Hennge KK

TSE:4475

Earnings Call Analysis

HENNGE Q1 FY2024: Strong Growth On Track

HENNGE's first-quarter results for FY2024 indicate a healthy progression against the full year forecast, with steady year-on-year growth in net sales, particularly from the recurring revenue of HENNGE One. Despite some increases in infrastructure costs, the company achieved a higher gross profit margin due to an improved average revenue per user (ARPU). Operating expenses have grown, primarily driven by headcount increases, though some advertising expenses decreased. The net sales growth outpaced operating expense growth, highlighting the strengthening of the business model. HENNGE maintained its policy of investing in marketing and recruitment to foster growth and to build a more solid organization. The ARR for HENNGE One is expected to grow by over 20% annually. The full-year forecast remains unchanged from the November 10, 2023 announcement.

A Quarter of Dynamic Marketing and Stable Customer Retention

HENNGE's first quarter of FY 2024 demonstrated substantial efforts in marketing, with roughly 40 events organized to boost the business profile and cultivate reseller relationships. These strategies are part of a broader marketing policy aimed at growing brand awareness of HENNGE and its offerings. The continuation of these varied marketing activities is anticipated to further propel growth. Customer retention remains robust, with the average monthly churn rate staying very low indicating a theoretical average contract period in excess of 25 years, signifying enduring customer relationships and sustained product relevance.

Financial Growth Metrics and Outlook Forecast

The quarter's financials showed promising trends with an increased Average Revenue Per User (ARPU) thanks to new customer acquisition driving up the Annual Recurring Revenue (ARR). There were no major impacts from existing customer migrations on these numbers this year. Projected sustained growth in ARR of more than 20% is targeted through the dual approach of expanding the customer base and enhancing ARPU. To support these objectives, the company plans to invest in marketing initiatives, technological advancements, and expanding personnel—specifically more than 50 new hires. These steps are considered crucial not only for maintaining their competitive edge but also for fuelling the company’s ambitious ARR growth to at least JPY 10 billion.

Innovations and Future Growth Strategies

HENNGE's executive expressed confidence in the current trajectory of growth, citing a notable increase in the number of contracted companies and an expanding market. Innovations such as new features for HENNGE One and the developmental File DLP, in addition to recent product releases like kickflow, have been vital to the company's strategy of maximizing lifetime value (LTV) delivered to customers. Promotion of HENNGE One is geared towards fostering productivity improvements among customers with strong support for Software-as-a-Service (SaaS) solutions. The company's future is focused on achieving an accelerated ARR growth in the medium term, targeting an average in the mid-20% growth rate range and surpassing JPY 10 billion in ARR for HENNGE One. To realize these goals, it will be key to enhance brand recognition, acquire new customers, and continue product innovation and value creation.

Earnings Call Transcript 2024-Q1

[小椋 一宏, executive]

Hi. I'm Kazuhiro Ogura, the CEO of Hennge. Thank you for watching our video today. Today, our Director, Haruo Amano, will explain our financial results for the first quarter of fiscal year 2024 and progress of full year forecast. Then I will explain our growth strategy and give my impression for this quarter.

[天野 治夫, executive]

Hi. I'm Haruo Amano. First, let me explain financial results for the first quarter of FY 2024. This is the summary of our consolidated financial results. Results of the first quarter is progressing well against the full year forecast, which was disclosed on November 10, 2023. Our quarterly trends for consolidated net sales, as was shown in the slide, sales for HENNGE One business is composed of recurring revenue, and it is continuously on an increasing trend quarter-on-quarter. Year-on-year fluctuation for consolidated net sales, as was shown in the slide, sales for HENNGE One business shows a steady progress year-on-year.

Our quarterly trends for gross profit and gross profit margin are as shown in the slide. Year-on-year fluctuation for gross profit and gross profit margin are as shown in the slide, although there were some increases in infrastructure costs for HENNGE One, mainly from exchange rate fluctuations and security enhancement as well as the number of R&D members, which led to higher cost of sales, the gross profit margin increased as a result of higher ARPU. We consider our gross profit margin still remains high.

Our year-on-year fluctuation of operating expenses by nature, as is shown in the slide, cost of sales increased mainly due to the increased infrastructure cost for HENNGE On as a result of exchange rate fluctuations and security enhancement and the increased R&D members. Personnel expenses increased mainly due to an increase in the number of employees and the introduction of allowance for sales members in April 2023. Advertising expenses decreased despite continued active efforts such as focusing on activities aimed at strengthening relationships with resellers. For the other SG&A, it increased due to additional internal system usage fees to accommodate increased employees and an increase in transportation expenses due to increased face-to-face activities.

The chart in the slide shows quarter-on-quarter fluctuation of operating expenses. Personnel expenses decreased slightly despite the steady progress in recruiting due to a combination of one-off factors, such as bonus adjustments associated with the former employees, who left the company, and a decrease in other special bonuses. Advertising expenses decreased despite continued active efforts, such as focusing on activities aimed at strengthening relationships with resellers. The other SG&A decreased mainly due to differences in the approaches that have been applied from the previous quarter in recruitment-related expenses despite active recruiting activities.

This chart shows quarterly trends in the net sales and operating expenses. The bar chart shows operating expenses and the red line chart shows net sales. Both charts are expressed in the same scale and the gap between the bar chart and line chart shows operating income. Over the last few quarters, the growth in net sales has been increasing year by year more than the growth in operating expenses. You can see that our business model is becoming more stable to generate more profits. You can also see that while net sales have been steadily increasing, quarterly operating income and loss have fluctuated depending on the timing of spending on operating expenses, especially advertising expenses. The market we belong to is continuing to grow more and more.

In the first quarter, progress in operating income was fast-paced when you compare with the full year forecast, but we will continue to invest for the future business growth in the second quarter and beyond. The number of employees and its breakdown by function as of the end of the first quarter of FY 2024 as is shown in the pie chart. The transition in the number of employees is as shown in the bar chart. We are aiming to increase more than 50 headcounts in net for this fiscal year, and we had a net increase of 4 in this quarter. In order to achieve the initial plan, we will build a more solid organization by enhancing our talent acquisition capability.

Now I will explain our business activities during this quarter. This is an overview of our business highlights. We have been conducting various advertising activities in this quarter as well, and we feel that the amount of activity is increasing. Although the targets, methods, durations and scales of events vary, we held approximately 40 events during this quarter. To explain in more detail, we held events to strengthen relationships with resellers and joint events with resellers for customer acquisition. Other than that, we promoted activities based on our policy for this fiscal year, such as participating in events aimed at raising awareness of Hennge. We will carry out a variety of advertising activities that will contribute to our growth going forward.

Next, I would like to explain our results of KPIs. This slide shows the progress of KPIs for HENNGE One from the previous fiscal year. This slide shows the year-on-year fluctuation of KPIs for HENNGE One. This slide shows the average monthly churn rate. The conventional reasons for the cancellations are such as the IT system was unified into a different system due to the merger of companies or the cloud migration plan itself was reconsidered. Reasons for cancellations during the quarter were similar to the previous cases and no major change in the trend has been observed. As of now, it is continuously very low and the theoretical average contract period is more than 25 years.

This slide shows the quarterly trends in the number of contracted companies and users. We have steadily acquired contracts with relatively mid-to-small sized companies as we continue to strengthen relationships with resellers. As a result, the number of new contracted companies increased steadily. However, the number of contracted users have shown a slight increase compared to the previous quarter due to cancellations by relatively large companies.

The quarterly trends in ARR and ARPU are shown in the slide, although there was almost no impact from the plan migration for existing customers, which have been implemented up to the previous fiscal year. ARPU increased due to steady progress in acquiring new customers. In addition, the steady progress in the number of contracted companies and ARPU led to an increase in ARR for this quarter.

Next, turning to our full year outlook for FY 2024. This slide shows our policy for FY 2024 that is to accelerate midterm growth in HENNGE One ARR, continuously developing new features and services, providing them to customers and building a more solid organization by enhancing our talent acquisition capability. As for HENNGE One business, we aim to sustained annual growth of more than 20% for ARR by increasing the number of contracted companies and ARPU. As for the marketing investments, we will carry out various advertising activities, such as joint events with resellers in order to capture the demand for security that increases year by year. We will also hold various events to raise awareness of Hennge.

As for the personnel plan, we will actively recruit in each function and aim to exceed 50 headcounts increase in net. We will also aim to promote recruitment with a view to building an organization, which enables us to create higher value. In addition, following last year, we will keep considering various actions, which will contribute to enhancing our talent acquisition capability.

This slide shows our full year forecast for FY 2024. There is no change from the forecast, which was disclosed on November 10, 2023. These charts show the transition of our sales by business over the last 3 years and the progress of the first quarter against the forecast for FY 2024. Results of the first quarter is overall on track. These charts show the transition of advertising expenses and operating expenses, excluding advertising expenses over the last few years and the progress of the first quarter against the forecast for FY 2024.

Regarding operating expenses, excluding advertising expenses, we consider that building and strengthening an organization that enables us to create a higher value is a key to further scale our business. Therefore, we are currently planning to take various actions after the second quarter, such as expanding our office in order to have more interpersonal communication and collaboration. Moreover, securing an environment to continuously provide high value-added services with high reliabilities, another key for our business.

In order to make this happen, we are planning to continue investing in, such as for enhancement of HENNGE One security. They are only examples, and our investment won't be limited only to these areas. We are exploring a range of opportunities for further growth, and it is set to continue in the second quarter and beyond.

[小椋 一宏, executive]

Finally, please let me explain our growth strategy. Our corporate philosophy is liberation of technology. We believe in the power of technology, we love technology, and we strongly believe that technology will make our life better. We want to deliver the power of technology to as many people as we can and to change the world to be a better place.

We established Hennge more than 25 years ago, and since then, we set our philosophy as liberation of technology, which we actually have demonstrated in various areas. From the experience we gained, we think that Software as a service is the most fair and sophisticated approach to liberate technologies. This is one of the reasons why we're providing software as a service, and we want to promote the use of cloud services among our customers as well.

Total amount of technology that we provide to the customers and total amount of liberated technology are the measure to prove our progress on our philosophy, and this is expressed as LTV, LTV or lifetime value as a total value arising from the current contracts with the customers. Our growth strategy is to maximize this LTV, maximizing LTV that is by seeking to maximize the total gross profit earned over the future. We would like to build a solid business model that can stably increase profits even if the investments for further business growth are increased.

Currently, our average contract period and gross profit margin is already in a high number. Therefore, in order to maximize LTV, we think that it is essential to maximize ARR. In order to make this happen, we will actively engage in activities with expected high return on investment and aim to accumulate the ARR as much as possible. ARR can be broken into 3 factors: large and small and ARPU, which represents the number of contracted companies, average number of users per contracted company and average revenue per user, respectively.

The progress of 3 KPIs for HENNGE One is as shown in the slide, including our main service, HENNGE One, our group mainly operates a subscription model business. Barring any cancellations, the contracts secured this year will continue to generate sales and become the foundational sales from next year onwards. You can see HENNGE One's ARR is steadily and stably increasing year-on-year. From FY 2021 to FY 2023 in order to create an accelerated upward trend in ARR growth, we strengthened the organization for acquiring new customers and continue to increase the value that we can provide to our customers.

Furthermore, we firmly deliver the value to our customers by encouraging their understanding. Through these activities, we have increased the number of contracted companies and ARPU. By continuing this cycle, we would like to accelerate ARR growth over the medium term.

Finally, I would like to give my impression for this quarter. As can be seen from the growth in the number of contracted companies over the past few quarters, we are making steady progress in acquiring new customers, and we feel that the market is actually expanding. As a result of the increase in personnel up until the previous fiscal year, sales members are now able to expand their activities to various regions.

Marketing activities have also been energetic, which enables events and exhibits to be held once in a few days. Operating income is progressing on a fast pace, but we plan to continue to carry out activities for future growth. We expect that the operating income will be in line with the full year forecast.

HENNGE One has been enhancing its value by continuing to add powerful new features and services. We are also continuing to take on new initiatives such as File DLP, which is currently under development, and sales of kickflow, which started in October 2023. In order to maximize the total amount of technology that we deliver to our customers, we will continue not only to enhance HENNGE One's value, but also adding new products, features and services that is essential in the field of customer, software-as-a-service utilization.

Additionally, through promoting the use of HENNGE One, we will strongly support customers' productivity improvement led by software-as-a-service utilization. By proceeding these steps, we will achieve midterm ARR growth in the mid-20% average growth rate. Our aim is to achieve and exceed JPY 10 billion for HENNGE One's ARR.

We would like to establish a sustainable growth model by actively implementing the business cycle to increase the acknowledgment of our brand and increasing the number of potential customers. And at the same time, we will also keep strengthening our sales force and the relationships with resellers, developing and releasing new features and creating additional values of HENNGE One.

This concludes our explanation of the first quarter of fiscal year 2024. Thank you for taking your time to watch our video.