istyle Inc. (3660) Earnings Call Transcript & Summary

Hi, everybody. Good morning, and good afternoon and good evening, and thank you for participating in the meeting. And this is Kei Sugawara, CFO of istyle. And I'd like to present the results of FY 2021 and our plan for this fiscal year, FY 2022, on this meeting. And let's get started. Maybe I'd like to present the first 20, 30 minutes, then let's move on to the Q&A. And if you have any questions in the middle, just jump in by pressing the raising hand on the Zoom functions. Thank you very much. And this is the overview of the business segment, and you may probably already aware, so that let me skip it. And if you don't, just dig into the data. Then this is the misspell or it's a mistake. This is not results for the 2020. These are for the FY 2021, and let's get into that. So this is the summary. For the latest quarter, Q4, from April to June, the -- it's been very difficult since the COVID-19 pandemic continuing in Japan and outside Japanese market as well. And most of the largest cities in Japan, the cities have locked down, so that it's been very difficult. But we finally achieved to generate operating profit somehow for the whole Q4. And then it's been almost -- or more than 2 years since we made an operating profit on a quarter basis since we missed the target quite dramatically for our midterm -- previous midterm business plan. Then for the On Platform business side, the -- I know that there's a lot of interest among the investors, the progress on the Brand Official, BO. And that is -- our progress on the Q4 was pretty good. That good news. And that was achieved by somehow selling the service bundling, everything from the [ advertisement ] and the campaign and e-commerce on the Brand Official, all together utilizing best use of all the data analytics from the Brand Official. That was a good sign for the recovery for the On Platform business segment. And for the Beauty Service segment, due to the hard lockdown of the many of the major cities in Japan, the access to our physical store has been quite difficult, to be honest. But instead, we still had a strong growth in the e-commerce side, online commerce side. So the -- as a whole of the business segment, we are maintaining the profitability somehow for the segment as well. Then this is the result of the full year, not just Q4, for the result. Then if you look at the consolidated results, our net sale was somehow a positive increase from the previous Y-o-Y. And for the operating profit side, we made a good progress compared to the previous year, achieving JPY 1.7 billion increase. But still, we are making operating losses on JPY 600 million somehow in the full year. Then move on to the On Platform segment. There are -- due to the situation COVID, we are still Y-o-Y negative 90.4% compared to the previous year. But instead, our operating profit increased as Y-o-Y 110%. The Beauty Service are -- for the revenues we increased quite a bit, but still, our operating loss is still there at about JPY 270 million. But still, the Y-o-Y basis, our operating profit increased about JPY 400 million. And as I said on the Q4, we made operating profit somehow on a quarter basis, lately. And on the global side, if you look at the Y-o-Y on the revenue, it's shrink quite a bit, that's why the third -- 3 quarters, by the -- we are kind of like more focusing on -- try to make a breakpoint -- breakeven point on operating profit rather than increasing the revenue. So that if you look at the operating profit, our Y-o-Y increase on operating profit side was quite large at about JPY 600 million. And we are still making losses as well as Beauty Service. But our operating loss is small, as much as JPY 150-plus million. And others, it's a little bit small compared to the last year on the revenue as global service. But it's almost breakeven. And the operating profits level Y-o-Y is close to JPY 200 million increase. And this is the summary of the full year. The -- if you look at the top message on the bold characters, there are -- we somehow achieved the operating profit to positive, and reducing all the costs, and we managed to modify the business structure somehow. And thanks to the e-commerce growth, we somehow made that. And for the On Platform segment, as I said, it's a repeat sales increase on the Q4 quite a bit. And number of the Brand Official subscribers increased -- well, it's implementations. It's not already implementations, but the subscriber increased quite a little bit. The Beauty Service, it's another repeat story. The e-commerce continue to see growth as much as the Y-o-Y, 177.5%. And the stores, the -- apart from the Harajuku flagship stores, the other existing stores remain profitable. But the flagship stores quite lagged behind as well. But at least the -- thanks to the e-commerce, the second half was truly operating profit positive. That's something happened, and thanks to the e-commerce. And the global, as I said, the -- it's all the repeat from the previous couple of pages. But like, we somehow managed to -- not really deficit, but like the cost decreased by JPY 600 million compared to last year. And also the -- and we somehow sold some of our assets and some of our businesses already. So thanks to that, we somehow became close to breakeven on the global business side. And SG&A, we've been working so hard to manage to lower the other costs for the last couple of years. This last fiscal year, we already decreased further 5% cost to make it more profitable somehow. Then this is the overview of the full year result compared to the budget and also the Y-o-Y changes. And this is the -- I already explained some -- most of that. Please look at the Y-o-Y changes. We increased the quarter thanks to the -- some of the asset sales and everything, but we somehow increased quite a bit to make it positive on the net income and increased Y-o-Y JPY 5 million plus. Then this is the historical changes in revenues. So we somehow maintained and overcome the -- exceed the previous fiscal year's revenue. And this is the consolidated revenue and the OP ratio by quarters. On Q-on-Q, we increased the total, on a Y-o-Y basis, and also increased double-digit as well. And this is On Platform segment. If you look at the B2B service, it's positive increase compared to Y-o-Y and the Q-on-Q, both. And this is the Beauty Service. If you look at the OP ratio, the second half, Q2, Q3 and Q4 are positive. And at the same time, in total, if you compare Y-o-Y, it's 100 -- close to 130% increase. Especially the last Q4 was quite difficult as the whole cities in Japan are fully locked down, so the store sales was really small, especially in the last year, Q4. So if you compare Y-o-Y on retail side, it's almost double compared to the last year. But instead, e-commerce was slightly smaller compared to last year. Since last year, Q4 was fully locked down, all the other cities in Japan, so that everybody goes for -- rushing for the e-commerce. Then this is the global side. If you look at the OP ratio, it's almost coming to the breakeven somehow. Also, Y-o-Y basis, revenue has been increased by close to 20%. But it's okay. Our main focus is to make it profitable or be level. So it's almost just around the corner to make OP positive. Then others, let me skip it. Then SG&A, this is -- I already explained a little bit. And we are pretty much happy that our SG&A ratio has been low, as much as 47%, which is quite close to our ideal situation. And this is the operating profit level that we somehow managed to -- just above breakeven. And our Y-o-Y OP was close to JPY 1 billion. That was super positive for us. Then let me move on to the latest strength. Our monthly active users, the unique users, pretty much maintained and slightly getting higher. I think that it's still a good situation here. Our monthly active user was maintained. Our SEO team has been -- engineers and planners has been working super hard. That was good news. And also the actual registered member has been -- still increased. And this is the connections, which is our original KPI, which increased quite a little bit, thanks to the increased number of Brand Official subscribers. Then this is the overview review of FY '21. And as you can see, the second half of our fiscal year or second -- that was Japan's COVID-19 second, third, fourth waves of the pandemic, and it's been very difficult. And the infection rate still increasing relatively. That is the situation in Japan. Then this is the repeat from the probably Page 2 or 3. We have somehow managed to make it operating profit positive somehow on Q4, thanks to the e-commerce drive and all the continuous cost reductions and modification of the business model to make it more or better breakeven structures. So the On Platform segment, the full year review of the division. All our client, the beauty brands quite suffered still under the COVID-19. And -- but somehow -- we are recovering somehow after we hit the bottom from our Q1. And also, this is the number of the Brand Official. It's been very difficult for us since many of the beauty brands actually shrink their marketing budget and the [ ICT ] budget somehow. But we somehow displayed quite dramatic increase on the numbers of subscribers on Q4. Also, we didn't achieve our initial target by a number of the -- 300 by the end of the fiscal year. But as I said earlier, we modified and updated the way we sell the product, so we demonstrate the market dynamics by the analysis functions of the Brand Official. And we conduct the marketing actions from the Brand Official, and together with this advertisement from our side of our business and tried to increase the result of the e-commerce sales for that client. And that tactics or the way we sell the products worked quite well so we somehow managed to increase quite a bit, about 40 new subscriber by the last quarters. And this is the historical changes in the e-commerce sales by produce. And as I said earlier, last Q4 was kind of bubble since the whole Japan was locked down so that everybody goes for e-commerce. But after that, somehow, we keep increasing the e-commerce sales somehow to sustain the total Beauty Service segment. This is the brick-and-mortar store side of the Beauty Service. As you can see from the OP ratio with the whole stores and the one -- the stores, with the flagship stores, the flagship store has been very difficult since the fixed cost is super high. But apart from that, we somehow managed to making profit on our OP ratio side -- our OP side. And if you look at the recent changes in our existing stores, apart from the flagship stores, it's decreased quite a bit due to the lockdown of the major cities in Japan. Then this is operating profit. The upper side is e-commerce profit. And the bottom bar is the store losses on OP level. But the difference is the blue side. We are somehow making profit, the Beauty Service as a whole. Then this is the global. As I said, it's been very difficult for us, so we conducted so many reduction of the headcount in many different countries. We closed down many stores, and we sold some of the businesses. Then we are almost there to just around the corner to generating operating profit, as I repeat. And this is another repeat that we reduced the cost. And our SG&A ratio has been decreased. And this is another repeat. We generated operating profit on the Q4 somehow. And this is our directions for FY '22, from the next page on. And of course, same thing happened to your country as well as Japan, there's so many changes happened due to the COVID-19. And on the consumer side and the Beauty Brand side as well. And after the COVID, the consumer shifted so much on the online side, obviously, myself as well. And for the cosmetic brands, Beauty Brands and sales strategy has shifted so much into the e-commerce as well. And also the marketing strategy as well, there's so much these activities, including the SNS, the influencers and the so many new ideas coming in. That's what happened. So we aligned to all this kind of shift in trend as well. And this is our direction or the basic concept underneath our business plan for this fiscal year. The way to accelerate -- making positive synergy, combining all the component on our platform, the media, e-commerce and the advertising, Brand Official and physical retail, all together, in order to create further growth of the e-commerce. That's one. And also, we are, too, connecting the e-commerce on the brick and mortar stores together by users. Then that increased the users' lifetime value. Then that creates the better use -- or more use of our other advertising solutions, together with utilizing the data from the Brand Official. Then let me explain the -- I'd like to show the positive effect on the synergy linkage from media to e-commerce. On the left side of this slide, the conversion ratio of the e-commerce, if you compare the users from the search engines, users from @cosme, it's super obvious the users @cosme is -- conversion ratio is super, super high compared to the ones from the search engines. Also, the number of the users -- the purchases of our e-commerce through @cosme has been increased. And also at the same time, the conversion ratio has been increased quite a bit. Then still, thanks to our positive situation on the search engine optimization, our e-commerce -- the purchase by more than half were coming from the search engines, so that we have more -- the wide space for the growth as well. Then this slide is the effect of the linkage between e-commerce and physical stores. I'd like to explain about the average purchase price, basket price on the both of the bar graphs. The left side is the average basket price, whether by the users from the e-commerce only or the users fully utilizes our e-commerce and our stores, the both. Then the users with the both e-commerce and the stores usage, the average basket price is 1.5% -- 1.5x. And on the right side, we haven't had much of the large number of cases yet, but we are increasing the number of the online beauty counseling. And our users are utilizing online beauty counseling. The size of the average basket price is more than double. That's the situation here. So the e-commerce and the brick-and-mortar stores, so much of the synergy we already prove. So this is the actions to take place this fiscal year in order to strengthen our synergy between online and offline, and media to the e-commerce. And the first, we're repositioning our stores -- physical stores as the physical gateway to e-commerce. And second, we'd like to enhance the more network of our physical stores, equal to distribution of e-commerce users, which means nationwide. But efficiently, which means that we are seeking new ways to increase the retail networks this year. And also, we like to accelerate the usage of the online beauty advisers. We already proved by ourselves that the huge success of the small number of beauty advisers by achieving the more than double the average basket purchase price through the online beauty counseling. So that we'd like to accelerate the size of the beauty. So this is the illustration of the structures, how we are increasing our business side, starting from the size of the e-commerce and our stores, then to the medias. So supposing the users are spending JPY 10,000 on the e-commerce of our stores, then suppose the brand -- the beauty brands, our clients are happy about it, then spending the half of their revenue, which is about the -- which is the JPY 10,000 put into our medias as our marketing investment. But what happens is that if the users are spending JPY 16,000 on the e-commerce and JPY 8,000 on the physical stores, it's JPY 24,000 stores in total as a revenue to our site, then the beauty brands are happy about it. Then they spend, say, half of the total that they are getting from their retail, then that's going to be the JPY 12,000, which is more marketing investment compared to the transaction amount, what is now. So this is how the synergy linkage is happening. Then I'd like to explain how we are seeing the upside opportunity by utilizing the BO and the other services. And the size of the each of the bar indicate the size of the business side by client. Then if you look at what kind of service these brands are using, the left bar client are using all the services from our site, including Brand Official, ad solutions and e-commerce stores. Then rest of the bar, if you look at the bottom, they are using some of the services, but not all of the services. Then especially these 2, the number of the customers are quite high. The average business side is very low. So that we are accelerating the introduction of Brand Official services to these clients. We have to increase average business size to these clients as well. That's what we are planning to do. Then this is the recap of our idea on our directions this year. We are to increase by the On Platform segment businesses as a whole, combining ad solutions and Brand Official. And also the Beauty Services side. We have to combining the e-commerce and stores, creating synergy by themselves. And at the same time that we are combining the left side, On Platform segment and right side, Beauty Service segment, altogether to create more of the business synergy to increase our upside opportunities. So let's move on to the next chapter, which is our business target from FY '22. This is the key KPIs on our profit and losses on the target. Our target for FY '22 is JPY 39.2 billion revenues, which is Y-o-Y 126.7%. And we are creating JPY 500 million operating profit, and ordinary income of JPY 400 million. And we are creating the JPY 300 million as our R&D income target, which is lower -- 20%-plus lower than FY '21, which we fortunately make it happen to ourselves. Sell some of our asset to outside parties. But we think our business shape, it's very healthy this year, and I'm looking forward to that. Then this is a breakdown of the net sales and the operating profit on each of the business segment. And On Platform segment, the revenue increased by 120%, (sic) [ 121.2% ] and operating profit, 131%. Then Beauty Service, the revenue increased 34% (sic) [ 134.3% ]. Then we are generating operating profit at JPY 230 million. Global, 51%, (sic) [ JPY 5.18 billion ], the increase again, 111.2% increase and JPY 130 million operating profit. And also, the others. Almost same as this year and breakeven. Then this is what we are planning to do. And I think that we are not defocusing our business strategy, but almost all the business segments becoming super healthy compared to the last year. So this is the difference between last fiscal year and this fiscal year. And we have a slight increase on the On Platform segment, which is the JPY 15 million (sic) [ JPY 1.5 billion ]. That was happened from the increase in Brand Official. And we had a huge increase on revenue by the Beauty Service. Thanks to the e-commerce progress. And also we are seeing that the COVID situation will be the same as past half, and second half could be slightly recovered somehow. That is the basic assumption on the basis of our budget. And the global side, revenue increased somehow and focusing on only those [ major ] and the e-commerce focus. That's what happened. And this is the changes from the FY '21 to the FY '22. Last year was negative on JPY 6 million (sic) [ JPY 600,000,000 ]. Then the On Platform segment, Beauty Service segment and global segment, each of the segment created positive changes. And it's a slight increase on the company-wide cost. That was the software. That's what we planned, then we will be hoping to ending the result of the JPY 5 million (sic) [ JPY 500,000,000 ] positive on operating profit. Then if you look at the back view from the -- starting from FY '16 to this year, FY '22, you might remember that we made a huge loss due to -- we missed the target for the previous midterm business plan. The situation was becoming really bad, starting from FY '19 by decreasing the operating profit quite a bit, then making huge operating losses on FY '20. Then last year, we shrink quite a bit of the operating losses. Then this year, we are back to generating profit again for the last 3 years. That's the history. And lastly, the -- we'd like to introduce the new candidates for the Board of Directors. He's Shinsuke Usami, he's the Chairman and Representative Director of the Carta Holdings. And he's a senior entrepreneur. And Carta Holdings is now a huge, what I think a conglomerate called Dentsu Group. And he had so many experience on the management, not just entrepreneur. He experienced IPO. So many M&A on the buyer side, on the seller side as well. And he's an experienced executive so we are more than happy to welcome Usami-san as a new Board member on our table. I'm so happy to work together with him. Then lastly, but not least, I'd like to explain a little bit about our activities on the sustainability. I see this. To be honest, we've been working on sustainability for many years, but I think that we have a responsibility at the same time to make our activities more visible and more explainable. We did so many things from many years ago, but we didn't actively conduct these sustainability activities until 2018. Then we upgraded our sustainability activities on the version 2.0. Then that was '19 that we start preparing the -- we are putting the CSO website on our company website, and we somehow plotting our activities into the SDGs framework. That was what happened from the FY '19. Then on the version 3.0, last year, we launched the new actions. We created many projects within the companies, and we actually take actions. For instance, like we conducted the Beauty SDGs Week last fiscal years, and it was a huge success. And we had many corporate supporters. And the numbers, the top CEOs from the global companies -- top Japanese companies, beauty companies supporting our ideas. And there's so many contents explored, and the users are thrilled about it. That was last year. Then this year, we are upgrading to version 4.0. This is the reinforcement and execution phase. Then what we do? We are to -- creating the executive -- the specialty committees on sustainability. Then the Director report to the CEO. And last year, we created the new actions. That was a series of actions. Especially the big one was the Beauty SDGs Week. But we need to make it continuous actions, that's why we created the committee, not just to see the project. And then second, we declared the new materiality on our website. Then materiality was updated from the -- since 2 years ago. Then we are enhancing the second materiality, especially sustainability beauty through the joint development with the outsiders, including Beauty Brands, the distributors and the users, everybody. That's something we newly added. We had to pass all the SDGs goals. So this is the end of the presentation. Thank you very much. I'm sorry that this was a long project presentation and -- sorry, that I took so much time. But this is pretty much over. And if you have any questions, I'm so happy to hear and answer the questions. Thank you very much.