Hennge KK

TSE:4475

Earnings Call Transcript 2024-Q2

[小椋 一宏, executive]

Hi. I am 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 second quarter of fiscal year 2024 and the 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 the financial results for the second quarter of FY 2024.

This is a summary of our consolidated financial results. The result of the second quarter is progressing well against the full year forecast, which was disclosed on November 10, 2023. Our quarterly trends for consolidated net sales is as 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 is as shown in the slide. Sales for HENNGE One business saw steady progress year-on-year. Our quarterly trends for gross profit and gross profit margin are shown in the slide.

Year-on-year, fluctuation for gross profit and gross profit margin are 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 remains high. Our year-on-year fluctuation of operating expenses by niche is as shown in the slide.

Cost of sales increased mainly due to the increased infrastructure costs for HENNGE One as a result of exchange rate fluctuations and security enhancement and increase our 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 due to differences in the contents and approaches that have been applied despite continued active efforts.

For the other SG&A, it increased due to active recruitment activities, 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 increased due to the steady progress in recruiting and the recognition of various allowances as expenses for the first half of fiscal year.

Advertising expenses increased due to active efforts such as exhibiting a Japan IT Week Osaka and holding various events. For the other SG&A, it increased due to active recruitment activities and additional internal system usage fees to accommodate increased employees. This chart shows quarterly trends in the net sales and operating expenses.

The number of employees and its breakdown by function as of the end of the second quarter of FY 2024 is as shown in the pie chart.

The transition in the number of employees is as shown in the bar chart. We had a net increase of 10 in this quarter compared to the end of the previous fiscal year.

Cash flows status is as shown in the slide. Operating cash flow decreased as there was an upfront payment related to our cloud infrastructure for HENNGE One, which is consistent to the previous fiscal year. The rest of the categories are shown in the slide.

Now I will explain our business activities during this quarter. This is an overview of our business highlights. Like as in the last quarter, we carried out various advertising activities in this quarter such as exhibiting our Japan IT Week Osaka. Although the target, methods, durations and scale of events vary, we had approximately 40 events during this quarter, which we feel that the amount of activity is kept at high level. We will keep carrying 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 side 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 module 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 20 years.

This slide shows the quarterly trends in the number of contracted companies and users. We have steadily acquired contracts with relatively small to midsized companies as we continue to strengthen relationships with resellers. As a result, the number of contracted companies increased steadily.

On the other hand, the number of medium-sized companies acquired were relatively higher than small-sized companies. Therefore, the growth of contracted users is settled with the numbers shown in the slide.

The quarterly trends in ARR and ARPU are shown in the slide. Although there was almost no impact from the prime migration for existing customers, which have been implemented up to the previous fiscal year, ARPU increased as a result of steady progress in acquiring new customers. As a result of having a steady progress in the number of contracted companies and ARPU, ARR for this quarter has increased.

Next, turning to our full year outlook for FY 2024. This slide shows our policy for FY 2024, which I explained in the previous earnings call. Our business is steadily growing in this quarter. However, there are some points which are different from the situation, which we anticipated in the policy of FY 2024. Let me explain specifics of the situation. HENNGE One business is steadily growing in this quarter. Currently, in addition to activities in acquiring new customers, we are actively communicating with customers in preparation for the renewal of license lineups from April 2024. We will continue to promote activities to ensure that our customers understand the value of the services and have a smooth transition.

As for the marketing, we will continue to invest aggressively in the marketing activities to accelerate midterm growth of the ARR. As a result, we consider the advertising expenses to settle in line with our forecast.

As for the personnel plan, while we aim to increase more than 50 headcounts in net for this fiscal year, we had a net increase of 10 up to this quarter and the progress has been through. The reason behind is that, in addition to the severe competitive environment for recruitment in the recent years, we are also thinking about the quality of candidates in order to build an organization, which enable us to create higher value.

In light of these circumstances, we currently anticipate that the net increase of headcount will be similar to that of FY 2023. In order to achieve a continuous growth, it is essential to say we stay with securing talented partner who can create a high value.

At this point, we are not progressing as expected in terms of the number of employees. However, we are working to increase the members with certain quality rather than just chasing numbers. We would like to further strengthen and carry out activities that contribute to enhance our talent acquisition capability such as strengthening our recruitment branding.

As I explained, if we look at the progress of the business, there are differences in the situation on what we have anticipated for. However, we will work on the activities, which will contribute to the future growth for the rest of fiscal year.

As explained in the previous slide, expenses such as personnel expenses may go below the forecast as the number of net increase in the headcount for this fiscal year is unlikely to reach the plan. However, building a solid organization through recruitment is crucial mean for our future growth.

We would like to make aggressive investments such as to further strengthen our recruitment branding throughout the last half of this fiscal year. Therefore, there is no change from the forecast, which was disclosed on November 10, 2023.

This chart show the transition of our sales by business over the last 3 years and the progress of the first half of FY 2024 against the forecast. Results for the first half is overall on track.

This chard shows the transition of advertising expenses and operating expenses, excluding advertising expenses over the last few years and the progress of the first half of FY 2024 against the forecast. We consider that building and strengthening an organization that enables to create a higher value is a key to further scale of our business. Therefore, we are currently taking various actions such as preparations for 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 reliability is another key for our business. In order to make this happen, we are investing in, such as for enhancement of HENNGE One security.

In addition to above activities, we will be continuing to invest for further growth such as to the measures that contribute to strengthen recruitment branding in order to enhance our talent acquisition capability, which is an urgent issue to be tackled.

[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 is 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 n, small n 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 KPS 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 steadily and stably increasing year-on-year.

In order to achieve and maintain high ARR growth, we consider that it is essential to strengthen the teams for new customer acquisition 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.

We believe that it is important to increase the number of contracted companies and ARPU through these activities. By continuing this cycle, we would like to achieve ARR growth over the medium term.

Finally, I would like to give my impression for this quarter. As it 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 able to expand their activities to various regions continuing from the previous quarter.

The amount of marketing activity is also kept at a high number. In addition, in April 2024, we announced the new products and reorganization of HENNGE One's additions, and we are working to provide even higher added value to our customers, along with the renewal of license lineups.

On the other hand, recruitment has not progressed as expected, and we feel the severity of the recruitment market and the necessity of strengthening recruitment branding.

To achieve a sequential growth, it is essential to stably secure talented personnel who can contribute to the creation of high value. We will continue to carry out activities towards our future growth.

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 being prepared for release within this fiscal year 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 add 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 continuously increase the acknowledgment of our brand, increase the number of potential customers who we can reach out to, enhance our sales force and relationships with resellers and develop and release new products.

By having this business cycle continuously, we would like to establish a sustainable growth model, which keeps creating an additional value of HENNGE One.

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