure and the enhancement of brand power. The organic sales growth rate is about 110%, and the growth by the Dentsu collaboration is added to this organic growth to realize significantly fast growth.

The growth rate of the collaboration with Dentsu was approximately 2.8x in the fourth quarter of FY 2021. And you can tell that sales have grown at an extremely accelerated pace in the past one year. This is the trend of unit price. Since the start of the alliance, we have made progress in acquiring large-scale clients. And over the past 3 years, the unit price per client has increased 2.5x, and organic spending per client has also increased.

In addition, the win rate and competition is also on the rise. As shown in the graph, unit prices are rising at a very good pace in both organic spending and the collaboration with Dentsu, indicated by the red line and the blue line, respectively.

This slide is about productivity per employee, sales per employee and the digital marketing business have risen by about 35% since the start of the alliance, and productivity is rapidly improving as per [ head ] sales increase. As a result, our business volume is expanding naturally with the growth in profits. This is an improvement in productivity. So far, I have explained the results of our collaboration over the past 3 years based on specific figures. Now I am going to explain about deepening the alliance going forward where we expect synergies by each initiative I mentioned earlier.

In this page, we discuss the competitive environment. As a result of deepening capital and business alliance this time, we can expect alliance will develop into a digital marketing partner with the top-level growth rate and the largest scale in the industry.

These graphs show our assumptions about market trend. The light blue part represents Septeni, and the dark blue part is the Dentsu Group. I believe that some of these 2 companies will have the largest presence and share in the market. On a stand-alone basis, we are the second largest player dedicated to digital ad in terms of market share, and we have been increasing our market share in recent years by accelerating this growth, we expect to gain a firm advantage in this competitive environment.

This is an image of growth after deepening the capital and business alliance. In this chart, the left most bar indicates before the alliance, the middle one is present and the rightmost one is the future. The pace of growth is higher than before the alliance, thanks to the expansion of Dentsu collaboration added on to our organic growth.

We expect the alliance this time will further accelerate this pace of growth. Specifically, the initiatives listed on the right are expected to build on the organic growth, the existing collaboration and the new synergy. This 3-story structure is our image for growth.

This is an image of sales growth. The left side is the achievement to date. And the right side is the assumption for the future. The graph is composed of 3 factors, as I said earlier, and we hope to further accelerate our growth. As for productivity, we don't regard the current level as the upper limit. Rather, we assume there is enough room for improvement in the market environment. As the market expands as a whole, and we deploy services for larger projects and larger clients, we expect further productivity growth in terms of sales per employee as we expand our organization.

This figure shows the overall picture of our business operations. We anticipate greater synergies from the collaboration than ever before, both in terms of domains and functions. The horizontal axis is the domain and the sum of the advertising market and the solutions market is the digital marketing market in which we operate.

The vertical axis is for functions. That is front, delivery and operation, consulting services, operations, product development and media platforms. And this time, a broader and deeper alliance relationship will be created in each vertical function, organizational function and business function. So far, our alliance was implemented in the areas indicated by blue arrows, and the alliance will be even deeper by adding the areas with orange arrows.

In terms of the scope of consolidation, we will acquire business domains of Dentsu Direct Inc., which will become a wholly owned subsidiary and Dentsu Digital Inc., which will be our equity method affiliate. This will allow us to operate in broader business domains and form a deeper business collaboration and will be able to build a solid business competitiveness in the advertising and solutions markets.

We have listed 4 expected synergies here. Both groups are already enjoying great performance, but to enhance it, we will deepen the collaborative relationship related to integrated marketing proposals and further expand commercial distribution from the Dentsu Group. Through the consolidation of Dentsu Direct, we will acquire capabilities and enhance our presence.

By making Dentsu Digital an equity method affiliate, we will strengthen the solution domain and incorporate the earnings of affiliates. By promoting the integration of the business infrastructure of the 2 groups, we will share BPO areas and do joint purchasing to achieve cost synergy.

As new shares will be issued in this scheme, EPS dilution is a possibility. However, as adequate measures are taken beforehand, EPS dilution is expected to be resolved at an early stage through organic growth of our company and synergies achieved by the business alliance. For the future, we expect to double EPS in several years. This slide shows the change in EPS from the track record to the outlook. The chart is conceptual.

Different colors are used in the bar graph. The portion that says synergy energy from deepening this alliance includes profits of the companies to be consolidated. We will continue to pursue synergies from existing alliances and organic growth of our company by continuously strengthening our brand. All 3 drivers of growth will be pursued to increase EPS. The philosophy targeted in this alliance remains unchanged from 3 years ago. The alliance of the 2 groups with diverse talents coming together to provide the best solutions to our clients, creates an organizational environment that motivates people to work and aims at being the biggest digital marketing partner in Japan that leads the development of the industry.

The collaborative relationship mentioned in this philosophy is already realized. There is very good chemistry between the 2 with mutual trust in each other. By deepening the alliance, we hope to accelerate initiatives to improve the enterprise value of both groups. So far, I have talked about the background and objective of this alliance.

Next, let me talk about the outline of the company to be acquired, then to direct. Mainly in direct marketing, they do digital promotional ads, EC support and have both online and off-line capabilities, including TV direct marketing. They have a very solid business foundation. This is the company that will be our 100% subsidiary.

This is a structure of the capital and business alliance. The top chart shows the steps to be followed to complete the transaction, as explained at the outset. For the schedule, today, October 28, we had a Board of Directors' resolution. As scheduled, the capital and business alliance agreement was also concluded today.

At the ordinary general shareholders meeting of our company, which is scheduled for December 22 this year, we are to have a resolution on this matter. This will be followed by the closing on January 4, 2022, with share exchange going into effect, third-party allotment and execution of share transfer.

For our governance structure after the transaction is complete, the structure of the Board of Directors from January 4, 2022, is shown on this slide. We will strengthen the monitoring function of the Board. As Representative Director of the company, I will be the only Board member who will also serve as Executive Officer. Mr. Yamaguchi of the Dentsu Group is the candidate for the new part-time Director.

We will have 5 independent outside directors, all of them being asked to continue to serve. Under this structure, the ratio of outside directors will be 71.4%, and the ratio of female directors will be 28.6%. For the structure of group executive officers, we adopt the delegated executive officer model and have been promoting the division of the roles of supervision and execution over the past few years. As this has taken root and is proving to be effective, we will strengthen the system further by reviewing part of the system.

The new structure is to start on January 1, 2022. With an increase in senior executive officers and appointing new officers, we will have a stronger executive structure, allowing us to make further advancements in developing management resources.

Here, we have some selective governance-related provisions agreed upon by the 2 parties. One Director and one part-time auditor will be appointed by Dentsu Group Inc. Even after the capital and business alliance, the majority of our directors will be independent outside directors. And our representative directors will be non outside directors who are not appointed by Dentsu Group Inc. We will thereby assure independence of the Board. The Dentsu group will respect our autonomy, even after the execution of the alliance and will act in such a matter that does not conflict with the delisting standards to maintain our listing. They will cooperate with us as far as it is reasonable. So we do have measures in place to maintain listing and management autonomy.

Dentsu Group Inc. will not acquire any additional shares of our stock without obtaining our written approval. With this governance structure, minority shareholder protection, autonomous management based on our group's philosophy of making the world more lively with our entrepreneurship, drivers of growth like innovation will be protected. That was the presentation on deepening the capital and business alliance with the Dentsu Group.

Let us now move on to the business results for Q4 and full year slides. As usual, I will cover the earnings overview, quarterly earnings overview, overview by business segment, midterm business policy update and earnings estimate.

For the fiscal 2021 earnings highlights, revenue is up year-on-year to reach a record high. Profits are up sharply. Revenue was up 19% year-on-year to reach JPY 21.3 billion. Non-GAAP operating profits were up 54% to reach a little less than JPY 3.8 billion. We saw significant growth.

For by segment highlights, starting with the digital marketing business, revenue and profits increased by adapting to environmental changes due to COVID-19. In the media platform business, revenue growth continues. As the deficit numbers include investments in new segments, the amount of deficits would have been reduced if those investments were excluded.

This is the consolidated income statement for the full year. For each of the performance numbers, they will be about the same as the estimate numbers we revised during the year. Net sales were up significantly to achieve a high year-on-year growth of 27%. Full year net sales was JPY 97.6 billion. So the size of our business has come close to JPY 100 million. For earnings trends by business segments, as you see here, with robust growth in the digital marketing business, growth is accelerating.

Now this slide shows what we had high expectations for as a priority area for the full year. Clients acquired through the alliance with Dentsu are shown by fiscal year. What we see here is the number of unique clients. In fiscal 2021, we achieved 108 clients for the full year. We are seeing very quick acquisition of new clients. Domestic brand ad transactions are also showing steady linear growth. Here, we look at the media platform business.

Both subscription revenue and commerce revenue in the priority area, GANMA!, are up dramatically. Steady growth was seen in D2C business, mainly in commerce. This is the quarterly earnings overview for July to September. Revenue growth grew steadily. On the other hand, due to expenses arising from processes necessary for the business and capital alliance, profits declined. Revenues at a record high. Operating profit margin recovered from the previous quarter.

This slide shows the consolidated cost structure. Because of an increase in projects, outsourcing expenses increased mainly in creative services. So we had an increase in expenses in line with top line growth. This is the consolidated SG&A trend. In line with progress in business results, additional performance linked bonuses and other factors led to increase in mainly labor costs. For performance linked bonuses, estimated amounts are recognized as labor costs since Q2. The breakdown is shown as a new disclosure item.

Next is business overview by segment. Starting with digital marketing business. Net sales grew by over 20% year-on-year, and the result was almost the same level as the full year estimate. The performance was in line with expectations.

For quarterly earnings trend, the year-on-year hurdle is up because Q4 of 2020 was a high revenue growth quarter. Yet, the pace of revenue growth is unchanged. So the growth momentum is sustained. Business results are solid.

For brand advertising transactions, I already showed you the full year numbers. Quarterly numbers are also growing. Record high transaction value and share were achieved. For progress in the business alliance with the Dentsu Group, this is the quarterly trend. The number of clients acquired through the alliance increased 1.5x over the previous year.

Next is the media platform business overview. Commerce revenue in D2C business continued to grow, leading to overall revenue growth. Excluding investments to expand business domains, profits are on an upward trend. Investment amount to expand new business domains is now disclosed. The existing media platform business, excluding this investment, saw increased revenue and reduced deficit. We are seeing solid improvement in profitability.

Next is Manga Content Business revenue trend, very steady and strong growth. GANMA! subscription revenue and ebook sales grew, contributing to significant growth in charge revenue. Advertising revenue, which was a challenge, is bottoming out. By improving the product mix in response to COVID related environmental changes, advertising revenue increased year-on-year.

This slide shows GANMA! subscription revenue trend, solid growth to 1.5x higher numbers than the previous year. Although the scale of business is growing, the pace of growth is not declining, it is rather accelerating. Just like the SaaS model in software business, a very sustainable linear growth model is created with Manga Content, which is unique. This slide shows the Manga Content business, commerce revenue trend.

GANMA's! popular work, My Lv999 Love for Yamada-kun is a big hit. In addition to in-app sales, outside the app sales through partner ebook stores was very robust, heading to significant overall revenue growth, led by ebook sales, both Q-on-Q and Y-on-Y. That was the by segment overview.

With the start of a new term, the midterm business policy domain expansion part was partially updated. As we explained at the outset, we deepened the capital and business alliance with the Dentsu Group. Mainly in digital marketing business, we will have the policy of further strengthening business competitiveness. These are the initiatives to deepen the alliance, which I explained before. This scheme chart was shown before as well. This one, too.

Image of growth after alliance is shown here. In terms of medium-term business policy update, with the deepening of capital and business alliance with the Dentsu Group. In addition to the existing growth drivers, we will create new big growth drivers to accelerate our business.

Finally, on our business forecast or guidance, for the year ending September 2022, considering the impact of the capital and business alliance, at this moment, it is difficult to make a reasonable estimate. And therefore, it is yet to be decided. When the performance forecast becomes available, we will swiftly make a disclosure. Likewise, the 3-year medium-term business plan will also be updated once we are ready to disclose the performance forecast. We ask for your understanding on this.

Dividends for the year ending September 2021 is planned to be JPY 3.4 per share. For the year ending September 2022, taking into consideration the impact of the capital and business alliance, this is also yet to be decided. This will also be disclosed once we are ready. We ask for your understanding.

This concludes my presentation. As the content volume was larger than the usual business results briefings, it took longer, but thank you very much for listening till the end. We look forward to your continued support for our group. Thank you.