Hennge KK

TSE:4475

Earnings Call Analysis

HENNGE Achieves Significant ARPU and ARR Growth

In the third quarter of FY 2024, HENNGE saw a significant increase in ARPU and ARR due to a price revision. The company's consolidated net sales and gross profit margins also grew, despite higher infrastructure and R&D costs. HENNGE is on track with its annual forecast but faces recruiting challenges. The firm aims to invest JPY 100 million in recruitment advertising. For FY 2025, HENNGE aims to exceed JPY 10 billion in ARR, maintaining a mid-20% growth rate by continuously enhancing product value and expanding customer contracts.

Strong Revenue Growth Amid Operational Challenges

In the third quarter of fiscal year 2024, Hennge has reported strong financial results, particularly in the HENNGE One business segment which relies on recurring revenue. The quarter saw net sales align closely with the company’s full-year forecast, supported by a successful price revision initiated in April. Impressively, the average revenue per user (ARPU) increased significantly during this period, reflecting the positive impacts of these pricing changes. Despite some pressures from increased infrastructure costs, including those due to exchange rate fluctuations and a larger dedicated R&D team, gross profit margins have remained robust, leading to sustained financial health.

Market Adaptation and Product Evolution

Hennge is proactively adapting to market demands by rebranding HENNGE One to enhance its value proposition. Noteworthy strategic introductions include the HENNGE File Data Loss Prevention (DLP), a service designed to safeguard against data leaks during file sharing. Additionally, to meet evolving cybersecurity needs, Hennge combined its existing services into new categories that bolster its market position. These developments are crucial as they help to solidify customer trust amidst an increasingly competitive landscape.

Churn Rates and Customer Retention Focus

While the company experienced a slight uptick in churn rates due to the aforementioned price revisions and cancellations from some larger clients, the overall churn remains low and is considered manageable. Hennge aims to maintain a high theoretical average contract period exceeding 15 years. This customer loyalty is vital; hence, the company is committed to improving client engagement and understanding through various initiatives aimed at enhancing service delivery.

Staffing Challenges and Recruitment Efforts

Hennge is facing challenges in recruitment, anticipating a net increase of only 25 staff, which is significantly below initial expectations. This is attributed to heightened competition for skilled talents and a lack of brand visibility within the recruitment market. Despite these short-term hurdles, Hennge management remains optimistic, stating that the impact on immediate business performance will be minimal. However, they acknowledge an urgent need to bolster talent acquisition capabilities to enable long-term growth.

Optimistic Outlook and Financial Forecasts

Looking ahead, Hennge projects that its annual recurring revenue (ARR) will experience sustained growth, targeting an increase to exceed JPY 10 billion by fiscal year 2025. The company anticipates maintaining an average growth rate in the mid-20% over the medium term. Additionally, the firm is likely to recognize extraordinary income of JPY 180 million this quarter, suggesting potential for overachievement against initial profit forecasts. Hennge plans targeted recruitment advertising investments amounting to JPY 100 million to help drive this growth and capture new opportunities.

Conclusion: Building a Foundation for Long-Term Success

In summary, Hennge’s third quarter results signal strong momentum in net sales and ARPU growth driven by strategic price revisions and product enhancements. While operational challenges such as increased churn and recruitment struggles pose risks, the overall outlook remains positive with clear pathways to sustained revenue growth through continuous innovation and market adaptation. Investors can be encouraged by both the current financial performance and the proactive measures being implemented to ensure future success.

Earnings Call Transcript 2024-Q3

[小椋 一宏, executive]

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 third quarter of fiscal year 2024. Then I will explain the progress of full year forecast, 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 third quarter of FY 2024. This is a summary of our consolidated financial results. The result of the third quarter is progressing well against the full year forecast, which was disclosed on November 10, 2023. Our quarterly trend for consolidated net sales is as shown in the slide.

Sales for HENNGE One business is composed of recurring revenue, and it is on an increasing trend quarter-on-quarter. Particularly in this quarter, it shows a significant progress as the price revision started in April. 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, fluctuations 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 increased number of R&D members, which lead 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 nature 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 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 from April 2023.

Advertising expenses remained almost flat year-on-year as a result of proactive efforts such as exhibiting a Japan IT Week in Osaka and Tokyo and holding HENNGE Unveiled. For the other SG&A, it increased mainly due to the expansion of the office floor. In addition, it increased due to additional internal system usage fees to accommodate increased employees and transportation expenses due to increased face-to-face activities.

The chart on the slide shows the quarter-on-quarter fluctuation of operating expenses. Personnel expenses increased as the recruiting progress for the quarter. Advertising expenses increased as a result of proactive efforts such as exhibiting Japan IT Week Spring and holding HENNGE Unveiled. For the other SG&A, it increased mainly due to the office floor expansion. 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 third 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 25 at the end of the quarter compared to the end of previous fiscal year.

Now I will explain our business activities during this quarter. This is an overview of our business highlights. In April 2024, we HENNGE Unveiled, where we announced HENNGE File DLP, a service to prevent data leaks from file sharing. We also announced rebranding of HENNGE One to meet the latest market demands. By combining HENNGE Tadrill, a training service for targeted e-mail attacks and HENNGE Cloud Protection, a cyberattack countermeasure service, we have newly established cybersecurity category.

Together with identity and DLP, we will provide services in 3 categories. We will continue to meet the latest market demands and focus further on our corporate philosophy liberation of technology. The rebranded HENNGE One was introduced at Japan IT Week, which is one of the largest IT events in Japan, held in Tokyo and HENNGE One Partner Meeting for sales partners held in Osaka. It has also been introduced of various events nationwide, creating opportunities for participants to understand the new value of HENNGE One. We feel that the amount of activity is kept at high level.

In addition, we expanded the office floor of the headquarter in Shibuya, Tokyo in June 2024. We will stimulate our internal communication more than ever and lead to the further growth.

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. In addition to the conventional reasons for cancellations, cancellations triggered by the price revision of license lineups also occurred during this quarter. There were also cancellations by relatively large companies, resulting in an increase in the churn rate.

However, the trend in churn rate is within the range of our expectation. It is continuously very low and the theoretical average contract period is more than 15 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 a result of strengthened relationships with reserves. However, the number of contracted companies has increased in a steady pace due to the impact of cancellations triggered by the price revision of license lineups, which includes the termination of lower price brands.

The growth of contracted users is headed with the numbers shown in the slide due to the impact of the cancellation by relatively large companies, the quarterly trends in ARR and ARPU as shown in the slide. ARPU increased significantly due to the price revision of license lineups effective from April 2024.

At the end of this quarter, based on the number of companies, approximately 30% of the customers subject to the price revision have renewed their contract with new price among those 30%, the number of relatively large companies is expected to be higher than other quarters, which led to an increase in ARPU. As a result, ARR increased significantly. We will continue to promote activities to help customers understand the value of HENNGE One.

[小椋 一宏, executive]

Next, turning to our full year outlook for FY 2024. This slide shows our policy for FY 2024. Let me explain an update from the previous quarter. As for Hanger One business, it progressed in line with our initial plan, including progress of ARR and the price revision of license lineups from April, marketing activities are progressing well, and we consider the advertising expenses to settle in line with our initial forecast.

On the other hand, as for the personnel plan, we anticipate that the net increase of headcounts will land far below from that of our initial plan. We consider that it will land at approximately 25. In this fiscal year, we have promoted recruitment with a view to building an organization, which enables us to create higher value. In spite of our policy, we are having difficulty acquiring such talents due to severe competition, low acknowledgment of our brand from the overall recruitment market and a lack of recruiting capabilities.

Given our business model, we believe that the impact of the current slumping recruiting to our short-term business performance will be minor. However, it is essential for our growth to continuously recruit the right talent in response to the changes in the company. We are strongly concerned that the current situation could lead to lose opportunities for the growth over the medium to long term. We will continue to strive to enhance our talent acquisition capability.

Additionally, as an immediate measure, we plan to carry out recruitment advertising during the fourth quarter of this fiscal year at approximately JPY 100 million, which is not included in the initial plan. As of the date of this announcement, there is a possibility that each profit, which was forecasted at the beginning of the fiscal year may overachieve.

In particular, there is a high possibility that the net profit will exceed expectations due to the recognition of extraordinary income of JPY 180 million in the current quarter. However, we will continue to explore investment opportunities which will contribute to the future growth. These include approximately JPY 100 million of investment in recruitment advertising, which is not included in the initial plan and aggressive investment is expected in the fourth quarter, which is currently underway.

For this reason, at this point, we do not expect that the increase in each profit fall under the criteria for timely disclosure related to the adjustment of the forecast. Therefore, we will not revise our forecast. We will monitor the situation and promptly disclose any revisions where necessary.

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. The total amount of technology that we provide to the customers and the total amount of liberated technology are the measures to prove our progress on our philosophy, and this is expressed as LTV.

LTV or lifetime value is the 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 are 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, ARPU, which represent a number of contracted companies, the average number of users per contracted company and the 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. HENNGE One has been enhancing its value consequently by adding powerful new features and services. At HENNGE Unveiled, held in April 2024, we have made announcement about rebranding of HENNGE One to meet the latest market demands. In July 2024, we integrated HENNGE File DLP and HENNGE Tadrill to HENNGE One and adding user provisioning feature to HENNGE Access Control.

HENNGE One is continuously evolving. 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 essentially 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 cloud 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 Japanese for HENNGE One's ARR by FY 2025.

Finally, let me recap for this quarter. HENNGE One's ARPU and ARR have increased significantly as a result of price revision for the license lineups with enhanced features. ARR is steadily approaching JPY 10 billion. We believe that the foundation for further growth is establishing as well. On the other hand, the slumping recruitment is a major challenge that will lead to lose opportunities over the medium to long term. We will continue to strive to enhance our talent acquisition capability.

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