Asteria Corporation (3853) Earnings Call Transcript & Summary

Thank you for watching Asteria Corporation's presentation for the consolidated financial results for the first quarter fiscal 2023. Now Founder and CEO, Pina Hirano, is going to give a summary of the latest results, and then there will be a question-and-answer session. Now I'd like to hand over to Pina for the financial review.

Thank you for taking time for watching our financial results conference. Today, I explain the first quarter of fiscal year ending March 2023. I'm Pina Hirano, Founder and CEO of Asteria Corporation. Now I'd like to share some important topics with you and then explain the financial results. Most important topic is that Gorilla Technology Inc. went public on the NASDAQ Stock Exchange on July 14. Gorilla Technology is one of our portfolio companies of the Investment business. The valuation changes of Gorilla Technology will be booked from our second quarter results. Fiscal year 2022 is the second year of our Mid-Term Management Plan, STAR, which stands for Sustainable Top Line Acquisition and Refine. We positioned the second year as gain, which is the halfway point of the Mid-Term Management Plan. It aims for JPY 4.5 billion in net sales, JPY 1 billion in adjusted EBITDA in fiscal year 2023. We have 3 main businesses. The first business is the Software business since our founding. It is fully devoted to enterprise software product development. The second business is the Design business. We have started it with the acquisition of U.K.-based design consulting company back in 2017. The third business is the Corporate Investment business. It was launched in 2019 in Texas, United States. The Design business and Investment business are established to support the growth of Software business in addition to expanding the capability of Asteria Group. Here's the head of each business. The Software business is led by Susumu Kumagai located in Tokyo, Japan. The Design business is led by Dusan Hamlin located in London, U.K. And the Corporate Investment business is led by Shinji Yoshida located in Texas, U.S. Now I explain the summary of first quarter results. Revenue was up 17.9% year-on-year due to the revenue gains from both Software business and Design business. This marks a [ breakaway ] to trend in which the Software revenue cover the decline of Design revenue. The operating income was down 14.7% due to active investment in line with the midterm management plan. The pretax income was up 287.9%, and the net income was up 196.8%. Here's the result of each business. Revenue of the Software business grew 11.9% to JPY 650 million. This was attributed to strong demand for our products from various industries due to the expanding digital transformation needs. Revenue of Design business returned to positive growth, recording a 53% increase. This was due to the acquisition of new clients in the United States. Regarding the Corporate Investment business, we will get total of more than JPY 60 million. It has become the portfolio valuation gain from [ Space X ] and the other companies. There are 2 revenue growth factors. The first one is continued growth trend of Software business. Warp, our flagship data integration middleware, saw expansion of demand for connecting cloud services and in-house systems. Platio and Gravio saw an increase in new industries due to the rising DX needs and awareness of no-code. The recurring revenue trends of the Software business. Recurring revenue, which is a revenue Asteria received continuously from customers. It has grown to over 70% of Software business, providing stable growth of our business. Another revenue growth driver was the Design business. Orders from IT clients we acquired in U.S. last year and additional orders from existing customers pushed up its revenue by 53%. Now let's look at the performance of each product. Warp product sales recorded the highest revenue for the first quarter. The license revenue keeps growing and was up 13% in the first quarter. Revenue of the subscription version, Core, increased by 30%. Support revenue hit JPY 270 million due to strong growth of license revenue last year. Platio enjoys strong demand from a wide range of industries as it created new template design to comply with changes in Japanese laws. Gravio has strengthened by collaboration with business partners. New use cases at various industries have been increasing. Handbook X was released last February. The number of downloads have been rapidly growing, and we continued marketing activities. This is a monthly recurring revenue, MRR, [ trend of our ] revenue churn rate in each subscription product. In this quarter, MRR of Warp Core is growing sharply. MRR of Handbook sales declined slightly, but we expect to turn this trend [ along ] later this year because the number of Handbook X app downloads grow at a faster rate than we expected. We encourage this user to switch to a monthly payment plan. MRR of Platio is growing rapidly. The churn rate is a little high due to the effect of active promotion activities. But we will continue with such activities from the second quarter to keep growing momentum. MRR of Gravio does not grow as we expected. It is because the COVID-19 pandemic is calmed down and the pandemic-related demand decreased. But in recent 2 months, the MRR shows strong growth again. Now I explain about SG&A. There was a big increase in SG&A. It is because of marketing expenses and HR-related costs in accordance with the midterm business plan, STAR. Marketing expenses nearly tripled compared with last year, which include additional budget used to increase the top line of Software business. HR-related costs also grew as steadily hired new personnel. Here are the HR investment trends. Although HR costs rose, its ratio decreased as the overall revenue increased. We are also advancing our workstyle reform. We continue to invest in human capital because we believe creating a comfortable work environment will contribute to greater employee productivity. Now the bridge from revenue to operating income. It is worthy of note that SG&A grew in line with the Mid-Term Management Plan. We booked an operating income of JPY 77 million. Then, the bridge from operating income to net income. There was more than JPY 311 million financial income. We booked at net income of JPY 231 million, significantly higher than the net income we reported in the same period last year. Regarding management indicators. Due to the growth of the Design business, the gross margin ratio, the operating margin and the recurring revenue ratio decreased, while the overseas sales ratio increased. This is financial statement. With the ample cash and cash equivalents and high equity ratio, we are in good financial health. Next, the cash flow statement. Although investments grew, we maintain ample cash and cash equivalents. Lastly, we have announced earning forecast for fiscal year ending March 2023. Revenue is expected to increase to JPY 3,700 million. The figures of income are forecasted in a range format as it is difficult to predict Gorilla Technology's stock price. Each income will also be affected by fluctuation in the currency exchange rate. The earnings forecast takes into account these uncertainties. This is the end of my presentation. Thank you for taking time to watch Asteria's financial results today.

Now based on his presentation, I'd like to ask Pina a few questions that are frequently asked by our investors in Japan and abroad. First question, Asteria disclosed earnings forecast for fiscal year 2022. What assumptions is this earnings forecast based on? Could you tell us the rationale behind these figures? Also, could you tell us the next growth strategy you have for the Corporate Investment business?

Thank you for the question. We expect revenues to grow year-on-year due to the strong performance of the Software business and expected increased orders from new and existing clients in the Design business. Profit is forecasted as a range as it may be significantly influenced by external factors, including fluctuation in the share price of Gorilla Technology, which was listed on NASDAQ last month and those in the exchange rates between the U.S. dollar and Japanese yen. Profit number is calculated at an assumption that Gorilla Technology's stock price is from $9 per share to $13 per share. Also, we assume that Japanese yen-U.S. dollar exchange rate is JPY 130.

The second question. The Software and Design businesses show strong performance. Who are the main clients of the 2 businesses recently in terms of industry? And what are your future prospects for and growth strategies for these businesses?