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Trend Micro Inc
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This is Negi speaking. I hope that you see my screen properly. This is a summary of our fourth quarter. Net sales was up by 21% and total operating expenses increased by 33%. And operating income was down by 39%. And we have started applying the new accounting standards. So therefore, it is very difficult to have year-on-year comparisons. So after that adjustment, basically, this is minus 15% negative profit. So I would like to talk about the details later.
And at the bottom, at the constant exchange rate, it's 9% plus. And pre-GAAP basis, so same growth for net sales, but pre-GAAP operating income was the same number as the previous year. And net income, why is this minus 89%? Well, in '21 -- in FY '21, there were some extraordinary factors, including the gain on sales of stocks of the sales company in China, and there are some details, but also the valuation loss on foreign exchanges, as well as a venture company that we're investing into in overseas, there was again a loss on evaluation.
Looking at the sales by region. This is denominated in Yen and excluding the FX impact, we have seen positive growth in all the divisions. Europe and EMEA are continuing with double-digit growth. And this is the FX impact. As I have mentioned, excluding this 9% increase in profit. Now segment and division, if you look at both of these, this is a continuity in yen, consumer versus enterprise.
Consumer grew in all the 4 regions, and the enterprise also grew in all the regions as well as all the segments. As I mentioned before, new accounting standards have been applied. And the 100 million revenue is deferred. And this is why we have a negative impact of approximately JPY 2 billion negative impact on revenue. But in terms of sales, something is not accounted as net sales. And now it is accounted for, and that's reflected in the total costs. So a minus -- excluding that minus 13%, this is operating income down by 13%.
And by division, if we apply the same accounting standard, this is what it looks like. Now ForEx and accounting standard change, if you combine the 2, -- in the end, what we see is operating income is JPY 7.7 billion, minus 15%. Now yen is stronger again. So there was a bit of a surprise, and this is minus 1.5%. Subscription SaaS business continues to grow steadily. And you can see the number of active customers here. And then in terms of ARR, approximately JPY 700 million is -- there is no FX impact. And approximately JPY 700 million -- JPY 691 billion and 19 -- sorry, 29% growth.
This is a share by region. I will skip this slide and go to pre-GAAP before deferred revenue. And this is again in the end, excluding FX impact, we have seen growth in all of the 4 regions. And looking at Japan, as I've mentioned before, JPY 400 million worth of impact was generated by the new accounting standards, which means that our net sales is pushed up by this, but even if we exclude this impact, still in this fourth quarter, Japan performed pretty well. And on this slide, you can see the pre-GAAP situation without the FX impact and consumer 11% growth. This looks quite high, but this was actually impacted by the JPY 400 billion. So that should be about 7% impact, but still, our consumer business in Japan is strong. And enterprise is 9% and the total growth is 9%. And this is the balance called reserve revenue.
And deferred revenue by region, we'll skip this slide. And this may be of interest to you. Cost is increasing, let me explain the reasons, starting from the top. This is basically cost of goods. For example, hardware cost of goods, as well as the software assets and hardware cost of goods and the royalty payment are the big factors here. And especially in Asia and also in Japan, Cloud Edge and TippingPoint sales is growing, and this is impacted by that. And also, IoT Security company related expenses are posted here. And selling and marketing is also growing, expanding.
Revenue is trending quite strongly, which means that variable bonuses need to be paid, and that's included in selling and marketing. That is why the number is going up. And similarly, salary and benefit is also increasing, because company performance bonus is something that we have as a system, and that is included in this salary and benefit. And then outside services, this is a mobile market revenue in Japan. And this is the sales fee basically that we pay to this market. [Foreign Language] This is the cash flow situation.
As for the headcount here. There have been other tech companies that have been doing layoffs, but we have increased our headcount by 162. So we did not hire that greatly, and we have sought hiring to some extent. But if we enter 2023, when we consider the people hired so far, we have to consider productivity. And so therefore, we will continue recruiting this year in 2023, but the hiring pace will not be as high as in 2022. As for the extraordinary items, we have the exchange loss because of the changes in the exchange rate with the yen.
And also there's a IoT-dedicated security company, and there's financing that was involved. And for the evaluation, there was some adjustments of our holdings that was carried out. And -- we have also made 3 investments into startup companies, and there was a loss on the valuation of the companies. But those companies are still operating -- in order to -- according to the Japanese accounting standards, we have to look into what we can do with it. And so ultimately, we had -- for the reevaluation, we have been looking at their PL.
To summarize, I would like to talk about this quarter's highlights. And it is the highest ever quarterly revenues. Also on a pre-GAAP basis, then we have a recovery. And also in all the regions, subscription business continues to grow. As for the lowlight,because of the new accounting standards, the operating income went down by JPY 2.4 billion, and there was also the loss on valuation of investment securities. And also for the total of the 4 quarters, the annual results, we have this result for net sales. We have increased this -- and we have this final result in terms of profits down by 23%.
Now we would like to look at the shareholder return. And in our case, we are looking at the basic policy. Up until now, we had looked basically into the payout ratio, but there is also cash on hand that is increasing. And so ROE has gone down. And so therefore, for the company, it's necessary to consider what the minimum cash levels are. And so, for the company, it's necessary to look at the working capital necessary. And within the capital, there are future costs related to deferred revenue, which needs to be taken into consideration. And so therefore, future service costs, which have not yet been incurred needs to be calculated.
And also, as described here, there are downside scenarios or unexpected scenarios. Perhaps the major earthquake may occur in Japan or there may be some geopolitical events. And so we need to prepare for such events that may occur. And so those are the points taking into consideration for the minimum cash levels. And we have to have the appropriate cash level calculated. We have not completed this yet, but we would like to complete that calculation by the end of this year, and we'll be announcing what we consider to be the appropriate level of cash.
And then we will look at how to carry out shareholder returns. We haven't finished the calculation yet, but we get the feeling that perhaps the amount of cash we are holding on to is excessive. And so therefore, as mentioned, we have to look at shareholder returns. And we'll look at the net income attributable to owners of the parent company by 100%. And we will be looking at increasing treasury stock by carrying out share buybacks. Currently we haven't finished the calculations. We believe that there is excess of capital of about JPY 10 billion. And so therefore, we hope to carry out the JPY 25 billion of annual share buybacks. And we believe that this -- next time it will come up to -- we expect to return up to JPY 50 billion through share buybacks in the near future.
As for the cash dividends for fiscal 2022, we calculate the net income. And according to the calculation, it comes to JPY 151 per share. Of course, this is subject to approval by the ordinary general meetings of shareholders held in late March. As for the compensation for our shareholders and what changes have taken place. Up until now, we had focused on dividends. But from here onwards, we'll be focusing on buybacks.
And as mentioned in 2020, we had a treasury stock of JPY 25 billion and JPY 21 billion of dividends, and there was 154% of net income. So for the time being, it will exceed 100% as we move forward with this. As for the guidance for the full fiscal year, in Americas and Europe, we anticipate a high growth rate, and there's also the SaaS business. And because of that, cloud costs are going to increase. And so we believe that net sales will increase by 11%. Operating income will also increase by 11%. And in regard to why net income is minus 16%. This is because in 2022, [Foreign Language] there was the sales of shares of companies -- and we are looking at net sales increase by 9%.
That concludes my explanation. But with that, I would like to close off my explanation. Thank you very much.
Hello everyone, happy new year. I think a lot of people like me are very welcoming to this 2023 as the new start after 3 years of lockdown and after all these roller coaster change in 2022. I think at Trend, especially not only for that, we are very welcome to 2023 and like to conclude 2022, because we believe 2022 concludes our transformation, first steps of our transformation. Let me go back to why Trend Micro took this transformation and why it's so important? For Trend Micro, our growth has always been followed by 3 factors; first, infrastructure change; second, customer change; or third, threat landscape change. Whenever those 3 change, we need to change and then we can grow. For instance, the infrastructure change, such as virtualization and cloud throw us a ray of growth. The customer segment emerge such as the SMB customers emerge in 2006, brought us another ray of change. And then the threat landscape change, the Internet, e-mail virus or the ransomware, those are the change that brought Trend Micro a growth.
In the past 3 years, actually, all those 3 has changed. First, on the infrastructure side, because of the lockdown, our customer accelerated their digital infrastructure transformation. And on the customer side, we're seeing that customers are opening up the new budget, and that budget is invested in security operations center. Security operations center before have limited budget, but now they're expanding their budget. Especially before security operation center, mainly are focusing on policy enforcement, such as firewall or authentication, access control, these are the main policy enforcement and is where the soft budget spending on. But now we're seeing that budget moving more and more and growing on both sides on to threat defense, because we're seeing there's severe damage caused by external attacks such as ransomware or supply chain attack. That was causing a lot of changes. And that's why we're seeing this world require Trend Micro to transform not just modification, but transform the whole company into a platform company so that we can catch up to this great opportunity.
According to the IDC that over our SOC operations budget is going to go -- grow to JPY 26 billion, and the total cyber security will grow more, almost USD 50 billion. And for Trend Micro to attain this growing market, we need to transform ourselves to serve better for the SOC operation center and for the CISO meets their challenge. Both requires, their biggest challenge right now is first, the attack service is growing, no matter the digital transformation, the OT environment or the IoT or even the vehicle and the work from home, these are increasing the attack service.
The second is that cyber security becomes so crucial for any company that our -- excuse me, sorry, I cannot see my slide. And because of that, all the boardroom are placing their focus on the cyber security and the CISO need to provide the visibility and the complete report to the boardroom. But at the same time, their biggest challenge right now is, because before all these solutions, cyber security solutions are very final. And therefore, combining all these products together, they are having the earlier overload. They cannot feel with so many different alerts come from different cyber security solutions. So Trend Micro Solution must move into a platform-oriented over our risk management platform. That's why we need to transform.
The second challenge that we are seeing or the opportunity that we are seeing is cloud security. Before customers are just moving their workload on to the cloud and have another server workload there. But now -- they are moving to cloud native application. They develop all their new customer-facing application based on the cloud computing technology, which means that that new challenge will require cyber security to be integrated into their application development process rather than just add on to their workload security. And that's why Trend Micro also go for a platform approach for providing a data security platform for the cloud.
Finally, even the consumer, they have so many different applications. There's so many different devices and their main concern is not just their device security, but mainly their identity safety. No matter what application they use, no matter what device they use, they need to protect their own identity. And therefore, Trend Micro's consumer product also need to move on to a platform approach to provide the security of all the consumer customers. So we believe what Trend Micro transform into is a tech service risk management life cycle. And that requires us to build a platform, so that means customers can get on Trend Micro's platform, continue to grow, no matter it's new application, new devices or new application that they were developing. These are all the tech service risk management life cycle.
In 2022, we completed this whole risk management cyber security platform, we launched version 1 and got a lot of great feedback and our customer base are increasing. We started testing our, what was called, the [indiscernible], a cloud application, native cloud application security platform, and we see a lot of great customers feedback, including very big application developers such as Sony. So these are the excitement part that we feel that we concluded in 2022, we were able to not only provide threat defense, but over our risk management platform. That is the tech service risk management, and this is our zero trust architecture that provide no matter it's IT infrastructure platform operation or security operations or cloud operation customers.
So moving on to 2023. After we complete the first milestone for our transformation, we believe that next step for us is to make this platform even more efficient. And we can deliver to more customers in a cost-effective way. I think this -- for last year's Mahendra-san's report, you can see our pre-GAAP revenue is already growing, and our pre-GAAP -- on the pre-GAAP base, our profit margin is already growing back. But I'd like to take this chance to explain, I believe, why a lot of investors are worried about Trend Micro's profit margin is declining. I think our profit margin was declining in the previous 3 years. It's because, first, we were investing on the investment of this SaaS transformation, we need to convert our customers from on-prem platform on to the SaaS platform.
And obviously, SaaS operation is much more costly than the regional software licensing type of business model. So that was why when our SaaS sales grow than our profit margin again freezed. But in -- starting from 2022, we're already starting the project of reducing our cloud costs, especially when our customer number increased our per customer SaaS cost was reduced, and we will continue that effort to make sure that our cloud costs will be optimized.
Then the second important cost increase is about -- because we focus very much in developing and growing our enterprise customers. And obviously, for enterprise customer services, no matter the IT people or the technical support people or the sales force, it requires a higher skill set, and of course then these -- that higher compensation and high cost for that to grow this enterprise market.
But starting from 2023, we believe we have the way to make sure all this new hire enterprise people will be more efficient, especially after we have this pathway of selling, we can -- understanding better how we can get the opportunity that is ready in front of our customer, but in front of our salespeople. Also, we know how to prevent the customer problem happen even before customer buy that they have that problem. So they will reduce our support cost. So that's the second thing that we are doing for our cost optimization.
The third one, of course, we do like Mahendra shows that in the past 3 years, we did grow our headcount, they grow. And -- but not like the other tech company during these 3 years, they have very -- ramp-up grow very much and now they need to do the cutdown. Rather, we do have the growth, but it's about the same pace as before. It's just the same pace.
So in this year, we are not planning any big size or those layoffs like other tech companies did. But we do want to make sure that we have what we call the 0-based planning, budget planning process and mentality, because after 3 years, we believe the organization learn another way of operation like video conference, like some of the events or how we held the event or after the work from home, how most efficiently using the office building or reduce some of the office building need.
And also, we believe that actually there is new technology such as open AI or recently a lot of people are hearing the ChatGPT, that new technology will transform how we work and make our work more productive and providing more value to our customers. So we believe all of this 0, we call it 0-based planning process. We're planning for the future, how will we adopt for the future and not just go back to last year or go back to 3 years ago how we work, I believe that is the best way for Trend Micro to step into this new era of Trend Micro as a platform company. And that is my strategy for 2023. Thank you.
[Foreign Language] Please allow me to talk about the domestic business situation in Japan for the fourth quarter of FY 2022. My name is a [ Ai ]. First, this is our new corporate logo. Please hold on a second. Starting from January, we have changed our corporate logo and the Trend message is emphasized here, and we're going to reinvest cyber security. And so we have especially focused on Trend. And the vision is to make the world safe for exchanging digital information. But the environment has changed and it has become more complex. And so therefore, in regard to the cyber attack threats, we have seen an increase in threats. So we want to protect our customers solidly. Furthermore, it's necessary for us to realize our corporate vision. Therefore, in order to express that we have made a change in the corporate logo.
Now I'd like to talk about the situation within Japan. First of all, for our enterprise business, the business and market environment is shown here. IPA has shown the 10 major threats to information security. And number one is ransomware. We hear it every day about ransomware threats. And so there's the issue of ransomware security. There's also the weaknesses of supply chain, which are exploited maliciously. And their supply chain attacks so that the surrounding companies are impacted as well. Meanwhile, there is a lack of security talent, this has become more and more serious.
In regard to the systems that need to be protected, such as critical systems, this is increasing in number. And furthermore, more and more companies are taking advantage of cloud in a full-fledged basis. And so therefore, it's necessary to have security expertise, but there's a lack of talent capable of carrying this out. So it's necessary to see how we can adapt and provide support in this area. And so therefore, it is necessary to focus on this.
Next, in regard to business towards the individuals, there was malware attacks, but there's also net fraud and leakage of personal information and attacks against individuals and there's much concern that has increased about this. And in fact, incidents have increased in this area. We believe that that's the situation. And in regard to information leakage or net fraud, we see according to our research that it has been increasing over the past several years. And so therefore, it's necessary to respond to this and to support efforts in this area. And so therefore, we need to have the resources available and we believe that it is necessary to take steps here. With this kind of social background in mind, it's necessary to look at our business opportunities. We have the enterprise business, as well as the business towards individuals and the new business areas.
For the enterprise business, our CEO, Eva Chen has already talked about the cyber security platform. In regard to this concept, we believe that this is a very important thing to focus upon. And so therefore, I'd like to summarize the points. We need to look at the attack service risk management. We have to find places which are vulnerable to attacks. And we must do risk evaluation and risk assessment. It is important for security to do that. And also, it's necessary to look at IT infrastructure and look at security, as well as security for the security operations. And as the shift to the cloud is taking place, it is necessary to look at applications built on the cloud, and we have to think about security taking into consideration that situation. And we need to have an integration over a cyber security platform, and it's necessary to take advantage of our threat intelligence and also our intelligence about vulnerabilities to see where problems exist and how they should be fixed as quickly as possible. This will be very important in the future.
The second point is in regard to the area of new businesses. And we've been talking about this for some time, but we are now in the era of IoT. The market is expanding. And in IoT, in addition to the existing IT arena, there are more security needs in this area, and we have to look at OT and 5G and also the connected car. And in these 3 areas, there is going to be increased demand for security on a medium to long-term basis.
The third is for the individuals. As you know, we have virus buster, this is for PCs owned by individuals, and this is providing security against malware. This was the existing business that we've had. But as already mentioned, from PC devices we need to look at how to protect users. And so we have to make a shift in our thinking in regard to security. And we believe that this is beyond device security and we want to expand and grow our business in this area. And we have to have countermeasures against fraud, protect personal information and protect privacy, as well as realized home network security. By providing all of this, we believe that we can provide safety and security to our customers.
Next, I'd like to report on our business progress in the fourth quarter, starting with enterprise business. One item relates to the platform very strongly, XDR extended detection and response. Corporate adoption is accelerating, specifically deals, including NDR is -- with managed service is increasing. This is partly due to the lack of security personnels and the companies need to respond to the -- this reality and this is a type of service that requires insights and it is in great demand. So this actually grew 4.2x compared to the same quarter last year, and we expect it to continuously grow.
And secondly, cloud and sales is very strong, especially sales through AWS Marketplace is very strong, growing at 75% year-on-year. And thirdly, SaaS-based security, especially for SMBs, we are seeing continuous growth in the SMB segment. Currently more than 70% of the customers from the endpoint now use the SaaS model. This is how much the environment has changed, and we will continue to provide this to our customers. Now SaaS-type security means that the latest functionalities can be provided without delay, making operation from the customers' perspective, much easier.
And the fourth bullet point is OT security demand. This is also growing over time, and it grew approximately twice, more than 11% compared to the quarter from the previous year, especially centering around manufacturing customers. So we're getting a very good sense that this is growing. Number of deals is increasing. There are some challenges in promoting business. Competition in the endpoint market is getting harder. So this is the same as we reported in the last earnings call. But we believe that the situation, the approach of a customer is changing. Rather than protecting endpoint on a point-by-point basis, they want to speak about the countermeasures for cyber security as a whole. And this is why it connects nicely to XDR. We want to capture this growth and continue to deliver a strong message.
Moving on to the progress of new businesses. As I said, OT security is showing strong growth. Together with Ministry of Economic Trade and Industry, we conducted joint webinar for guidelines for cyber security measures in factory systems, version 1.0. Through this online seminar, we are trying to improve awareness in 5G security, we have a new subsidiary called CT1, and the subsidiary was established. And this provides cyber security for 5G and local 5G environment and post 5G high-speed communication standards. Currently, at Fujitsu Nasu plant, local 5G, drone and security are combined for demonstration.
Thirdly, this is the area of connected car security. There have been some exhibitions of automotive security, and we have exhibited at these exhibitions and we are getting good response in this year. In the connected car, importance of security should not be an add-on. There is a movement to embedded into a process. And we have also issued the automotive cyber security threat prediction report. This is something we're doing on a regular basis.
Some overseas topics. OT security, this is one of the new businesses. And there, we have TX1 networks, which is one of our affiliates. And the OT security exhibition center was opened in the head office. Here, we conduct demonstrations and we share best practices so that industry leaders and supply chain manufacturers can share insights and experience from a global perspective. There is another topic related to TX1 networks. As part of the section for the media on the latest security trends in the semiconductor industry was held. SEMI-E187, this is the new semiconductor manufacturing security guidelines, which was issued. And based on this, we have explained the specific content measures.
Moving on to the Consumer business, for the fourth quarter, as I stated before, beyond Device Security, voice-specific data security is another name and this grew by 52%. Again, under various virus malware contentious, from there we are moving towards protecting the information. And we are conducting the Internet fraud awareness promotion together with the metropolitan police, as well as prefectural police. We are regularly holding a joint awareness events. And also, we provide support and services for our customers, which we are enhancing. For example, [ Rakuraku ] support for smartphone users. And this is a support that is provided by chat. Number of users is increasing.
We are also conducting test marketing for security posture diagnosis, as well as advice. We interview the customers first, and then, we will look into to what extent the e-mail address of the customer is used or available on the Internet. And what kind of risks these customers would be exposed into the future and we are getting very good response. So we are hoping to increase the number of implementations of these services.
As for device security, we will continue -- we are seeing continued growth in the usage. For the full year, we had some challenges. PC demand increased during the pandemic. But after that, the sales of PC decelerated very quickly. And since we provide software-related businesses, there was some soleration on our part. But we will continue to increase the attach rate and also continue to increase the product value. In order to further promote the implementation, introduction of our products and services. And this is the confirmation that will be continuously worked on.
Moving on to the Consumer business overseas. Maybe I should talk about the third bullet point. The customers are continuously using our services, and we are seeing growth in the mobile-related application business. And depending on the region, there are some different characteristics. In the U.S., Mac Windows related utility is growing. And in Oceania, in both ingenious and online business, we're doing pretty well. And in Asia and Africa, it's unique to this region, but we are growing through collaboration with our telecom partners in the consumer segment.
Last but not least, I would like to talk about the cyber security institute. And first of all, I would want to talk about Transparency Center. 138 inquiries were received by this center in '22. Most of them were related to procurement and security checklist, as well as development process. Cloud is being used, environment is changing, and there are many inquiries coming in about security, mostly from government, as well as critical infrastructure operators. So there is also -- this is properly in response to the new regulation.
And the next one is in Threat Intelligence Center, the second item. We are trying to remove electronic payment fraud. This is a joint effort with Nagasaki Prefectural Police headquarters. This is an example. We jointly prepared flies and distribute them in big home appliance stores and convenience stores, as well as mobile phone stores within Nagasaki Prefecture to provide awareness about these frauds. And this is also an ongoing continuous effort.
And this is another item related to the Threat Intelligence Center. This provide analysis for fake shopping websites, and we received a certificate of gratitude from Hokkaido Police. So we conducted an analysis and the results was shared with Hokkaido Prefectural Police, JC3, in order to raise awareness among the users and prevent damage.
Next one is knowledge and education center, and we conduct security education. We collaborated with SBI Shinsei Bank on security personnel training. And last year, in August and December, we have trained a group management of cyber security personnels. And after that, within this bank, and on their website, they stated decoration for cyber security management. I understand that their phones are too small for to read, but you can find this activity online. So SBI Shinsei and Trend Micro will continuously collaborate on security personnels training as they have announced on their website.
So that's all about the business in Japan. Thank you very much for your kind attention.
My name is Tanaka of Mitsubishi UFJ Morgan Stanley Securities. Can you hear me? Best of regards. There are 3 questions that I'd like to ask. And if you could briefly reply to each, that would be appreciated. First, in regard to pre-GAAP in the APAC area, there was -- without the ForEx impact, plus 9%. But in Q3 and Q4, it's a single-digit growth. Now you are growing, so it's not a problem. But it seems like it's a weak growth. How do you see -- anticipate the future?
This is Negi and I will reply. Last year -- compared to last year, in 2021, there was a large business in EMEA. But in 2022, there were not too so many large projects and there was high ROS.
I see so considering these levels, then you will be increasing and can we expect double-digit growth or single digit?
Well, in our assumptions, we have shown this.
And the second question, for this fiscal year's plans, you've talked about net sales and profits. And so you're looking at 21 -- 213.7 billion, which is plus 21 billion. Do you have a breakdown on how you plan to increase?
The wages are going to be high because for 2022, it was about 700 persons and we'll have a full year of wages to be paid. So this will increase things. Mr. Habara, is there more additional points?
Also, there's the cloud costs. We're enhancing our SaaS business. And so therefore, for the wages, as Mr. Negi has mentioned, there's going to be an increase. And there's also the SaaS and cloud costs. And so -- this should represent about 60% to 70% of the total amount.
I see. And third question I have, this time for the fourth quarter, the pre-GAAP margin was 29%. So you've got quite a recovery. I think that's a good thing. But in regard to how this reflected in the PL, what would be the timing? I think that it's going to be on a long-term basis, but how should we look at this?
For the timing, that's difficult, for pre-GAAP and post-GAAP, it's just a matter of how you look at it. But in the case of pre-GAAP, the hardware sales that was high and there was the deferred portion. So on a quarterly basis -- and both for pre-GAAP and post-GAAP, this has increased and we believe that there will be a recovery from this year. Mr. Habara, do you have any comments?
That's a tough question to answer. However, as Mr. Negi has mentioned, this may sound rough, but on a pre-GAAP basis, operating income should be focused upon. And then after deferring, then there is going to be the operating income that appears on the accounting. So in this regard, on a pre-GAAP basis, if we're going to try to increase the operating income, then this will only -- to the post-GAAP increase, but there's a time lag. So it should be at longest 6 months.
I see. So at longest it will be 6 months? And you are planning to increasing the net sales by 11%?
One thing that can be said, there is the first half and the second half, and it won't be completely the same all 4 quarters. And I believe that we should be seeing greater improvement.
I see, thank you.
Well, if I may add to that, as Mr. Negi has mentioned, on an annual forecast basis in Q1, it may be tough. As Eva's materials indicated, there's going to be a sales kickoff, which was not held last year. This was being held for the first time for a long time when we didn't have that cost last year, but it will occur this year. So this will be a major factor. And then after reopening, since summer of 2022, there had not been any business trips in Q1 and so on and administration costs would increase in Q1, the cost would increase. So it will be difficult to generate profit in Q1, but we'll generate more profits in the second half. It can be anticipated that that will be the case.
In regard to the kickoff meeting, how much did it cost? Negi-san?
We're Paying this, but consider this as being several hundred million yen.
[Operator Instructions]
My name is Tsuruo, thank you for this opportunity. First about profitability, it's flat for this fiscal year and better in the second half. And towards the next fiscal year, is the profitability is going to increase? Where do you see a bigger leverage or big factor for improvement? And as Eva-san mentioned, I know that you will be doing certain things, but can you please talk about that perspective first?
Margin will improve due to productivity improvement of the individuals and also cloud cost. I think these are the 2 different factors that -- and as Eva has mentioned, we will be making efforts to control those costs.
I have 2 more questions. If you cannot improve the profitability, if you cannot maintain the current business level, will you abandon the policy of no laying off?
As a company, what we want to do is follow this theory. And as Eva said, we're not doing this in a large scale. We don't need to. But in the end, we will have to see what happened and then respond to that situation.
I see. My third question, if possible, could you please answer the following question. Management compensation scheme, you have various indices or metrics and how are they connected? In other words, proxy statement is usually issued. So I would like to know how this is decided. I understand that you are focused on shareholder return, but the performance is not as good. And long-term investors require certain things is the company really aligned to those requirements?
It really depends on the management zone, but there's options and also basically, if the sale price doesn't go up, revenue doesn't go up, doesn't go up and also the performance based on us. So first is the pre-GAAP sales increase that is reflected and also the subscription service growth. And this is also reflected. If the premium profit doesn't go up. That is not really reflected or if certain level of growth is not achieved, then we cannot receive this. So I believe that our view is very much aligned with those of the long-term investors.
Yes, I understand.
[Operator Instructions]
My name is Segawa, Morgan Stanley Securities. Can you hear me? There are 3 major questions I'd like to ask. First, for the net sales of 2023, in Japan, according to the material, I see the assumptions. And in Japan, there is going to be a single-digit growth. America will be 10% and you will also have the other growth rates. And in America, there's going to be macro impacts. But for this fiscal year, it seems that the outlook calls for further growth. So what are the assumptions that are the basis for the net sales forecast? Do you think that the macro impact will not be so high? Or you're planning to increase sales price, so -- so could you tell us about your thoughts in regard to the guidance for net sales?
Yes. There is some macro impact that is taken into consideration. But as Eva has mentioned, we're providing much more wider services than before. And so therefore, we have a bigger budget and we're looking at the negotiations and the pipeline and our budget. And based on that, we provide the outlook.
What about the impact of the price increase?
So the price increase in Japan will be after April. And even if the price increase takes place, even if it's announced on January 1st, there's still a period of time. And in case of new negotiations that new price will be applied, but the impact will probably appear from the second half. So it doesn't mean that the increase will take place just because of the increase in price.
And then next in regard to expenses -- in regard to the wages, how many are you assuming will be recruited?
Last year, it's a net increase by 650, and we believe that it will be less than half of that. It will depend on the macro environment and what conditions exist, but it will be less than half of the last year's number.
Next, in regard to the profit rate for 2022. In regard to per capita compensation, there seems to be an increase, so what is the compensation per head? Your thoughts on this. And in regard to 2023, what is your forecast for per head?
In regard to the expenses per head, there is a combination of different countries. There are countries where wages are high and others where the wages are low. So with regard to a per capita basis for the overall company, that's difficult to say, but at a rate -- we're looking at productivity shown over the past 2 years and various factors are looked at and we focus on those points. And we believe that we can anticipate major productivity.
To follow up then, for 2023. When we look at the case of other security companies, if we look at the increase in wages for 2022, then can we assume that for 2023, the things will be more stable?
But it's hard to say that about the other companies, but in regard to our expenses and also the recruiting plans, it might be about 300 persons recruited per year, but in regard to how that will increase the situation can't really be said. And does that answer your question?
Yes, I understand. Thank you.
You were asking from '22 to '23. In the case of other companies, there's an increase in the wages and perhaps you were asking if there's going to be a major increase in the wages like other companies, but there is not going to be such a large increase. Now there is some inflation, 100 basis points may increase because of inflation factor. But in regard to 30% or 40% increase, we do not believe that, that would take place.
So the growth rate for heat will be more stable in '23 than the growth rate in 2022?
There is a drive. But in 2022, as already explained, there was the Asian R&D expenses, and we had to increase because this was lower compared to the other competition, but there was no other factors in 2022. And so if we consider that there's nothing that we need to catch up to, and with overall, we are not probably going to see an increased rate that we had seen in the past of 10% or 20%.
[Operator Instructions]
Yes, this is Sato, Jefferies Securities. Can you hear me?
Yes, we can.
I have 3 questions. First of all about the shareholder, you started the share buyback program. And historically speaking, and also speaking from the previous earnings call, 70% very high payout ratio has always been maintained. And the share buyback is basically -- or a shareholder return is covered by this high ratio, as was explained in the last earnings call. Now you are adding share buyback. Is this because of the request from your major shareholder, is that why the company changed its view? That's my first question.
If we continue to have high level of cash, well, this was pointed out from the fall, but small sized share buyback was done in the past. But according to the logic that I explained, today we believe that we have to explain this more logically. And if the return is increased, of course, we had a conversation with the major shareholders, and the dividend is high, payout ratio is not bad. But if we want to do this, a share buyback should be for the capital efficiency improvement. And to reduce the number of shares, this is the opinion that we received from the shareholder. And in the end, well, the dividend will continue as is. We are not trying to reduce the dividend. We're not changing the focus, by the way.
I understand. So this was based on the discussion with your major shareholder?
Yes, that's correct.
I think I also want to mention that before we consider all these shareholder returns, but during our transformation, we're not sure how is our SaaS model's profitability going to be. And like I say, in the past, there was a lot of transformation, including the consumer product, we transform from the PC base to a lots of device based revenue and also the channel transform into mobile channel, the profitability on this are different. We are not sure what this model would be. So before, we are not very aggressive in all these capital restructuring. But now I think we are more confident that we have a whole -- we know what is the new profit model for SaaS and we have the confidence that even in the SaaS model, we can continue to generate cash flow. That's why we agreed to have this bigger, say, buyback program or shareholder returns.
Okay. And the second question about this fiscal year that just to finished and there was a downward revision in the third quarter, including operating income. And in the fourth quarter, I think the lending was actually even lower than that. And I didn't get the impression from covering your company that it may happen, but downward revision guidance and also the fourth quarter as was full year number, it looks like there was a gap in terms of profit again. So I don't understand what didn't work. Can you please maybe talk about the factors behind this?
First of all, level of deferral, we could not really estimate. We can talk about pre-GAAP, but hardware sales may be increasing and at the end of December, there was a big sales and there was a deferral increase that was one factor, as Habara-san mentioned. And another factor was, we expect the net sales to hit a higher level. So I was -- maybe we were a little bit too optimistic. And current pre-GAAP is in line with our internal expectations, but we were expecting it to be a little bit higher than that.
Oh I see. Maybe we should talk about the specific numbers.
As you have mentioned, Sato-san, 37 billion, this was run rate revision on the 2nd of November, 2 weeks before the Q3 announcement. And the lending was 31.3 billion, which means that this was down by 5.6 billion. And the biggest factor was, as Negi-san said, the revenue recognition difference. This was back in Q3, but the 2.4 billion, a bigger number was posted in Q4, which was not expected. So this is the biggest factor.
And then as Negi-san mentioned in terms of cost, hardware ratio is high in the sales mix, the cost of sales. And the cost of sales, this was quite big and revenues basically deferred, which means that the profitability has to suffer as a result of that. And this impact was going to be about JPY 1.0 billion to JPY 1.5 billion. So in terms of product mix, we didn't expect the cost to be so high. And another revenue recognition perspective.
Going back to the first point, when Q3 earnings announcement and the revision was made, there was like 1 week in between. And the revenue recognition impact was about JPY 800 million, as we explained in the Q3 announcement, but this was not reflected in the revision. So from the start of Q3, we already knew that we were behind the plan, but it's mostly about the revenue recognition. And that is why in the end, we did not really fill the gap.
So as Negi said, on a pre-GAAP basis, it is according to expectation. But net sales, we didn't really achieve. This is basically due to the revenue recognition.
Excuse me, what was JPY 800 million?
This is the Q3 recognition impact.
Oh I see, I remember you saying that.
We made a downward revision, and after that downward revision there was something else that happened in between this period. So Q3 revenue revision was not reflected in our JPY 37 billion forecast. So Q3 and Q4 revenue recognition was basically not in line with our expectation.
Thank you very much for your very detailed explanation. That's very clear. Additional questions. What about guidance of this fiscal year? I understand you're using a new accounting standard and the GAAP in revenue recognition? Well, it would not happen, because this is going to be apple-to-apple.
Yes, exactly. It's going to be apple-to-apple compared to the fiscal -- previous fiscal year.
Okay, I understand. And you are always focused on net sales rather than profit. And the last time, you had maybe FX problem and the revenue is suffering. But this new guidance, are you taking extra attention to the profit this time around?
What do you mean by that question?
Well, Negi-san, you say that net sales is more important than profit usually. And in the previous fiscal year, you had FX and some assumptions that did not work. And for this fiscal year, I feel like you may have paid more attention in terms of planning the profit. I just want to check my understanding is correct.
Well, as Eva mentioned, in the last couple of years, we have hired people and done many things, so investment will continue. Productivity improvement will also happen, which will help push up the profit.
I see. And [ Ai-san ], I have a question to you. Guidance for Japan. When you think this is too weak, cyber security that is the theme that people are shifting to? And why only 3% lower end of the single digit? Why not double digit, but the low end of the single-digit growth?
[ Ai-san ], as can you please answer this question?
Rather than the low end of the single digit, Japan is always lagging behind the European and American markets, as you may know. And this year, we understand that there are many opportunities, but on the other hand, as we found out, well, shift to cloud will mostly happen in 2024 and in 2023 we have to get ourselves ready. And we need to implement mid-term plans or measures. That's what's important for FY '23. And as I have mentioned before, we have to strengthen the team. We need to be clever with this, we are also planning for new subsidies too, and it will take time for these new initiatives to take route.
In terms of profitability, internal organizational structure is already being worked on. It isn't about headcount reduction or increase, we are actually talking about transforming our business into something that is suited to the market, and that will take some time. So please understand it that way. Maybe I'm giving a more conservative point of view.
I understand.
So direct sales being increased and Platform Solution and XDR to promote that, maybe tech sales is better. And shifting people to move to direct sales rather than using agencies or distributors. Well, one of the things that we are trying to do is really understand the end user behaviors and reflect that interactivity that's very important. So we're talking about internal changes, transformations, and we have a partner business as well, and we have been doing this for decades. This is still important to us. And the mechanism for that is already in place. And how to contact the end users? Well, we want to increase the contact points, and that's how we are changing our activities. I hope that answers your question.
Yes, that's clear.
So we intend to promote this strongly.
[Operator Instructions]
This is Kikuchi, this is from SMBC Nikko Securities. There are 3 questions, and there is some overlap with previous questions. First of all, Mr. Negi, around the 10th of November when you made an explanation about the results for the new fiscal year, you explained about the points, but you've seen that it's lower than your outlook. And after you made a downward revision, the numbers are lower. But it seems then the goals for the new fiscal year has changed. And there is a new accounting system that has already been carried out. But when it comes to the profit outlook, it seems that it has gone down compared to the past. It's just a slight increase, and it may not have been precisely calculated. So are there any reasons for this? No, I'm sure that your feeling about this has not changed. Are you just being conservative? That's the first question I have.
In this regard, one thing, before November, for the first half we were going smoothly, but the external environment started to influence things in the second half. And with that, expenses were incurred. And this year, we will have those expenses reflected for the full fiscal year this year. And -- if we strive for higher productivity, then things could get better, so rather than error in our outlook, we want to look at it. And as we see increase in net sales, then the profits will also increase, and we will be able to achieve more continuity. But rather than generate profits by reducing expenses on the short-term, we may lose out on opportunities. So for the profits, I believe that we have reached on turning point.
You say that it's a turning point. What do you mean?
Well, for 2 years, we see a decrease in profits, and I believe that it's a turning point from that trend.
I see. The second question, this came up in the discussion about Japan. When we look at the results in Japan, over the past several years here in Japan, Japan's business had supported your company, especially a little while ago. Over the past 5 years, the shop, there were sales and the consumer sales were pressed up by JPY 10 billion in 4 years, which is quite a large number. However, on a quarter-to-quarter basis, it has been solidly increasing. But from last year, from the first quarter to the fourth quarter, it's become more flat. And on a quarterly basis, perhaps you've peaked out despite the impact of DOCOMO stores, it seems that we adding, right? And for the Japan guidance, you have this growth outlook. And for the consumer mobile channel, is it possible that you're assuming that there will not be much growth? There is the DOCOMO shops and some shop operations that have been acquired. So do you believe that in your guidance, you indicated the consumer business may change from here onwards?
Mr. [ Ai ], what do you think for the Japanese?
We are looking at the corporate market, as well as the overseas market. What about the mobile business Mr. [ Ai ]?
Well, as mentioned, in regard to the mobile shops, there's more integration taking place. There is a reorganization that is taking place, and there are risk factors there, we believe. But for the mobile demand itself, we don't think that this will go down. Under those circumstances, we are dependent on device shipments. I think that there is a direct impact. Meanwhile, in regard to what we're trying to make an effort on is, as mentioned, we're looking at beyond device security. So we're not just focusing on the device itself. We're looking at how to provide added value to our customers, and that's how we intend to carry out our transformation. So firm customers, we want to offer the right type of security in this consumer business as well. And when we look at this, it may seem as if the mobile shop business is flat. But for this business model, there's several patterns, and it's difficult to answer what will be the case, but that's an aspect that needs to be taken into consideration.
I see. Well, I'd like to ask about details later. But the third question, in regard to return to shareholders. I'd like to confirm about how this will take place? You mentioned about 50 billion in excess capital and you'll be looking at 25 billion for buyback. And then after calculations, we don't know when, but there may be another 25 billion buyback. And starting from next fiscal year, from fiscal 2025, it is the 70% payout ratio and then there's the buyback. And aside from the dividends, you will be looking at the excess capital as of December and if there is hardly any change, then after the end of the fiscal year, about 30% of net income will be for buyback and 70% for dividends. But from the profits, you subtract the dividend portion and you look at the 30% buyback. And when you announce the fiscal results, the numbers will be realized then?
In regard to our working capital and in regard to other aspects that cannot be calculated, we don't know specifically what will happen. But in regard to buyback, we'll be looking at the payout ratio and will increase the efficiency of the balance sheet and we're looking at 25 billion. And for the remaining 25 billion, we will look at the excess capital situation. And we believe we should be able to do that extent. And we will look at how much capacity we have by calculating. And we'll explain about it.
I see. Naturally, as a company, there may be other factors that cause increases. But if we -- I think and we are able to move forward on the 100% basis for the time being. So there's a period of adjustment and you'll be looking at what kind of appropriate level of cash level is necessary. And once you make the adjustments, you are not sure when that will be concluded, but once that is concluded, then for working capital or M&A capital, you need to have some amount. But then otherwise, 70% will be for dividend and 30% for stock buybacks. And that's the nature of the announcement for return to shareholders?
Yes, that's the format we're thinking about.
And for the remaining 25 billion, when we consider the 50 billion, let's say that there's 25 billion and then the remaining 25 billion, it seems to be quite easy to calculate. But is there any barriers to the calculations?
Well, we have to look at the balance sheet of the parent company and the excess capital as of the end of December. So we have to look at the surplus situation there to explain. So Kikuchi mentioned about, how about dividends from the subsidiaries that can be used. But according to corporate law, that can be done -- that cannot be done. And so we have the 25 billion. This has been decided in the Board of Directors meeting.
And for the 25 billion for dividends, this is on a non-consolidated basis. And that will be the limit as far as surplus, and we will not be able to do more for 2023. But even if we have the dividends with the subsidiaries, we have to wait until February of next year before we can be able to use this as surplus capital. And so for the current dividend and the buyback, no further efforts can be made for 2023, because the balance sheet for the non-consolidated results is not clear yet.
And so for the remaining 25 billion, it will be something that will be coming up from next fiscal year onwards. Yes. It can be expressed in a different way, but it was mentioned about 50 billion, and there is an appropriate cash level that is not clear to us yet. But if we are able to have -- if you have an annual income of 10 million, then it's like trying to buy a car for JPY 1 million. It depends on the impact on one's life. So we're looking at what level of cash is necessary and what level we are able to spend is a matter which we are still calculating.
[Operator Instructions]
My name is [indiscernible] with Sumitomo Asset Management. I have several questions. About the revenue recognition impact, on the first quarter to fourth quarter it continuously went up. And in other companies, usually the number tends to decline toward the end of the year. But in your case, it increased toward the fourth quarter. So why is the impact bigger in the fourth quarter? And Asia Pacific impact is really big in the fourth quarter. Can you really explain why?
Yes, I would like to try to explain this. As Negi-san mentioned, cost wise, cost of goods is pushed up by the higher ratio of hardware. And hardware sales revenue recognition changed under the new accounting standards. That is the biggest factor, for this Q4. Well, last year, we would have been able to include everything in the revenue. But now we have to defer the revenue. So net sales is small, but cost is higher. That is why the profit level is lower. And in Asia Pacific, we saw a more pronounced impact on this.
Well, on software capitalization. Is this the line item you're talking about?
Yes, in terms of cost of goods, yes. TippingPoint hardware and Cloud Edge hardware, can you please explain this?
Well, Cloud Edge in Japan is one. And in other regions in Asia, I think it's TippingPoint, Deep Discovery and TX1 for IoT. I think those were the big factors.
I understand. Sato-san asked the question earlier about the impact of revenue recognition, and it was not really identified during the revision. And that basically pushed down the profit by 3 billion, and that's 5.7 billion in the fourth quarter downward revision. In the beginning of November, when you made the revision, you didn't -- maybe you didn't know it was revenue recognition, but you knew that the profit was going down. So I think this was already reflecting the number, is this understanding wrong?
I would not say it's wrong, but hardware product mix in Q4 was a little bit different. Software and license renewal would not have been impacted as much. So in terms of a sales mix, high ratio of hardware was not expected in the beginning. But that's limited to the fourth quarter and the JPY 700 million, JPY 800 million in the third quarter profit. Well, if the question is Q3, revenue recognition impact had to be analyzed postmortem. So this was a reverse calculation as the results came in. When we made announcement on the 10th of November and we the released the numbers on the 2nd of November, and we actually knew the impact after the fact.
Oh I see. You know the total number, maybe you did know the details, but the number was already available to you. Is that correct?
No, the number was available to us afterwards. On the 2nd of November, we didn't know how much of this was impacted by revenue recognition.
I understand that they don't know the impact or breakdown that you already have the overall number. So 5.7 billion down. And out of that, 3 billion is impacted by revenue recognition. I think this is to exaggerate it, because in the third quarter, you already knew about the numbers. So 700 million, 800 million was already included, which means that maybe 2.2 billion, 1.3 billion was a downward factor. What about the remaining factor?
Well, I do think it is really true because in the third quarter, we said that our outlook already included -- it was not including the JPY 800 million behind the plan. So with the actual in Q3, we were already behind by 800 million against the plan, as we explained.
Okay, that's fine. What about the remaining half? 2.7 billion down and we know how much is revenue recognition. And I think that explains the net sales decline, but the profit was still further down by 2.7 billion. How can you explain this? I'm not quite sure what you mean by this. I'm not following your logic. So 11.1 billion was the target, and you did 5 and 5.7 was the gap for the fourth quarter. And for net sales, I understand this was mostly due to revenue recognition. And I understand that part. So it's not the top line factor. There must be some cost factor to push down the profit even further.
Well, so your question is these factors don't cover everything. So I said these are the major factors. It's only 50%. Well, there are multiple factors. And as Negi-san mentioned, sales commission is one factor, pre-GAAP. If a difficult product is sold, then they would receive a bigger bonus. And these people achieved their quota and received the commissions, for example. So sales line commission, several hundreds of millions yen.
And also on-site services, for Japanese consumer mobile channel, the business is strong, as we have explained. And also U.S. legal cost in Q2 and Q3 and also in Q4 went up. These are the -- some of the cost factors, which was higher or stronger than when we made assumptions for Q3. So 5.6 billion is reflective of those. But the revenue recognition is still the biggest factor, as I explained.
Right. Number of headcount, in the third quarter, there was an increase of about 300 quarter-on-quarter. And I asked the question about the outlook for the fourth quarter. And you said for the third quarter, this was mostly for Asia Pacific. And there you started hiring for the first time in 3 years, and this is temporary. And Japan, America and Europe only increased slightly. And in the fourth quarter, you didn't expect to a big increased. But now outside of Japan, you increased the headcount a lot in total 160 or so. Why did you increase so much? And for the next fiscal year, is it going to be really 300, that seems too little?
Right. When third quarter number was disclosed, we were not referencing hire, so we were making offers and there's a time lag until people actually joined the company. So in the fourth quarter, some of the headcount already decided in the third quarter.
I do understand what's happening. And that is why I'm asking. You say that there's not going to be much headcount increase, but there was a big increase. And I understand there's time lag, of course. And that is why I'm questioning your focus of 300. In the first quarter and second quarter, there will be some time lags for the full year. Are you going to stick to 300?
Well, right. But depending on how the environment changes, we have to explain to you the new factors at the earnings announcement.