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

[Interpreted] Thank you very much for watching this video presentation of Macromill for fiscal year 2021 full year results. I'm Sasaki, Representative Executive Officer and Global CEO. This time, again, we use this video format to present the outline of results. Here is today's agenda. First, I will summarize the fourth quarter and the full year results, followed by Shimizu, CFO, who will present financial information. And then I will explain about Japan and the Korea Business segment and Overseas Business segment, excluding Korea. At the end, I will also give an update on the mid-term business plan. Please turn to Page 3. The fourth quarter revenue was JPY 10.07 billion, which is a 30% increase compared to the fourth quarter last year and increased 25% in constant effects where there was a severe impact from the COVID-19. The operating profit was JPY 0.21 billion with Paycheck Protection subsidies offsetting significant increase in total employee expenses and outsourcing expenses. The full year revenue was JPY 43.170 billion were up 5% year-on-year and up 3% in constant FX. Operating profit booked a big increase compared to the previous year with impairment. Fiscal year 2021 full year operating profit was down 6% and also down 6% in constant FX compared to FY 2020 excluding the impairment. Revenue, operating profit, EBITDA and net profit exceeded the guidance, which was revised upward in the third quarter. With respect to shareholders' return, dividend payout is increased from JPY 11 per share to JPY 13. The share buyback process, which had started on May 14 was completed on July 8, buying back a total of JPY 800 million, the equivalent of 2.3% of the total shares outstanding. The guidance for the fiscal year ending in June 2022, which is the current fiscal year, sets revenue at JPY 47.4 billion or up 10% year-on-year, and operating profit at JPY 5.1 billion or up 2% without Paycheck Protection subsidies. Fiscal year 2022 is clearly positioned as the first year of the new 3-year midterm business plan to achieve the planned goals due to sustainable working environment and transform Macromill's business model with focused and aggressive investment in talent and outsourcing. We will also continue to increase shareholders' return. So much for the outline of the fourth quarter and the full year results. Now Shimizu, CFO, gives financial update.

Thank you, Sasaki-san. Please turn to Page 5. Full year revenue was JPY 43.1 billion. We saw an increase of JPY 1.9 billion year-on-year. The revenue also exceeded the revised guidance by JPY 670 million. Q1 revenue was down 8%. Q2 revenue recovered and Q3 and Q4 revenue exceeded the prior year. Full year revenue also exceeded the prior year. Our clients appreciate merits of online research even in these difficult times. Also, we have continued to provide off-line research services to our clients using online interview tools, and prepared safe environments for panels and clients. Our business is seasonal. The highest revenue in the overseas markets was generated in December. The peak for Japan was March. While Q4 is relatively quiet compared to other quarters, its revenue increased by 30.5% year-on-year. As to operating profit, it was JPY 5.3 billion. This also exceeded the revised guidance, and we invested in outsourcing expenses and employee expenses in order to handle strong bookings. We received Paycheck Protection subsidies in the U.S. and a few other countries which amounted to JPY 340 million. Thanks to this onetime income, full year operating profit was down by 5.5% when we excluded impacts from the impairment loss in FY '20. We'd like to walk you through P&L in more detail, so please turn to Page 6. Full year revenue in Japan and Korea segment increased by 3.2%. We confirmed recovery in clients demand in online and digital products. Revenue in other Overseas segment improved by 10%. We saw a strong recovery in bookings from major clients in this segment. In terms of major expense items, we are optimizing employee cost to handle strong clients demand. We increased employee expenses by JPY 1.3 billion and saw an increase of 8.4%. As to panel expenses, it increased by 4.9%, in line with revenue. Regarding outsourcing expenses, we increased outsourcing to handle projects and saw an increase of 10.6%. Both employee expenses and outsourcing expenses are spent on human resources, and we monitor the sum of both expenses, and we'll continue to optimize them to generate revenue in the future. In the short run, we will continue to rely on outside partners. But after we have hired a target number of team members, we aim to internalize tasks and functions in order to enhance quality clients and generate higher revenue. Depreciation expenses related to IT investments grew by JPY 160 million. Our decision to cancel part of our office lease contract increased depreciation expenses from the capitalized asset retirement cost by JPY 82 million. As to depreciation expenses related to IT investments, we will start to see a slower growth in the future. We saw savings in office utility costs and travel expenses, which absorbed the increase in IT expenses. Together with the onetime Paycheck Protection subsidy, other operating expenses were flat compared to FY '20. Full year operating profit margin was 12.4%, and EBITDA margin was 20.1%. Please turn to Page 7 for segment profits. Operating profit was down by 6% year-on-year, if we exclude the impact from the impairments in FY '20. Out of negative 6%, negative 11% came from Japan and Korea segment. And this is mainly due to an increase in outsourcing and employee expenses. The remainder positive 5% came from other Overseas segment. This is due to an increase in revenue and the onetime subsidy. When we compare FY '21 to FY '20, by excluding the impairment and subsidy, operating profit was JPY 5 billion, down 12%. Please turn to Page 8. We'd like to show you historical revenue trend. As you can see on the left chart, full year revenue increased by 4.6%. As shown on the right, revenue in Japan and Korea segment turned to positive from Q2. Revenue in other overseas segment turned to positive from Q3. We saw a strong recovery in both segments in Q4. We'd like to share with you historical cost trend. So please turn to Page 9. As you can see on the left chart, full year operating expenses increased by 6% after excluding the impairment in FY '20. Chart on the right shows quarterly cost trend. Q4 panel expenses moved in line with revenue. We continued investments in outsourcing and employee expenses to handle strong recovery in clients demand, an increase in employee expenses in Q4 was affected by reversed bonus accruals in FY '20 and added accruals in FY '21. Depreciation expenses were flat compared to Q3. Travel expenses and utility costs declined. This offset the increase in IT-related expenses. We saw an increase of 30.5% in revenue in Q4 stand-alone and saw an increase of 22% in expenses. Operating expenses in Q4 increased by JPY 87 billion from Q3. Then we'd like to share with you historical head count trend. Please turn to Page 10. Total head count increased by 167 year-on-year. We hired people to handle strong demand in online research. We also aim to hire new members for our new business lines. Then we'd like to explain balance sheet on Page 11. Starting with working capital, our cash position and liquidity is stable. Goodwill on our balance sheet was JPY 41.7 billion. JPY 39.1 billion of total goodwill was attributed from Japan and Korea segment. The remainder JPY 2.5 billion was attributed from other overseas segments. You can find more information on our valuation of goodwill in the appendix. Our credit rating is BBB+. So in June, we issued a 3-year bond in JPY 5 billion and a 5-year bond in JPY 10 billion. The coupon was 0.38% for 3 years and 0.56% for 5 years. We received strong demand from investors. The annualized finance cost was 0.81%, which is lower than previous year. Net debt-to-EBITDA was 2.33x. We met our target of 2 to 2.5x, which we set prior to the COVID-19 pandemic. Interest coverage ratio was 12.92x. Our return on equity was 9.94%. Next, we'd like to explain where and how we generated cash and spent it. So please turn to Page 12. Operating cash flow was JPY 6 billion. It decreased by JPY 1.7 billion due to higher revenue and accounts receivable. But we generated operating cash flow to increase enterprise value. We decreased the investments this year. Investment cash flow was minus JPY 1.1 billion. Our free cash flow was JPY 5.1 billion. Finance cash flow was positive JPY 630 million as we issued bond and used part of proceeds to repay bank loans. As a result, we increased cash by JPY 5.7 billion from a year ago. We had JPY 19 billion in cash and cash equivalents at the end of June, and we used JPY 5 billion to repay a bond which matured in July. Let me explain how we did against the revised guidance, which we announced in May. Please turn to Page 13. We experienced strong demand from clients. And the recovery in other overseas segment was stronger than expected. We increased investments in outsourcing employee expenses to handle clients' orders. We converted bookings to revenue and absorbed additional investments. Profits also exceeded the guidance. We also saw a positive impact from foreign exchange translation. We will pay JPY 13 per share as dividend, as announced in May. We have continued to increase dividends per share since IPO in 2017. Dividend payout ratio is 18% this year. We aim to meet our goal of 20% to 30% dividend payout ratio. As to share buyback program, which we set in May, we used all of JPY 800 million by the end of July. As a result, our total shareholder return, combining dividends and share buyback, amount to JPY 1.3 billion which results in payout ratio of 46.8% of net income after tax. I'd like to explain FY '22 guidance on Page 14. We expect our clients demand will continue throughout the year. Revenue would grow by 9.8%. We plan to increase revenue in online, digital and new business lines. We will continue to invest in human resources, and both outsourcing expenses and employee expenses would grow faster than revenue. Contribution from smaller office space would be savings of JPY 400 million. We do not plan to receive another Paycheck Protection subsidy in FY '22. In order to make year-on-year comparison easy, let us use adjusted operating profit and adjusted net income, excluding impact from the subsidy here. We plan to increase both profits in FY '22. Due to share buyback and reduced number of shares outstanding, adjusted earnings per share would grow by 10.5%. We plan to increase annual dividend by JPY 3 and make it JPY 16 per share. We have paid dividends once a year, but we will start to pay out dividends twice a year. We would like to pay JPY 8 in March and JPY 8 in September. On Page 15, I'd like to explain the guidance by splitting the first half and second half. We expect that there remains negative impact on offline research, but demand to online and digital products will continue throughout the year. New business lines will start contribution to the top line, too. As to expense items, while we will continue to rely on outsourcing partners, we will hire and train our team members. Towards the second half, we will have completed internalizing tasks and functions and start to see outsourcing ratio to go down. We will then start to see a positive impact to profits gradually in the second half and plan to make a full year impact in FY '23. I then would like to discuss our capital allocation policy on Page 16. We aim to continue to invest in people, research systems and new business lines and take a balanced approach to both debt repayment and shareholder return. We aim to keep our credit rating, enjoy low interest rates environment and merits from leverage and maintain net debt-to-EBITDA ratio within our target. We plan to keep momentum in dividend increase and target dividend payout ratio from 20% to 30%. We will continue to use share buyback as a means of shareholder return together with dividends. Now I'd like to hand the microphone back to Sasaki-san regarding business update. Thank you very much.

[Interpreted] Thank you, Shimizu-san. Now I would like to give update on Japan and the Korea business segment. Please turn to Page 18. Top right of the page, the first quarter revenue was up 19% year-on-year and up 17% in constant Korean currency. As the bottom right of the page shows, the operating profit decreased. Top left, the full year revenue was up 3% year-on-year and also up 3% in constant FX. Bottom left, the operating profit was down 11% year-on-year and also down 11% in constant FX due to increase in outsourcing expenses as well as total employee expenses. Please turn to Page 19 for Japan business. As shown on the left side of the page, the full year revenue was up 2% year-on-year, with digital increasing by 7% and online, offline research increasing by 1%. The right-hand side of the page shows quarterly development. As the fourth quarter saw off-line research service being at halt in recurring states of emergency, digital and online areas recovery more than offset the negative impact, increasing revenue on a full year base, which we are looking at positively. Please turn to Page 20 for Korea business. As shown on the left, the full year revenue was up 15% year-on-year and up 11% in constant FX. In the fourth quarter, an employee was infected by COVID-19, and we had to close the office for 3 weeks. Although the impact from the pandemic is still being felt, we are successfully working on demands for a shift from offline research to online research by achieving double-digit growth on the full year, while markets and competition are struggling. We expect Korea business to continue to drive growth in the current fiscal year as well. Please turn to Page 22 for other overseas business, excluding Korea. Top right, the fourth quarter revenue was up 83% year-on-year and up 59% in constant FX. Bottom right, the operating profit markedly increased, partly due to about JPY 300 million one-off impact from Paycheck Protection subsidies. Top left, the full year revenue was up 10% year-on-year and up 4% in constant FX. Bottom left, operating profit would have been down without Paycheck Protection subsidies in the fourth quarter. Revenue has recovered the pre-pandemic level, showing very strong performance. Although some sectors are struggling, our efforts to increase our wallet share in strategically important global key accounts are paying off. We expect the positive effect not to be transitory, but to continue in the current fiscal year. Meanwhile, with clients becoming more demanding about prices and competition competing with prices, profit recovery is slower than that of revenue. To deal with this issue, we are, for example, reviewing from offer prices. But when services with higher outsourcing ratio are increasing, we are yet to get around to producing good results. That said, we have very good prospects for revenue expansion through efforts to maximize our wallet share in global key accounts, which we will continue to pursue as our first priority. Now let me give you some regional views. Please look at Page 23 for the U.S. As shown on the left, the full year revenue was up 6% year-on-year and flat in constant FX. We are seeing it positively that the fourth quarter performance drove the year-on-year increase on a full year basis, showing recovery toward the pre-pandemic level. Please turn to Page 24 for Europe. As shown on the left, the full year revenue was up 10% year-on-year and up 4% in constant FX. Europe is emerging even stronger than the U.S., recovering the pre-pandemic level in the fourth quarter, driven mainly by the U.K. Next, please turn to Page 25 for Latin America, Middle East and Asia, excluding Japan and Korea. As shown on the left, the full year revenue was up 25% year-on-year and up 18% in constant FX. Showing a strong recovery than the U.S. and Europe, this region exceeded the pre-pandemic level in the fourth quarter and achieved double-digit growth for the full year. So much for updates for each segment. Now lastly, let me give you update on the midterm business plan. Please turn to Page 27. To be ranked among global top 10, and to be #1 in Japan and Asia, we remain committed to these ambitious goals stated in the current midterm business plan. On top of that, in the new midterm business plan comparing to the year ending June 2024, we targeted JPY 57 billion of revenue, which translates into the annual average growth of 9.7% and operating margin of 15%, and we will maintain ROE of at least 10%, BBB+ rating and net debt-to-EBITDA multiple of 2 to 2.5. With respect to shareholders' return, we will maintain payout ratio of at least 20%, assuming profit increases during the 3 years. We would like to exercise share buyback in a flexible manner as well. Please turn to Page 28. Along with the development of the new midterm business plan, we have partially changed our mission statement and renewed our vision. We have put back the original mission statement, the one we had at the inception of Macromill. When we announced our strategy for Japan business, which is the main business for the group, I explained how we will transform our business model. In our new vision, we have reflected this business model transformation and value offering to our clients through the transformation. Our new vision is, build your data culture. We have been working with data since the foundation of the company, helping our clients for better decision-making by offering data-native ideas and specific solutions. We will continue to do so. We believe that it is necessary to build a data culture on the part of clients to make better decisions in a sustainable manner, and we would like to be the driver to make that happen. The new vision reflects such aspiration of ours. Now I explain about the new midterm plan more in details. Please turn to Page 29. Revenue is projected to renew record high every year, and operating profit is expected to renew a record high in 3 years after hitting the bottom in FY 2021 and 2022, with operating margin improving to 15% level. Please turn to Page 30. First, Japan business. Macromill that's Macromill Insight, Hakuhodo Macromill Marketing and other subsidiaries are categorized into either research business or digital and other new business with target growth rates, respectively. Research business targets at 6% of annual average growth in revenue, and digital and other new business at 20%. These growth targets translate into similar increasing revenue amounts, for research business and digital and other new business over the 3 years of the new midterm business plan. Of course, we expect digital and other new business to continue to show strong growth and revenue increase after the 3-year period as well. So much for Japan business. Please turn to Page 31 for Korea business and other overseas business. Korea business, with Embrain being the main entity, targets at 16% of annual average growth. As both Korea market and competition are struggling, our Korea business is a sole winner with its only and the largest proprietary panel in Korea, given competitive edge. We expect the situation to remain unchanged going forward. And our Overseas Business with MetrixLab targets 9% of annual average growth. Considering its past tracking record, promising perspective and growing online market, we believe that the business can continue nearly double-digit growth in revenue. Contribution to profit meanwhile is expected to be limited. So much for Japan, Korea and other overseas business. When we announced the first quarter results for fiscal year 2022, we will show KPIs to track progress in each business and for the 2 business categories for Japan business. Moving on to profit targets. Please look at Page 32. Let me explain how we are thinking about total employee expenses and outsourcing expenses which are currently increasing. We are thinking of 3 steps. Currently, we are in the first step where we are increasing total employee expenses and outsourcing expenses. This is to stabilize repeat ratio through improved service quality, to expand in-house research capabilities and reduce outsourcing expenses, to improve productivity as well as workflow for better customer satisfaction and to accelerate automation. In the second step, we will be able to use increased capacity of in-house research and reduce outsourcing expenses. In the third step, we will limit the pace of increase in total employee expenses. In particular, for Japan business with its strong profit contribution, we will make that happen by rebuilding value chain in 3 years of the new midterm business plan. Through these steps, we will achieve profit targets. Now wrap up. The new midterm business plan which covers 3 years, including the current fiscal year, has a significant meaning for Macromill. We are committed to realize a sustainable work environment and business model transformation along with record high revenue and profit and shareholders' return more than ever. While the pandemic gave us a huge negative impact, it also made us to realize the importance and the potential of data and offered new perception. We will work for achieving the targets in the new midterm business plan for the sake of all the stakeholders. We would appreciate your understanding and continuous support. Thank you for staying with us till the end of our presentation today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]