Macromill, Inc. (3978) Earnings Call Transcript & Summary

Welcome. Good afternoon, and greetings once again from my home in Concord, Massachusetts. Thank you for joining us for our Q4 earnings announcement. This is now our second time using prerecorded content for this announcement. Thank you again for being patient with us as we continue to work through these new processes. Before we dive into the content, I want to acknowledge that, while the last 6 months have certainly been challenging, our Macromill teams have made significant progress in adjusting to the new realities that we're all now facing as part of this global health and economic crisis. Our teams have responded rapidly to COVID-19 issues, and we've been both agile and innovative. We've quickly moved into new ways of working, so that we can continue to deliver on the essential services that our clients rely on more than ever. And I'm proud of how our teams have reacted across the globe, and I'm optimistic about our market opportunity going forward. So back to our presentation. In today's content, we'll cover 3 topics: first, a Q4 and full year financial update, along with our guidance for fiscal '21; second, Japan and Korea segment update; and third, we'll finish with an update on our Overseas segment. So let's start with a very high-level summary of Q4. Slide #3, please. The following are a few key takeaways that I'd like to share with you at the start of this presentation. As usual, we'll go into more detail on each of these topics, but these are the major points I'd like you to remember from this presentation. First, COVID-19 adverse impact expanded significantly in Q4, and it has had a material impact on our business. Q4 revenue of JPY 7.7 billion is down negative 23% in reported revenue and negative 22% in constant currency. While this decline is significant, it was in line with our revised guidance. While these may be challenging time, we continue to operate our business with the health and safety of our clients, panels and employees as our #1 priority. We remain committed to maintain our continuity of the services that we provide, and we'll work to continue to control costs and protect profit, while we look for new opportunities for growth. And we'll use this disruption to reaffirm our position as a digital leader and to turn the turbulence that we are now experiencing into a long-term strategic advantage for Macromill. Second, considering the business performance and the future profitability of our Overseas segment, we've made the decision to recognize an impairment loss of JPY 5.3 billion in Q4. Given the magnitude of this write-down, we feel the potential for future impairment risk is minimal. Third, as a result of our Q4 performance, year-to-date revenue was in line with our revised guidance, while our operating profit fell significantly below our revised operating profit guidance largely due to a onetime impairment charge. Full year revenue was JPY 41.3 billion, which is a decline of negative 7% in reported revenue and negative 5% in constant currency. Full year operating profit was JPY 5.7 billion or negative 27% decline before the impairment charge or JPY 0.4 billion or 95% decline after the impairment loss. In addition, full year EBITDA exceeded revenue guidance, our free cash flow improved year-on-year, and we ended fiscal '20 with more cash on the balance sheet than we had in the prior year. Fourth, fiscal '21 guidance assumes that the adverse impact of COVID-19 will continue through the first half, resulting in full year revenue guidance of JPY 40 billion or negative 3.1% year-on-year, with a significant improvement in operating profit. Given our cash position and our strong cash flow, we are planning to maintain our dividend payment of JPY 11 per share. And then lastly, while we are all living in a very different business climate than any of us have expected, we believe that the goals and objectives outlined in our midterm plan, along with the individual plans that we've developed, are consistent with the current environment we are experiencing. What that means is that we'll continue to aspire to become a global top 10 research company and to become the #1 research company in Japan and the #1 research company in Asia. This requires us to evolve into a research and data company and to be a trusted partner for our clients. And we'll maintain our commitment to grow faster than the market in terms of both revenue and profit. So now let me hand it over to Shimizu-san, who will take us through our Q4 and full year financial performance along with our fiscal '21 guidance.

[Interpreted] Please turn to Page 5. This is a summary of the results. Graph on the left illustrates the revenues. Year-to-date revenue up to Q4 was down by 7% year-on-year to JPY 41.270 billion. Until February, we were expecting the revenue to grow year-on-year with a few exceptions, including China. However, coming into March, in all the markets where we are present, we started to feel the impact of COVID-19 on our business. Since April, many cities around the world was placed under the state of emergency or lockdown, which significantly impacted our business, and the revenue for Q4 alone was down year-on-year by 23%. The assumption for the revised earnings guidance announced in May was that the state of emergency would be in place until end of June. However, the actual timing of lifting that status happened earlier than expected, and we enjoyed firm underlying order for our mainstay online research service, which led to this result. Graph on the right is the operating profit. In addition to the impact from lower sales, we reviewed the performance of the Overseas Business, excluding Korea, for fiscal year ending in June 2020 and the future earnings outlook. And judging that it's difficult to recoup the investment, we decided to incur impairment loss of JPY 5.28 billion on the goodwill related to this segment. As a result, we booked an operating loss of JPY 5.65 billion for Q4. The full year operating profit was down by 95% year-on-year to JPY 396 million. I will give you more details on the P&L later on Page 6. The breakdown of the 7% decline on revenue was as follows. Japan and the Korea Business was hit with COVID-19 since February, and revenue for the full year was down by 5.7%. Overseas Business was more severely hit by COVID-19, and the full year revenue declined by 10.7% year-on-year. With lower revenue, we managed part of the employee expenses as variable cost, and it went down by 1.7% year-on-year. The group headcount was up by 7 people to 2,470. No big change from last year. Regarding the panel expenses, we unified the accounting categorization for the group from Q2 last year, and part of the other expenses was transferred to the panel expense item. This impact has run its course by Q1 this year, so adjusting for this factor, the panel expenses were down by about 2.3% year-on-year. We lowered the outsourcing expenses by 12.8% year-on-year, thanks to the training programs and enhanced in-house capabilities. Depreciation and amortization was impacted mainly by the implementation of IFRS 16; office rental expenses, which were previously booked as other operating expenses but transferred to the depreciation item, and that had the biggest impact of JPY 1.269 billion. We have been increasing our investment into software assets over the last few years, but with the cost for switching to cloud and license fee booked in other operating expenses, depreciation from IT investment was muted to a marginal increase. The impairment was -- on goodwill was sizable in the Overseas Business segment, incurring JPY 5.28 billion in other expenses. Financial expenses were down by 16.7%. Under IFRS, impairment loss of goodwill is booked as operating expenses. Hence, it fell through to all the profit lines below OP. Therefore, for the full year, operating profit, profit before tax and net profit are all significantly down year-on-year on a consolidated basis. On the other hand, EBITDA margin is not impacted by the impairment loss of goodwill. There was a substantial margin decline for the Overseas Business. But partially due to IFRS 16, EBITDA margin improved from 20.7% to 21%. I will now walk you through the segment P&L by using the waterfall chart on Page 7. The breakdown of the 95% year-on-year decline in OP was as follows. 18% was due to lower profit and increase in IT spending in the Japan and Korea Business segment. For the profit decline in the Overseas segment, excluding Korea, 9% was due to lower sales and 27% was due to lower profit, excluding the impact of impairment loss of goodwill. Including the impairment, the impact was 77%. In both segments, the impact of the sales decline was partially offset by cost control. The adoption of IFRS 16 also had an impact on the depreciation for both segments. From Q2 last year, we adopted a uniform definition of panel and other operating expenses, and that impact is specialized by the graph on this page. Next, on Page 8, I will explain the revenue trend. As shown by the graph on the left, the year-to-date revenue was down by 7%. But on constant currency basis, it was down by 5%. Japan and Korea Business was down by 6% on reported basis and 5% on constant currency, whereas the revenue for the Overseas segment was down by 11% on reported basis and by 5% on constant currency. The graph on the right indicates the track record of quarterly revenue. The revenue in Q4 on a standalone basis was down by 23% year-on-year on reported basis and down 22% on constant currency. The graph illustrates the seasonality of the business. Since February, we started to see the impact of COVID-19. Our business was hit in March, which is a big revenue month for Japan and in Q4, which is seasonally a slow quarter in terms of sales. In Q4, sales for Japan and Korea Business and Overseas segment declined by 17% and 41%, respectively. Page 9 shows the trend of our expenses. Compared against a seasonal fluctuation in revenue, high proportion overspending is fixed cost. And hence, the operating expense is stable to a certain extent. As indicated by the left graph, although the operating expense, including the impairment loss of goodwill, increased by roughly 12%, we managed to control other cost items. Today, panel and outsourcing expenses are more correlated with the sales trend. Fixed costs, including fixed portion of employee expense, IT maintenance cost, IT investment and depreciation, including leasing costs, such as office rent, have remained relatively stable since taking the ownership of the JV with Hakuhodo back in Q4 of fiscal 2019. Next, I'd like to talk about the headcount trend using Page 10. The headcount remained nearly unchanged compared to last year, with only an increase of 7 people. Under the current business environment, our plan is to focus on enhancing the quality and speed of our service with the current headcount. Next, on Page 11, let me walk you through the balance sheet, starting with the working capital. Accounts receivable turnover is 66 days, and account payable turnover is 46 days. There is a gap in the cash-in and cash-up cycle, but this gap is consistent, and our liquidity management is stable. For contingency, we maintained a cash position worth 2 months of revenue. Let me give you more details about the goodwill, which is quite sizable on the balance sheet. At the end of last fiscal year, the total sum of goodwill outstanding was JPY 46.8 billion, out of which, JPY 39 billion was related to the Japan and Korea Business, and JPY 7.8 billion was the Overseas Business. When we did the valuation exercise of the JPY 7.8 billion at the end of the year, we reached the conclusion that it would be difficult to recoup the investment of JPY 5.28 billion, and we took the impairment loss. The left table shows the variance of JPY 5.4 billion, but this figure was impacted by the currency fluctuation at the end of the fiscal year, and the actual impairment loss was JPY 5.28 billion. As last fiscal year, we were able to lower the financing cost, and annualized funding cost in Q4 was down from last year's 1.05% to 0.89%. Our rating is BBB+, and outlook is stable. We improved the leverage ratio. And as of end of Q3, leverage was managed as planned, making good progress toward the goal of 2 to 2.5x for net debt to EBITDA multiple. To our regret, the ROE was negative due to the impairment loss of goodwill. Next, on Page 12, I will give further details on the goodwill. As I mentioned on Page 11, we have 2 types of goodwill. The top half of the page is goodwill affiliated with the Japan and Korea Business, which was booked when the company was privatized with the LBO transaction. The balance of this goodwill changed slightly with the subsequent M&A transactions for the Japan and Korea Business, but have remained stable at around JPY 39 billion. It accounted for 83% of the total goodwill for the group before the recent impairment loss we booked. The present value of the future free cash flow or the value in use where exceeded this goodwill, and their internal calculation implied that the value of use would equal the goodwill amount for the first time if the future free cash flow were to decline by 68%. At the end of the fiscal year, when the goodwill was recalculated by the auditors, this goodwill came to account for 94% of the total goodwill. The value of use would be called goodwill only when the future free cash flow were to come down by 41.8%. And hence, we believe the asset impairment risk gets small for this segment. The goodwill for the Overseas Business was booked when we acquired MetrixLab. In the fiscal year ended in June 2015, we took an impairment hit, and this is the second time we did the asset impairment. The goodwill after the impairment will come down to JPY 2.4 billion, which is roughly 30% of what it was last year, and it will only account for a mere 6% of the total sum. Therefore, we believe the risk of another asset impairment in the future is small. Next, let me illustrate where and how we generated cash and what we used the cash for. Please see the cash flow statement on Page 13. The operating cash flow for the full year was up by JPY 2.1 billion or 38% year-on-year to JPY 7.78 billion. Investment cash flow was negative JPY 2.16 billion due to IT investment, among others. Free cash flow before the financing cash flow was positive JPY 5.92 billion. The cash out portion of the financing cash flow was smaller than last year. And as a result, cash and the cash equivalents increased by JPY 3.2 billion to JPY 13.31 billion. Next, on Page 14, let me go through the earnings guidance for June 2021. The revenue guidance assumes that the COVID-19 impact continues throughout the fiscal year, with the impact in the first half remaining unchanged and subsiding in the second half. At the same time, we expect the clients' demand to recover as they would want to understand the major changes happening in the consumption behaviors through our main products of online research. Under such assumptions, we are guiding for a revenue decline of 3.1% year-on-year to JPY 40 billion. Employee expenses and system-related expenses would be incurred primarily to retain the current talent and system assets. Impacted by the fixed cost, we project the EBITDA to decline by 25% to JPY 6.5 billion. Thanks to the absence of impairment loss of goodwill, OP and net profit will rebound back to black ink to JPY 3.4 billion and JPY 1.6 billion, respectively. EPS will be back in a positive territory at JPY 39.74 per share. For the dividend in fiscal '21, we will keep JPY 11 per share, which is the EPS we will pay at the end of September. Our operating cash flow remains robust, and we'd like to reward the shareholders by keeping the dividend. The currency assumption is indicated on this slide as well. Next on Page 15, I will explain the full year guidance by breaking it down to the first half and the second half. We assume that the pandemic will have more impact in the first half of the year and then weaken in the second half. In the first half of the year, revenue is expected to be JPY 19 billion or down 12.7% over the same period of the last fiscal year, which was before the onset of COVID-19. In the second half, revenue is projected to be JPY 21 billion or up 7.7% year-on-year. Here, we are showing how expenses are allocated to protect existing human resources and the systems assets as well as profit projection in the first and the second half of the year, respectively. We expect profit to improve in the second half, where revenue tends to be higher in the seasonal cycle. With the backdrop of the operating environment and the guidance, I now explain our capital allocation policy. Page 16, please. As I explained on the page of balance sheet, Macromill had sufficient cash and deposit amounting JPY 13.3 billion. Our first priority in allocating capital is hiring of talent, a most important asset; and stable operation of research systems. While continuing maintenance-related investment for business operation, we would like to wait for the timing to operate fully with the current personnel and assets. Next, we will also use our capital for debt repayments according to the repayment schedule, while continuing the dialogue with banks and corporate bond markets to have flexible access for new borrowing, if and when necessary. Then we allocate capital for shareholders' return. The current dividend per share of JPY 11 remains unchanged. At this moment, we are not considering share buybacks, but once the economy rebounds and our results are likely to recover, we would like to review share buybacks again. Now Sasaki-san will explain about our Japan and Korea Business.

[Interpreted] Thank you, Shimizu-san. I'd like to give you business update on Japan and Korea segment. Please look at Page 18. The fourth quarter revenue was minus 17% year-on-year, as shown in the top-right chart. With constant currency, it was also minus 17%. The full year revenue was minus 6% year-on-year, and with constant currency minus 5%, as shown top left. The fourth quarter profit, shown bottom right, was minus 101% year-on-year, and with constant currency, also minus 101%. The full year profit, as shown bottom left, was minus 19% year-on-year and minus 19% with constant currency. Although we could avoid the worst scenario, both revenue and profit decreased on a full year basis due to a significant impact of the pandemic in the fourth quarter. That is for the results in the Japan and Korea segment. Now I would like to explain more about the Japan Business. Please look at Page 19 for the results. The fourth quarter revenue was minus 18% year-on-year, as shown top right. Area-wise, digital was minus 19%; and in the rest of the business centering around online/off-line research was minus 17%. The full year revenue, as shown on the left-hand side of the page, was minus 5% year-on-year. By area, digital was plus 16%; and in the rest of the business centering around online and off-line research was minus 8%. Now I would like to give you more details about the Japanese Business. Please turn to Page 20. This page illustrates the 6 months since the onset of the COVID-19. Our work style changed significantly during this period. Remote work has become a new normal. Although we experienced lower productivity and a decreasing number of client appointments, our productivity has now stabilized, and the number of business appointment has come back up to the pre-pandemic level. Compared to conventional seminars, webinars allow us to provide information and the case studies to clients more efficiently. With the needs to grasp changing perceptions, clients' expectation for our role in the marketing activities is becoming greater. With digital transformation being accelerated, support needs in the marketing area are more visible than pre-COVID period. It is a tailwind for us when we evolve ourselves in the longer term into a real data company. Please move on to Page 21. This page summarizes our future direction, including what we presented to you in the past. Although we have some concerns about the uncertainty for how the pandemic evolves and its impact on our plans, we are confident that we are being able to face and deal with the current situation. Facing with our clients, we are renewing the sense for our unique strength. Leveraging that strength, we aim at being the one and only marketing partner for our client. So much for the Japan Business. Please move on to Page 22 for the Korea Business. The fourth quarter revenue of the Korea Business was minus 14% year-on-year and minus 8% with constant currency. The full year revenue was minus 11% year-on-year and minus 4% with constant currency. In the second quarter, we were going to recover from the impact of the budget decrease of a large client in the first quarter. But due to the pandemic impact in the third and the fourth quarters, even if the fourth quarter impact was in line with our expectation, the full year revenue resulted in decrease. However, we remain an only research company in Korea with a large-scale proprietary panel. Our panel big data service utilizing this proprietary panel is doing very well. In July, our Korean subsidiary was listed in KOSDAQ. The proceeds from the market will be used to strengthen our digital area, including our panel big data service through, for example, acquiring purchase data. Wrapping up, Japan and Korea segment saw a decrease in both full year revenue and profit, but operating conditions are better than those at the time of the last results announcement. It is clear what we have to do, and we have confirmed that we are on the right path. Of course, with the exit from the pandemic being invisible, we need to remain patient, but we will move forward with positive mind, even with the pandemic. We thank you for your support. With that, I return the microphone to Scott.

Thank you, Sasaki-san. Now let's look at our Overseas segment performance, starting with Slide #24. In our Overseas segment, the momentum that we experienced in the first half clearly did not continue into the second half, with a relatively larger impact of COVID-19 in Q4. While this impact was significant in each of U.S., Europe and rest of world, revenue performance was in line with our revised guidance expectations. Looking at the numbers we see, Q4 standalone Overseas revenue was JPY 1.4 billion, which is a decline of negative 41% in reported revenue and 38% in constant currency. On a full year basis, Overseas revenue was down negative 11% in reported revenue or negative 5% in constant currency. On Q4 standalone Overseas operating profit was 5 point -- negative JPY 5.6 billion, driven largely by the combination of a onetime impairment charge and also a decline in Q4 revenue. Full year operating profit growth was negative 41% in reported operating profit and negative 38% in constant currency. Now let's look at our regional business summary information for the U.S., Europe and rest of world. Q4 U.S. standalone revenue was JPY 719 million, which is a decrease of negative 37% in constant currency. Full year revenue was JPY 4 billion or a decline of negative 6% in constant currency. In the U.S., we remain in work-at-home mode, and it's difficult to predict that -- when we'll be back in our offices across all regions in the U.S. In Q4, the U.S. saw strong individual client growth from an OTC pharma company, a big 4 Internet tech platform and a financial services company. In fact, this OTC pharma company was a strong growth engine in each of our regions in Q4, which is a great example of how we can grow client relationships, even in uncertain times. Precision Sample, our U.S.-based panel subsidiary, showed a decline of negative 18% in Q4 due to COVID, reversing the strong performance Precision Sample achieved through Q3. Even with this COVID-related decline in Q4, Precision Sample was able to show revenue growth of 5% year-on-year. Now let's look at Europe. Slide #26, please. Q4 European standalone revenue was JPY 574 million, which is a decline of negative 39% in constant currency, with a decline in each of our largest countries: U.K., Netherlands and France, largely due to COVID-19, but partially offset by growth in Germany and Italy. Q4 full year revenue was JPY 3.2 billion, which is a decline of negative 10% year-on-year in constant currency, also driven by a decline in our largest European markets due to COVID. Similar to the U.S., European offices are still largely in work-at-home mode, with some offices starting to return, with limited access to our facilities based on local guidelines. In Europe, we saw good client growth with a Scandinavian dairy brand and one of the world's largest confectionery food and beverage companies. We also see positive signs in Switzerland, our newest office, where we're seeing solid growth, even in the midst of all this disruption. And now rest of world. Slide #27, please. As a reminder, rest of world includes EMEA, LATAM and rest of world countries. Similar to the U.S. and Europe, COVID-19 impact in rest of world became significant in Q4. Rest of world struggled in Q4, with total revenue of JPY 115 million or negative 55% decline in constant currency in Q4. Full year revenue was JPY 1.2 billion, which is an increase in -- of 16% year-on-year in constant currency, in spite of the impact of COVID. Singapore, our largest rest of world country by revenue, saw a significant decline in Q4, resulting in a full year decline, but this was fully offset by growth in China, UAE, India and rest of world regions. Australia, a new office that we opened in Q2, is showing continued strong growth. In rest of world, we saw good individual client growth from an FMCG client and a European beverage brand. We're also pleased to see our colleagues in China leading the return to a new normal work mode, with the government lifting the lockdown restrictions and -- while most other rest of world offices continue with remote work. So let's wrap up with Slide #28. In summary, the COVID-19 adverse impact expanded in Q4, and it has been a material impact on our business, but the performance was in line with our revised guidance. Based upon the business performance and future profitability of our Overseas segment, we've made the decision to recognize an impairment loss of JPY 5.3 billion in the quarter, but we feel the potential for future impairment risk is minimal. Full year revenue was also in line with revised guidance, while operating profit fell significantly below revised guidance largely due to the onetime impairment charge. Full year EBITDA exceeded revised guidance, our free cash flow improved year-on-year, and we ended fiscal '20 with more cash on the balance sheet. Fiscal '21 guidance assumes the adverse impact of COVID-19 will continue through the first half, resulting in full year revenue guidance of JPY 40 billion or a negative 3.1% year-on-year growth and a significant improvement in operating profit. Given our strong cash position and cash flow, we are planning to maintain our current dividend payment at JPY 11 per share. And lastly, we believe that the goals and objectives outlined in our midterm plan, along with our individual plans to find growth and control costs, are consistent with the current environment we're experiencing, and that our midterm plan objectives will get us back on our growth trajectory when we recover from COVID. Before I hand it over to Sasaki-san, I'd like to share some thoughts with you. On June 15, I announced that I will be stepping down as global CEO following our Annual Shareholders Meeting in September, and that Toru Sasaki will become the company's new global CEO following my departure. As I start to reflect on my experiences at Macromill, I'm proud of what we've accomplished, including growing our Japanese Business, accelerating our global strategies and strengthening our next-generation digital services. As described in our midterm plan, we have started our ambitious plans to transform Macromill into an essential insights and data provider for our clients. I believe that we have the right strategy to deliver on this vision, and now is the right time to entrust a new leader to guide the company into its next phase. I have great trust, confidence and respect for Sasaki-san and his team. The last 5 years have truly been the most personally and professionally rewarding of my career, and my relationships and experiences with our clients, our teams and our stakeholders will always be with me long after my day-to-day interactions at the company wind down. Thank you all for joining us on this journey to create the first truly global digital research company. And with that, I'll hand it back over to you, Sasaki-san.

[Interpreted] First, I'd like to extend my hearty gratitude to Scott Ernst for his excellent leadership and achievements. As I am taking over the baton from Scott as global CEO, I would like to convey 2 messages to you. First is about matching our words and deeds and recovery of trust, to achieve guidance, to launch even more specific growth strategies, so that all of the stakeholders will choose Macromill for a longer term and to return appropriately to our shareholders. These are my missions, and I will work to realize them. Second message is about recovering global business. We recognized impairment loss related to MetrixLab, and future risks are now alleviated, and there remain abundant opportunities for us to move forward. With respect to global business, including MetrixLab, we take over Scott's dynamism and take some new actions. I have been accumulating experience and knowledge in the industry. It is my strength, which I will certainly capitalize on to pursue group synergy. Mr. Thijs, CEO of MetrixLab; and Choi, CEO of Embrain; and myself working together, we will make steady recovery in business performance, both in Japan and globally. I'd appreciate your continued support to the new management team of Macromill. Thank you again for joining us today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]