Ateam Holdings Co., Ltd. (3662.T) Earnings Call Transcript & Summary

This is the agenda for today's briefing. I will cover important notice, second quarter financial results, results by segment and full year guidance and dividends. Up until night, I was the speaker for the entire briefing, from now on, the results by segment will be explained by the Head of each business. First, its important notice, there are 3 points. The first is the transition to a holding company structure. There are 4 objectives namely, the positioning of the Ateam headquarters as the platform for business creation, improvement of the decision-making speed at each business, development of human resources with abundant management experiences and enhancement of enterprise value through the reinforced management capabilities of the entire group. There are 2 resolution items, namely, transition to a holding company structure and establishment of 2 subsidiaries in preparation for company split. The time line is as shown in the slide, the effective date is August 21, 2021. 2 subsidiaries will be established. Ateam Entertainment, Inc., is a spin-off of our entertainment business that distributes smartphone games and other products. The business will be established as a wholly owned subsidiary of Ateam. The other is Ateam Commerce Tech, Inc. a spin-off of e-commerce business that operates cyma, a bicycle e-commerce site. This company will also be established as wholly owned subsidiary. As for the naming of Ateam Commerce Tech, Mr. Mitsuoka will give you more details later. It was in 2013 when Ateam launched cyma, the bicycle e-commerce site. There were some difficulties in the beginning but the business is finally able to show positive growth in both revenue and profit. That's why we have decided to take the next step. The second important announcement is the acquisition of Treasury Stock. The purpose of the buyback program is to improve capital efficiency to implement a flexible capital policy in response to changes in the business environment and to increase the value per share as part of shareholder return. The program is limited to 1 million shares in terms of the number of shares or JPY 1.2 billion in terms of the total amount of acquisition. And will be executed on the Tokyo Stock Exchange between March 15, 2021, ended December 30, 2021. The third important announcement is about the New Large-Scale IP Game. Mr. Nakauchi will give you more details later.

Thank you. My name is Nakauchi. The other day, we announced a new game title currently under development. The name of the title is Final Fantasy VII, The First Soldier. We are working with Square Enix to develop this title. It's a combination of Final Fantasy VII and the battle royale Action game for global audience. It will be released sometime in 2021, the detailed schedule is yet to be announced. It will be available worldwide, except for Mainland China. We are planning to release the game in the several languages listed here. The content of the title is as shown on the slide. The visuals are based on Final Fantasy VII Remake released last year. This is a battle royale based action game.

Thank you, Mr. Nakauchi. We are happy to release the title that we've been working on for 3 years. Mr. Nakauchi was a member of the graphic team that worked on Final Fantasy VII when it was first launched 23 years ago. I'm grateful to have his involvement in this title again, and I'm very much looking forward to the release. Next is the consolidated financial summary for the second quarter. Overall, revenue and operating profit were down, but net income was up year-on-year and quarter-on-quarter. With revenue, JPY 7.377 billion, operating profit, minus JPY 157 million and net income of JPY 483 million. We had to record our first quarterly loss since IPO. I will explain the reasons later. In Lifestyle Support, revenue was down year-on-year but up quarter-on-quarter, while profit was down year-on-year and quarter-on-quarter with revenue JPY 4.841 billion and profit JPY 64 million. Later, Mr. Mase will explain the details. Revenue share was 65.6%. In Entertainment, revenue and profit were down year-on-year, while the profit was up quarter-on-quarter with revenue of JPY 1.932 billion and a profit of JPY 120 million. Revenue share was 26.2%. In e-commerce, revenue was flat from last year, but profit was up year-on-year. Revenue and profit were down quarter-on-quarter with revenue of JPY 603 million and profit of JPY 6 million, revenue share was 8.2%. Next is the consolidated financial results and the progress on the full year forecast. Revenue is generally in line with the forecast and the progress was 44.4%. Progress was 44.2% on operating profit and 103% of net income. Next is the results for the first half. This is, as explained earlier. As shown in the table on the left, revenue was JPY 14.871 billion. Operating profit, JPY 221 million. Ordinary income, EUR 363 million and net income, JPY 741 million. The following graph shows the consolidated quarterly results. These are major KPIs. There is nothing special to report on KPI trends. This is advertising expenses by segment. As usual, the Lifestyle Support business saw an increase from the previous quarter as a result of increased promotion of moving related services. In preparation for the busy season, the Entertainment business is flat from last quarter as a result of focusing on efficiency in advertising. This is the quarterly change in the number of employees by segment. Again, there is no significant change. This is the balance sheet. There was an increase in intangible assets due to the recognition of goodwill arising from the acquisition of Links Corporation. Next is the details by segment. I will hand over to Mr. Mase.

Hello, this is Mase. I will explain about the Lifestyle Support business. First, the quarterly results. Segment revenue is down year-on-year. This is because the demand for Hanayume and other services decreased due to the COVID-19 pandemic. Segment profit decreased quarter-on-quarter due to increased advertising expenses for financial services, including insurance services, which is currently our focus. Next is the breakdown by subsegment, namely Digital Marketing Support, Platforms and Other. As mentioned earlier, Digital Marketing Support includes Hanayume, so revenue decreased year-on-year. Platform and Other businesses increased year-on-year. On a quarter-on-quarter basis, the Digital Marketing Support is flat and the Platform and Other businesses is up. Here are the revenue trends for the Digital Marketing Support business, as I mentioned earlier, the impact of the pandemic on the year-on-year growth remains severe due to the decline in demand for Hanayume and other services. Here is the trend of each KPI of the Digital Marketing Support business. Looking at the chart, we can see that user count has decreased year-on-year. This is mainly due to the impact of the lower demand for Hanayume. Because Hanayume is a high ARPU business, the overall ARPU was also declined. Next is the revenue trend of the Platform business. Revenue is growing significantly year-on-year. Thanks to the steady growth in advertising revenues of Qiita. I will talk about the specific initiatives later. Next is segment topics. For Qiita, we held a social tech talk in collaboration with Hitachi. This is an initiative to educate engineers on the latest case studies of Hitachi's AI, big data and DX initiatives on Qiita. This event was held on February 25, 2021, and received a lot of positive feedback. In order to maintain the momentum, we are currently preparing for the second and third sessions of this talk event. The other topic is also related to Qiita. The number of members has been steadily increasing since the acquisition of the business. In about 9 years since the launch, the number of registered members has exceeded 600,000. To make the service even better, we released a beta version of a major update on January 18, which includes improved user interface. That's all from myself.

I will now explain about our Entertainment business. The chart shows the business performance trend, both revenue and the profit increased in Q2 compared with Q1. This is due to the contribution of year-end at New Year events. Although there is a downward trend compared to the previous year. The current situation shows that the bottom has been reached. The overseas sales ratio is currently 28%. This is a slight decrease from the previous quarter. But it is due to the large growth in the year-end and the New Year events in Japan. Segment topics. We have been collaborating with popular anime contents from time to time. We are also collaborating with Youtubers, which is very popular these days. One of the characteristics of our content is that we have many long-running titles. For example, Three Kingdoms Smash has already celebrated its 6th anniversary and Dark Summoner has reached its 9th anniversary. These are contents that have been left by our customers for a long time. As for the R&D pipeline, Final Fantasy VII, The First Soldier mentioned earlier, is scheduled to be launched in 2021. From next fiscal year onward, 2 titles currently under development will be released. One is based on our original content, that can be enjoyed on multiple devices. The other title is based on an intellectual property of another company that we are currently negotiating for. This is also something that can be enjoyed on multiple devices. That's all for now.

Next, I will explain the EC business. First, I would like to explain the intention behind the naming of the company, Commerce Tech. Commerce Tech is a word coined from a combination of commerce and technology. This name expresses our intention to solve the various inconveniences and the problems that customers feel when shopping on the Internet with the power of IT, which is our strength. We want to be a company that not only provides shopping functions to customers, but also provides a better buying experiences. This is the idea behind the naming. Now let me explain our business performance. First of all, revenue was flat year-on-year. But profit was positive for the quarter despite the slow season. This, I believe, is the results of our continuous improvement efforts in operations. Next, let's take a look at KPIs. Gross profit increased due to higher sales of electric bicycles and cost control. The inventory turnover temporarily dropped due to the slow season, but the inventory level is now under proper control. That's all from myself.

Thank you. Next is a company-wide topics. First, Ateam has been recognized among Great Place to Work employer for 8 consecutive years. We were ranked 15th in the Large Company category. With 1,000 or more employees. We have completed the partial closure of our offices. As a result of the pandemic, we had a surplus of office space due to the promotion of remote work. We have completed the closure of the Fukuoka office, part of the Osaka office and Nagoya Lucent Tower office. This is equivalent to 20% of the total office space. The completion date for vacating offices was the end of February 2021. Currently, 20% to 30% of employees at the Nagoya head office are coming to the office every day. Next is the FY 2021 earnings and dividend forecast. There is no change in the full year guidance at this time. This slide explains our approach to the guidance. We are trying to attain a lean organizational structure by closing part of the offices and optimizing the allocation of personnel. While continuing to invest in the development of each business for their future growth. The Lifestyle Support segment continues to anticipate the impact of the pandemic on Bridal related businesses, Hanayume. The Entertainment business will continue to focus on the development of new IP collaborative titles. In the e-commerce business, we will continue to invest in improving our recognition while aiming for the first full year positive profit. Recently, we have been conducting TV commercials in the Tokai and Kansai regions. Supplementary explanation for fiscal 2021 guidance. Compared to the last year's operating income of JPY 1.2 billion. Investment in new titles will increase, which is JPY 700 million. In addition, there will be JPY 23 million increase in expenses for the entire company. As a result, we have set our operating income forecast at JPY 500 million. In the second half of the year, the impact of the pandemic will likely intensify. So we need to make careful decision of investment execution. In the Lifestyle Support business, we have experienced deviation from the initial forecast for some services. Therefore, we may need to discard some of the prior investment projects. As I mentioned earlier, we are reallocating personnel in line with the business environment. In the Entertainment business, we expect upfront investments in the development of new IP collaborative titles compared to our initial forecast. Despite the increase in investment, we are determined to provide better products to our users. Full year revenue and profit of the e-commerce business is expected to be in line with the initial target. We expect to pay a dividend of JPY 16 per share as forecasted at the beginning of the fiscal year. That's all I have for today. Thank you.