Trend Micro Inc

TSE:4704

Earnings Call Transcript 2019-Q2

[Mahendra Negi, executive]

Thank you very much. My name is Negi. This is the actual results of the second quarter. And you can see the net sales have gone up. Operating income has also gone up. But if you go down, we can see the pre-GAAP, up 2%, and then it will be 4% up, excluding foreign exchange impact. And so you may be wondering about this. But if we look at the year-end results it may be down, but for the second half, we believe that we can recover and be able to achieve our annual plans. Here, these are the revenues so far. And then we have the dollar-denominated numbers. And then by region, our net sales are shown like the previous quarter. What stands out is the decrease in North America, minus 12%. But in the other regions, we are seeing growth and for Europe, APAC, Middle East and Africa, we continue to have double-digit growth. And especially in Middle East, we are seeing increase by a considerable amount in net sales. And there is an appreciation of the yen. But even without the foreign exchange rate impact, we can see the growth rates. But it continues to be minus 13% for North America.

Here, we're looking at the constant currency revenue growth. Last year, the growth rates were quite high. As we mentioned, we anticipate that it will increase because we're comparing this on a year-over-year basis, and we mentioned this in the first quarter results, but compared to the previous year, network security and TippingPoint last year had big deals which, relatively speaking, we do not have this year. So on a year-over-year basis, we are impacted and there is a negative result. But then from the next quarter, that impact will no longer be seen. So in the third and fourth quarters, especially in the third quarter, we are looking forward to a recovery here.

And this is sales by segment. What stands out is the increase in Japan by 7%. This is for the mobile handset sales, there is increase. Meanwhile, what stands out is the minus 14% in North America. As already mentioned, the major factors here is in regard to the decrease in network security TippingPoint sales. And this year, we do not have big deals like last year. So that in the second quarter, we were facing a tough situation. Otherwise, we have been seeing good results. And in Europe, the growth rate is lower than the first quarter growth rate. But there has been some delay in realizing deals. And so in the next quarter, we believe that the growth rate should go up again. And this is for enterprise sales. Here's the analysis. And on the left-hand side, we are focusing our efforts in Hybrid infrastructure, and it's a 3% increase with no foreign exchange impact reflected. And for cloud security, we are seeing double-digit growth. But for TippingPoint, we are seeing a decrease in revenues by over 20%, so that it is only a plus 3% here, but we believe that recovery will be possible in the second half. As for user protection, this is quite a mature market. And so therefore, it's single-digit growth that was anticipated. It's not so different from our forecasts. But in our following presentation, this will be touched upon.

And if we look at sales by region, well there is nothing to comment in special here. As for pre-GAAP, the appreciation of the yen has impacted things. And as mentioned in Europe, there has been some delay in realizing deals, but we are looking forward to a recovery in the following quarter. In North America, we have the network security, TippingPoint sales decrease that has impacted things. And we have seen unexpected growth in the consumer sales in Japan, especially in the handset shop sales, we have seen growth here in Japan.

Next, North America. We've mentioned this in the previous quarter as well, but we have the same factors at play currently. As already explained, there was the large TippingPoint deals last year. And we may have been overly optimistic here so that compared to the previous year, we were in a tough situation for the first half of this fiscal year. But in the second half, we anticipate that there will be a recovery. And as for consumer business, we continue to see a decline and anticipate that this will continue in North America. As for what steps will be taken for the second half, the outlook focuses on the following points. This is not just for North America, but a major strategic focus will be discussed by Eva in the following presentation. But rather than focusing on point products, we'll be looking at software as a service or MDR and XDR. And this will be explained in more detail by Eva later on. But we'll be focusing on this type of business. And cloud-related security and comprehensive deals are what we are capable of implementing. And so therefore, we are looking forward to increasing our revenues in that area. And as a result of that, as already mentioned, starting from the second quarter, on a pre-GAAP basis, we are looking forward to a 20% increase. And we intend to have a positive result in North America starting from the next quarter. And this is deferred revenue and there is nothing to comment here. I will skip this.

And in costs, previously the salaries were focused upon. But now this is flat. We have not hired that many people this year. And if our stock prices go down then salaries may go down because there are salaries that are linked to stock prices. So if stock prices go down, then this number goes down slightly. As for selling and marketing, we're seeing an increase because once a year, for our customers worldwide, we have a major event and there are expenses that are realized in the first -- in the second quarter. And there was a major internal event which was not held this year and we see these fluctuations that reflect whether there are big events held or not. And in pre-GAAP profits, we're seeing a slight -- improvement.

As for cash flow, it's minus 17%, and this is because the taxation rates have increased, and there's a time gap and there are taxes that increased after a 1-year period. As for the accounts receivable and accounts payable, this has increased, but this is a matter of working capital. And as time passes, this will improve so there's nothing of note to comment here.

Moving on H1 headcount, there was a decrease in the previous quarter. So in total, this is basically flat. I have nothing to comment on this slide. And nothing about the balance sheet.

In terms of highlight. We have implemented cost control. We have not really stopped people from spending money, but we are trying to spend money according to the revenue. Over the last year, we have made a lot of initial investments. And in order to generate benefit from those investments, we are controlling the costs this year. And the second point of highlight is that for consumer business in Japan, sales at mobile channels is very strong. And Asia and the Middle East, revenue is also growing. These are the lowlights for the second quarter, same as the previous quarter. Negative growth in North America and I have already explained the negative growth earlier. Also in Europe, in terms of growth, pre-GAAP growth in Europe did decelerate in the second quarter, but we believe that it will recover in the current quarter. So that was all about the second quarter.

And we also have some slides for the half year. Outlook is the same for the half year. You may wonder whether we're doing okay, but in terms of sales for the quarter, we believe that we will see improvement in this current ongoing quarter. We cannot really predict what will happen with exchange rate. Our assumption is JPY 110 to a dollar. So if it's JPY 107 or JPY 105, we will see some impact. But putting that impact aside, we believe that we can achieve this plan. That's all for me. Thank you very much.

[Eva Chen, executive]

Good afternoon, ladies and gentlemen. This time, I'm going to talk about a special strategy, we call it stand tall on the cloud. Trend Micro has been talking about cloud for 10 years. We're talking about securing customers' journey to the cloud. But standing tall on the cloud is a very different business model. It's not just technology. For the past 10 years, if we look at the IT industry, there's a lot of new technology; big data analysis, cloud technology, AI, automation, all these are new technology. But today, we are seeing more and more of this technology, really, we call it lending on to the customer benefit, which is -- integrating all these technologies will enable customers to make quicker decisions, more agile. They can depend on the data and quickly react to make the decision. So eventually -- Forbes Magazine says it very well, eventually, every company is going to be a software company, is run by the software because it is the software that is doing all this analysis and providing the decision-making base.

So in this type of environment, what is the difference than before when we say cloud only? Before, when we are talking about cloud, mostly, we were just talking about you develop some software and then you put it on the cloud. In between, there is a big war, the development and the cloud operation are separate, 2 department. And therefore, it's just still slower even though you can say your server is running on the cloud. The new model is called DevOp model, which is really integrated, not only the hardware is in the cloud, the software is in the cloud and can quickly react to whatever data have been received and make the decision. So it look like this model. That's what they call DevOps model. This DevOp model, what is the benefit about this DevOp model? The benefit of this is first, you quickly react to customers' problem. You understand customers' problem, I will use Trend Micro's example to explain all these 3 advantage.

For instance, Trend Micro has a product called Virus Buster corporate edition, biggest endpoint product. There was one bug that for 10 years, me and my engineers, we cannot solve that problem. It was a database crash problem but because it's in the customer environment, we just never know what caused the database crash, which the customer will just reset it and it's come back. But after we move that to the cloud, and we -- Trend Micro, we ourselves operate the OfficeScan, we call it OfficeScan SaaS model, within 2 months we understand what was the log that causing this cash. And therefore, we were able to fix that problem that 10 years, we cannot solve. So it provide -- SaaS model can provide better quality to customer, better service and faster response. The second benefit is that it's easier to adopt new technology.

For instance, we've been trying to collect more log from the endpoint side, we know there is a lot of more valuable information. But the database inside the on-premise version just cannot handle that much, and we cannot go to a customer and say, please, can you triple your server capacity to hold more log. It's impossible. But once we go to the SaaS version then it's all up to us, we can easily change the database, we change that to data lake, to let it search, not bounding to SQL database anymore. Much faster adoption of new technology, make the product much more powerful. The third one is that if you have several different products, then it's much easier now to break the data silo, each product will have different database. But now because of this SaaS model, you can link all this data in the back end, and therefore, much easier to do correlation.

So these are the 3 big benefits of a SaaS product. And that is why today, I am so excited to present this chart. This chart is just this half year. This chart is the on-premise product, Trend Micro customers when they deploy on-premise and on SaaS. Actually, although we did not say it, but the depth of the model, Trend Micro has been working on that for several years and until this quarter, we proudly say that line, the yellow line exceed the on-premise model. I know you probably say, hey, why -- that yellow line, why isn't that line coincidence with your revenue growth, right? Actually, that was the part that I really want you to understand. The SaaS model, the initial order could be smaller. But the lifetime value of that customer grow much longer and faster. When it grows, you get more customer because SaaS model is subscription. So the recognized revenue is smaller. The on-premise one, we recognize a big chunk of the revenue like TippingPoint, right?

So if we lose one big deal then we experience this Y-o-Y revenue decline type of things. But SaaS model, this model, if we continue to grow, then our customer value will grow much steady and much faster. So based on this -- I'd like to talk about our strategy based on this type of new model. This new model means 2 things for our product for cybersecurity. One is for the DevOp. For the DevOps, a lot of our customers, they are actually a software company like Nike, like Disney, they operate their company on their software. So they make decision, their most important thing is their application. So there is a new group of people that need security that is called DevOps. That's the new buyer. When they develop their company's application, they need to embed the security into their application. That's the DevOp security market.

The second one is, Trend Micro will be able to utilize the DevOp or SaaS model so that we can gain all the benefit that I just talked about, those 3 big benefits, and provide our customer faster, better, more stronger cybersecurity. And that, again, is plan. On the DevOp model, as you can see, the new challenge of cybersecurity is that you cannot wait until your application is deployed, then at -- on the security, you need to embed the API or the SDK, the security service inside your application. So Trend Micro is the Deep Security, which is our special product in cloud security. Before we were doing the server protection, but now we already shift left, we call it shift left, into the earlier cycle. We have Smart Check. Before they load the product onto the container, already our security is inside their code, and therefore, can provide the security for their code before loading onto the container. So this movement has been recognized by Gartner group. They were talking about the DevOps and they say -- for 2019, a survey Gartner group did, Trend Micro is the one security company that published most security service, which is needed by the DevOp people among all the security vendors, and these are widely used API by our DevOps customer. So important thing, new market, new buyer and Trend Micro is a leader in this new market.

So that was part of the reason that we acquire a lot of new customer, although you haven't seen it in the revenue yet, but we acquired a lot more new customer, DevOps customer in Deep Security, that's DevOps for DevOp. The next one is the SaaS-based application are growing much faster. We're seeing customer adoption of the SaaS-based application. For instance, I heard that Japan government just announced that their next version of the operating system need to be all SaaS, the SaaS goes fast first. So customer adoption of SaaS application is now much faster. That shows in our chart, in the previous chart I showed also. And Trend Micro's new capability called XDR, cross-platform, cross-generation, cross-different products. Security, detection and response that's XDR, is totally based on SaaS and have the best security that customer can get. Why? Because if you look at what customers' problem recently, there is new threat vector, it's very complicated, and the security operation centers' biggest problem is they receive millions of alert every day and they don't know which one to prioritize. Coupled with, they don't have enough security experts to deal with that. So it's a double wham problem for our customer.

Trend Micro XGen is to directly deal with this. If you look at this, everyday customer receive 1 million alerts from endpoint, 1 million alert from email, 2 million alert from network and they just deal with all these millions of alerts. They cannot correlate them. They don't know how to deal with so many alerts. But with the SaaS, with the XDR vision, what you can see is we can combine all this log in the back end. We don't re-burden or we don't ask any customer to upgrade all of their server, we correlate all of this data, we can see where the threat coming, how did it landed and where is the big impact. And therefore, those millions of alert can sum up to maybe 5 or 6 events only. We see these are the events that you need to deal with. That's how we say we can prioritize an actionable alert for customer. Not only that, even more exciting is not just the passion and response, we can even do what we call predicative. Predicative why? Just think about this, before we have this email, right? Email we brought a lot of this phishing email. This email, nobody look at that. We just block it. So nobody look at that.

But actually, with our analysis in the back end, I can say, hey, Omikawa-san is the one that received most of spurious e-mail. So it's a very risky user. Why is that risky? Because he is very popular in social media. His e-mail is out there. So it's most likely more -- so risky users. Then we analyze in the cloud what was the URL or the attachment was embedded to the email that's sent to Omikawa-san, and we can find usually who is targeting, which attack group is targeting because we can see on the back end.

Even though they haven't cracked down, they haven't tricked Omikawa-san to click, we already know his risk here and who is attacking. Then we can associate which server that Omikawa-san most frequently assess and then which server has the highest vulnerability. And therefore, we can easily predict what is likely, most likely attack path from the hacker. By doing that, we will be able to say this is the path. Among so many servers that need to be patched and so many vulnerability that need to be patched, I know this hacker group like to use this vulnerability and I know which server that Omikawa-san is most likely to assess, and therefore I can choose which servers that I need to patch.

So it's very actionable. I can educate Omikawa-san or ask him to change his e-mail address or change his password, and I can patch the specific server with the specific vulnerability, much more actionable for customer. That's what we say. This is the power when we're using the SaaS version, the cloud version, the XDR for our customer.

Trend Micro is the only cybersecurity company in the whole world that have both, e-mail, network, endpoint, IoT, server, server in the cloud, server in the data center, all of them been covered. We can collect all these data back to the back end, and therefore Trend Micro can apply our threat expertise and help our customer to prioritize and provide them with actionable to prevent high risk. As you know, recently, it's not just compliance that is getting -- people, if they got the data breach, they get big fine. So today, SOC is not just responsible for compliance, they're really responsible for threat defense. And therefore, cybersecurity, prioritizing the threats and defend against these threats is becoming Security Operation Centers' top priority.

So I will say all this fast response will enable us to use AI and DevOp process to provide security analytics for our customer. And those new technology enable us to go beyond endpoint and correlate all those data and provide our customer with complete visibility. That's what they need. All this DevOp model, I want to say, I think it is a great movement in the whole IT industry or maybe, I will say, the human beings' industry because it benefits all 3 parties. For customer or in the cloud for DevOp, it will enable them to deliver their applications safer and faster. For user of DevOp, Trend Micro will be able to deliver to our customer, better security and faster in updating and deploy the new technology.

For our employee or our customers' employees, they were able to use the newest technology, and the innovation will come out much faster. Like security expertise are very few, and you need to give them incentives. And their incentive is not money, it's new technology. When they are very passionate they can use the new technology, they feel incentivized and high morale. So I already see that in Trend Micro. Our engineers are so, so happy. They feel like it is the key. They broke the lock, and they are now free to innovate. So it's great incentive for the security expertise to provide better technology.

And finally, to investors. I would say, for the first one, for the DevOp, that's a new hot market that Trend Micro is growing in that new hot market, the DevOp security market. And the second one, when we switch to SaaS model, you will see our revenue growth is much more smooth and sturdy. And the customer total value, lifetime value, is much higher than before.

So again, I'd like to come back to this chart. Even though right now, this chart shows the customer gross count, our SaaS customer gross count this quarter exceed our on-premise customer count. And I would say, that's the line that our revenue will be going in the future. Thank you.

[Akihiko Omikawa, executive]

I would like to provide some explanation. For FY '19, we have the enterprise business strategy for Japanese market, which was shared with you in spring. And this is just a recap. And I would like to update you on each one of these items later on. Based on business process, we want to provide security solution that crosses various organizations of intelligence and should be fully utilized. So that development support, development service, all of these different organizations will be supported. Very large enterprise customers, we are involved in their businesses, and we would like to continue to do business as a comprehensive solution vendor by leveraging the intelligence.

And the second point I want to highlight is SOC managed services. Partners who are providing the services should be supported by Trend Micro. And as Eva mentioned before, we have MDR, XDR. These types of intelligence will support the efforts of our partners. And comprehensive services will be delivered to each end customer, and we will continue to improve this. And the third point is IoT. Smart home, smart car, smart factory, each of them are progressing quite nicely. I would like to talk about this later. For consumer market, we have global and domestic home network security. We promised that we will accelerate our efforts, and I will come back to this later on.

So let's start with our domestic situation. Second quarter enterprise business. Hybrid infrastructure protection, HIP. We have Deep Security on the slide, and this is showing strong growth. And the security growth can -- is seen across the board, including a small business area. Based on the SaaS model that was mentioned before, Deep Security sales is growing strongly, 55% year-on-year and also 53% new sales. This is a very fast growth, and the revenue volume is growing. Number of customers is also expanding at the pace of 11%. We still have more room to grow, AWS and others. Everything can be equipped with this type of security but the attach rate is still low, and we are working together with various partners to go further into the AWS environment. We want to see high attach rate. So we believe that there is still a lot of room to grow. Deep Discovery sales has grown 24% year-on-year. Again, this is a very strong growth and the number of customers is growing as well.

Moving on to the User Protection segment. As was mentioned before, we have EDR, it's a new functionality for U.S. and global. This has been shipped for more than 6 months. Middle East, Asia and Europe, we'll see this new Apex One. Well, actually, the sales is very strong in those areas. Japan was very cautious, and finally, delivery started on the 31st of July. Apex One is now available, and we want to further accelerate this business. Virus Buster Corporate Edition was the old name. But we do have a big user base in the Japanese market. New EDR functionality can be provided to those users. And using XDR, we can provide various services. Managed security services is taken care of by some partners. We can work closely with those partners. And this should expand our business and partners' business. So our partners have been really waiting for Apex One, which has finally started. For Trend Micro Japan, we have actually the largest user base and therefore a very high expectation.

With regard to the SaaS model, we have been working with a [ Worry-Free ] Business Security Service for SMEs, and we are seeing a 37% growth. Every quarter, we are growing this business and CAS office for Office 365, there are some large deals that have been closed. We're seeing growth in this SaaS model. For Office 365, of course, security is necessary. And the question is can we bundle our product. And we do have expectation for growth for SaaS type CAS business.

For consumer, global and the Japanese market, Mr. Negi mentioned this earlier, but we see a very strong growth in the mobile channel. So users who access the internet via their smartphone can receive proper explanation and that leads to sales of our product. And the password manager and other mobile products are showing growth of 1.9-fold or 1.8-fold. And enterprise PC is strong, but consumer PC is not. And Trend Micro is the only company that is growing revenue in this consumer segment.

Now for global business, Home Network Security products for people's homes. Sales started in Japan, Australia, New Zealand and the United States. We are seeing steady growth of the revenue. Home Network Security is showing a growth of a 3.2-fold year-on-year, and this shows that we are developing new business. Now IoT, we have a list of announcements listed here. [ Stradas ], Trend Micro [ and CC ] system for factory use with redundancy.

This is where Trend Micro's sturdy security can be provided. So CC is providing support, and we are collaborating in this area. We made this announcement. Security for factories have already started. This is also a complete white space for Trend Micro. We are beginning to enter completely new user base. So IoT gateway equipped with our IoT security has started, and this is a Japan systemware and also center systems. Mitsubishi Electric produces industry PC. And as their standard wide list type security, they have decided to use our Safe Lock as a standard for default. So we are showing a lot of announcements in the industry area. This is still small, but we are beginning to see some income coming in from these businesses, and we believe that this business will continue to grow on a monthly basis.

And finally, all of these began in the second quarter. And thank you very much for waiting. On the 20th of June, we have finally established the TXOne Networks, Trend Micro and Moxa as one. IoT, ICS, focused security product company, TXOne networks finally established, and I am serving as the Chairman of this organization. And we're making a lot of efforts day and night to generate revenue from this business.

TXOne networks will provide a trial at [ Edge Guard ] [indiscernible] ICS and portable security. These are the different products. And these are not finalized, the product names, yet. But within the factory, in the production line, there are various equipments, which are controlled by programmable logic. And it's not really encrypted. It's really actually quite risky. So I was talking about firewall and IDS dedicated to factories. These are small boxes and they can operate anywhere between minus 40 to plus 70 degrees centigrade. So we have [ Edge Fire and Edge Guard ]. And especially for [ Edge Guard ], there was no security product in this area at all in the past. This is a completely new area for us to enter. And in May, we invited global end users and had an event and showed this product, and we are beginning to receive a lot of inquiries from around the world, including Japan. This is not officially commercialized yet, but some discussions are already ongoing.

[Mahendra Negi, executive]

One thing, getting back to [ ODC ]. This is a console for OT. And within the factory for configuration and vulnerability situation, it is possible to monitor through this. As there's OT and IT convergence, there may be unfamiliar elements of OT that need to be visualized. And with Deep Discovery and TippingPoint, we're covering the upper layers. But now we're going to have a linkage, and we'll be offering a comprehensive solution.

Here is the TippingPoint, Deep Discovery and the new products. And this shows the areas covered so that we are a company that can provide you total coverage, and we have the existing IT and OT areas and what products can be deployed and what the linkage is, is shown here. So we can talk about these matters comprehensively. And because it involves OT matters. It will be necessary to have different types of knowledge than just simply IT systems. So in the area of OT, we are looking at new sales channels that will be focused in this area, and we are developing this. So for IoT, we are making positive efforts with, for example, DOCOMO. Currently, it's 4G, but we are anticipating 5G and holding events of this kind with DOCOMO so that we can cover both 4G and 5G, and there will be several POCs carried out this year. Including the factory area, there are many events that we are promoting. And we have dedicated to the factory, what is referred to as ARC. This is an event which covers that area, where we make an appearance. And we have shown demonstrations that are quite easy to understand so that in the IoT and ICS areas, which are new to us, we have the new efforts made in the area of XDR, all of these will be tied together. So that in the new business areas, we will be able to add to the existing market areas that we cover. Already efforts have started in this area. With that, I would like to close off.

[Yusuke Hori, analyst]

My name is Hori of Mizuho Securities. There are 2 points that I'd like to ask about. Now in regard to North America, I'd like to summarize the situation. I understand that TippingPoint network security, there were no major deals. But for the customers' investments, how do you analyze what is happening among the customers? For example, when it comes to firewall players, if we look at their numbers, it seems like the market situation is stagnant. But looking at the billings or the top line, there is still strength in that market. So after a cycle of investments are made in the firewall area, then will there be more investments anticipated for IPS and so on? Is it a matter of priorities? Or is it necessary to cover the firewall first, otherwise, you will lose in cloud security? It has to be the previous situation, otherwise, your story would not be viable. So if you could tell us what is actually happening in your analysis of the situation, that will be appreciated.

[Eva Chen, executive]

First question by -- first of all, the TippingPoint point, when we acquire, we know this IPS market. And our current revenue from IPS is mainly from what we call the refresh cycle. Existing TippingPoint customer, for instance, there's 100 of them, and the big chunk of the money is every 5 years, this type of customer, they will refresh their appliances. And that's where our revenue, major revenue come from. So if this year, there's 100 that -- year 1, we have 20 customers come to the refresh cycle. Second year, there's 10 customers come to the refresh cycle, third year, there's 30 customers come to the refresh cycle, the last year, there's -- the total is still 100. But the fluctuation come from when those refresh deal come in.

So you will see this up and down of the y-o-y, but actually, in our understanding until now is not like we are losing customers. But the fact is true that we are not acquiring that much new customer like next-generation firewall. But from beginning, the reason that we acquired TippingPoint is because we foresee this type of IPS is going to be a very important part of the cloud security.

Because in cloud, when you move to the cloud and the cloud zone, for instance, each customer has their zone, actually, firewall will become part of the cloud providers, what they provide. But IPS, which is threat defense, the cloud provider such as Amazon and Azure, they will not provide.

So in this quarter -- actually, last quarter, we worked with AWS and using one of their new services and come up with TippingPoint in the cloud. That is where we're aiming our TippingPoint growth going to be. It's part of our DevOp security, part of our cloud security roadmap that we're seeing. So in general, what I want to say is that appliances type of TippingPoint business were not intended to have big growth or we just maintain the current customers. But our future growth for TippingPoint, we believe, is in the cloud IPs, which we just announced, and we are working with Azure also on this type of new cloud IPS offer.

[Yusuke Hori, analyst]

I see. Then for a tipping point, the refresh cycle is one aspect. And also the tipping point capacity is a point that I understand. But when it comes to the order of investments made by the customers, it doesn't mean that they'll necessarily just stick with firewalls, but they'll go more into the internal areas eventually. And you anticipate that there'll be opportunities. But for the duration, what kind of timing are you considering before the next-gen firewall is incorporated? How do you perceive this?

[Eva Chen, executive]

You mean the next-gen firewall replace pure IPS or...

[Yusuke Hori, analyst]

Or once the firewall investments are over and when they go more into internal countermeasures, when will the customers spend more money in the internal area? And what would be the transition time or duration that's required?

[Eva Chen, executive]

I really don't know what is the time, but I do believe that it will come. And that's why you see our investment in TXOne. Actually, I think the biggest growth on the internal network, what they are really facing the biggest security problem was the operating technology department. As previously, there are several cases in the first half of the year, like PMIC, the biggest chips maker, their factory was attacked by ransomware. And therefore, they have to stop operation. Even the iPhone shipment was affected because of that. So that type of factory security. There's another case, which is Hydro, the biggest aluminum producing factory in the whole world, and they got the ransomware. Their whole operation switched back to manual processing of everything. It affect even the worse aluminum price. It goes up because not enough producing of aluminum. So what we can see is this type of internal network firewall or IPS is going to grow first in this type of factory mission-critical segment that previously don't have security.

That's why we invest in the TXOne. And this type of security is different than traditional IT security. Just for instance, while our TXOne IPS box is such a small box, we learned that in OT environment, the test is just as fast not like the IT department side. And even the OT department, they have high requirement for temperature resistance and also the vibration. In IT, we never thought what is vibration have to do with my security product? But in OT department, that's going to be affected.

So our investment in TXOne is mainly on that, which we believe will catch the first wave of when customers starting to focus on their smart factory, smart agriculture or even when 5G come out, all those critical infrastructure out in the field will need this type of security.

[Unknown Analyst]

Mr. Omikawa, if you could comment about the Japanese enterprise situation there, how Japanese enterprises are behaving in terms of investments in the next year in firewall if you have any thoughts on this.

[Akihiko Omikawa, executive]

The purchase cycle will depend on the timing of the initial procurement. But when it comes to TippingPoint and the Japanese market, in Japan, there had not been too many existing users. Consequently, for Trend Micro here in Japan, as far as tipping point is concerned, there are still inquiries coming in and the support has faced an end of cycle from IBM. So there's many inquiries in regard to replacement. And that's not just restricted to Japan, but also globally, depending on the region. There's the Proventia support, which is facing end-of-life by IBM, and now in Japan as well as outside of Japan, there are several inquiries on this. As far as Japan is concerned, for infrastructure, infrastructure companies or critical infrastructure companies and OT areas from 2 years ago. The combination of TippingPoint and Deep Discovery is an area where we are using to enter the production and manufacturing industries.

And we have TXOne. With TXOne, we want to make efforts to link to the upper layers as well. So as far as Japan is concerned, we believe that there is still room for growth as far as TippingPoint is concerned.

[Unknown Analyst]

Second question about cost control. In second quarter and also the full year plan, profit plan, the progress is a bit slow. But do you want to make a recovery? Last year, in the fourth quarter, you did AI contest. And I know that you had a lot of expense. But that was an ad hoc event. So this year, you will not have to pay for that event?

[Eva Chen, executive]

Yes. Last year, it was an ad hoc event. So this year, we don't have a plan to hold this event. But as we mentioned last year, if something happens or if we do something, we have to explain.

[Unknown Analyst]

Excluding all the ad hoc events, what we want to communicate today is the following. Last year, we received many questions from analysts. And looking at those questions, it seems that expense is growing faster than the revenue. So is the company not controlling this? Or are there any competitive factors in the market reducing the profitability?

[Mahendra Negi, executive]

Well, we did have to make some investments in advance and for us, it's not something that we discovered yesterday. We are now able to share this information, but we have already made some investment into this technology. And going forward, we have to improve the productivity to some extent. As far as events are concerned, Eva did not really talk about this today, but DevOps concept, we want to make sure that this concept will take root within our organization. So we have to remove the silos and the walls and improve internal communication. And therefore, we will require to implement some internal events, but it's not as big as the AI contest we did last year. Thank you.