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

Thank you for taking time out of your busy schedule to the presentation on Macromill's financial results for the fiscal year ended in June 2022. My name is Toru Sasaki, Representative Executive Officer and Global CEO. Once again, we have decided to video shoot the financial results presentation. We'd like to cover the following agenda today. First, I'll give a summary of the fourth quarter and full year results for FY '22, followed by a presentation on the financials from Mr. Hashimoto, who has resumed the role of CFO effective April 1st. After that, I will share the status of the Japan and Korea Business segment and the Overseas Business segment. Lastly, I will share the earnings guidance for this fiscal year and update you on the progress of the midterm business plan. Please turn to Page 3. Revenue for Q4 was up year-on-year by 18% to JPY 11.85 billion, maintaining the momentum leading up to the third quarter. On the operating line, Q4 was at operating loss of JPY 303 million due to investment on talent and for future opportunities. For the full year, including Q4, revenue was JPY 49.81 billion, up 15% from the previous year with the operating profit up 8%, overachieving the guidance that was revised up in May. For the current fiscal year ending in June 2023, we are projecting double-digit growth for revenue and operating profit over the previous year. We will provide more details later. We also plan to raise the dividend by JPY 4 per share from JPY 17 to JPY 21. For the current fiscal year, we expect strong demand to continue and we'll strive to grow the revenue, expand the operational capacity, particularly in Japan, and enhance productivity. These are the key takeaways for Q4 and the full year. I will now hand over to our CFO, Mr. Hashimoto, and he will update you on the financial information.

Now please turn to Page 5. The graph on the left illustrates the revenue trend. Revenue for the year was JPY 49.81 billion, up slightly by more than JPY 6.6 billion from the previous year. This was about JPY 810 million higher than the guidance that was raised to JPY 49 billion in May. In the year under review, we achieved double-digit growth in all 4 quarters with a 15% revenue growth for the full year. On the right is a trend for OP, and we achieved JPY 5.81 billion for the full year, also overachieving the guidance. Q4 marked a loss due to relatively small quarterly sales stemming from seasonality as well as from investments in people and future growth. However, the actual loss was smaller than the revised plan and the full year profit was up 8%. In light of the better full year performance vis-a-vis the earnings guidance, we will pay a year-end dividend of JPY 9 per share as planned. As a result, the full year dividend will be JPY 17 per share, an increase of JPY 4 over the previous year. This is equivalent to the consolidated dividend payout ratio of 21%. For the first time, we have reached the 20% to 30% payout target range that we have set as the long-term goal since our relisting. Next on Page 6. I'd like to explain the trend of our segment sales and profits. The graph on the left shows the full year revenue and its breakdown with double-digit year-on-year growth in both segments and 15% growth on a consolidated basis. Our business has seasonality with overseas sales peaking in December and domestic sales peaking in March. Every year, revenue in Q2 and Q3 tend to be low. And as the graph on the right indicates, this trend has not changed. Double-digit growth continued in the fourth quarter. And as we explained at the announcement of Q3 financial results, we believe we have returned to the growth trajectory from the recovery phase from COVID-19. Next, using the waffle chart on Page 7, I will explain more details of factors behind the change in operating profit by segment. The 8% year-on-year growth in operating profit for the full year shown on Page 5, can be broken down into a negative 2% in the Japan and Korea Business segment and plus 10% in the Overseas Business segment. In both segments, total employee expenses and other operating expenses, including IT costs increased. On top of that, in the Japan and Korea Business segment, higher outsourcing expenses resulted in total cost increasing more compared to the revenue growth. On the other hand, in the Overseas Business, the revenue growth outpaced the increase in expenses and helped to increase the profit. In the end, profit growth was achieved on a consolidated basis. Page 8 shows a trend of operating costs. As shown in by the left graph, operating costs increased by 16% for the full year. And right graph summarizes a curly trend of operating costs and the major trend in Q4 remained unchanged from in Q3. Panel expenses are basically linked to sales. On the other hand, outsourcing and total employee expenses continue to grow at a high rate as we strive to expand our operational capacity with sustained order growth from the clients. Depreciation and amortization expenses continue to decline year-on-year, thanks to the impact of freshly return-to-office space last year amongst others. As one-offs, other expenses were significantly higher due to an increase in M&A-related expenses and IT-related expenses. Although not specified on the slide, travel expenses and other utilities costs also increased year-on-year as the business started to normalize from the pandemic, and this also led to a significant increase in other operating expenses. In sum, operating cost for Q4 alone were up 23% over last year. Next on Page 9. Let me show the trend for headcounts, outsourcing costs and total employee expenses. In the Japan and Korea Business segment, we were able to significantly increase headcount in the fourth quarter with the hiring of 16 new graduates in Japan. Although the shortage of Personnel and Operation division has not been completely resolved, we currently slowed down the overall pace of recruitment in the future as we have been able to increase headcount in other divisions as planned at the beginning of the fiscal year. In the Overseas segment, we were able to hire more people than planned, thanks to our aggressive hiring amid higher-than-expected client demand. Going forward, we will shift our focus on productivity gain for the newly hired talent and aim to move to the next phase from the second half of fiscal '23. Mr. Sasaki will explain the details later. Page 10 to 12 show the P&L, balance sheet and cash flow statements. Please refer to the slides for details as needed. I will briefly go over the highlights. As you can see on Page 11, that covers the balance sheet information. Goodwill increased by JPY 800 million due to several small M&A transactions in the Japan and Korea Business segment. While for the Overseas business segment, goodwill increased by JPY 400 million due to foreign exchange effects. On the other hand, credit rating was maintained at BBB+. Net debt-to-EBITDA was 2.2x and consolidated ROE was 10.3%. All of the profit-related targets set under the midterm business plan reached a targeted range. In addition, although we did not prepare a specific chart on this topic, we will continue to enhance shareholder return. As I mentioned at the outset, we've been raising dividend steadily and will continue to do so in the future. We will also continue share buybacks while keeping a close eye on our business performance and stock price. That concludes my explanation. Next, Mr. Sasaki will explain the status of the business and the earnings guidance for the fiscal year ending in June 2023.

Thank you, Mr. Hashimoto. I will now give an update on the Japan and Korea Business segment. Please turn to Page 14. As indicated at top right, Q4 revenue was up 12% compared to last year and up 11% excluding the currency impact for the Korea Business. The graph at bottom right illustrates that the operating profit was down. Following the fourth quarter results, revenue for the full year was up 11% from last year or up 10% on a constant FX basis, as indicated at top left, while operating profit was down 1% year-on-year with an actual and constant FX basis, as shown at the bottom left. Increase in outsourcing costs, employee expenses as well as other costs led to a weak performance for OP. Now let me turn to Page 15 for a look at our Japan Business. In the third quarter, the number of projects declined increased due to the lack of operational capacity. But in the fourth quarter, we were able to reduce the number of projects we had to turn down, especially due to Q4 being relatively a quiet quarter, resulting recovery in the pace of sales growth for the Japan Business. And therefore, as shown by the right graph, the fourth quarter revenue was up by 10% year-on-year, with the Research business up 5% and the Digital & Other New business driving the Japan Business with a 31% increase. Following the Q4 performance, as shown on the left, the full year revenue grew year-on-year by 9%, with the Research business up 5% and the Digital & Other New business up by 28%. I will now go into more details with the Research business and Digital & Other New business. Please turn to Page 16. Despite the stronger-than-expected client demand in the Research business, we fell short of the 6% growth target due to missed opportunities for the client declined requests, resulting in a 5% increase in sales to JPY 1.1 billion. The Digital & Other New business segment grew by 28%, significantly overachieving the target. The segment sales growth was JPY 1.6 billion, outperforming the Research business in both growth rate and absolute amount of sales growth. Looking closely, the Digital business was impacted in Q3 by a lack of operational capacity and digital measurement and DMP Sync service but achieved recovery in the fourth quarter. In Other New business, the Data Utilization Support and Life Science business continued to drive overall growth. That concludes my explanation on the Japan Business. Next, please turn to Page 17 for the Korea Business. On the right, the fourth quarter revenue was up by 26% year-on-year and up 21% on a constant currency basis. The business in Korea achieved double-digit growth in all quarters, driven by accelerated demand for shifting from off-line to online research amid the pandemic. Capitalizing on this tailwind, we also exerted our strength, leveraging our competitive advantage of being the only player in Korea with a large proprietary consumer panel and the growth of digital services utilizing the in-house panel. As shown on the left, revenue for the full year was up 22% and up 17% on a constant currency basis. That concludes my explanation on the Korea Business. Now page turn to Page 19 for the Overseas Business Segment. On the upper right-hand side, revenue for the fourth quarter was up 37% from the previous year and up 32% on a constant FX basis. As indicated at bottom right, operating profit was down 24% year-on-year or down 21% on a constant FX basis. However, there was a onetime employment adjustment subsidy of approximately JPY 300 million in the previous year. So when adjusted, OP would have increased. After closing the book for the fourth quarter, the full year revenue shown at top left was up 33% or 28% on a constant FX basis. As illustrated at bottom left, we achieved an outstanding profit growth for the full year with the OP up 194%, 183% on a constant FX basis. Our measures to increase the wallet share of global key accounts or clients which we have identified as strategic clients, have been successful. We are blessed to have excellent clients and expect to continue to grow the revenue. Compared to the pace of the revenue growth, the growth of profit has lagged, but this is gradually recovering. For improvement, we are reviewing the prices for our service, and we are making progress, mainly with global key accounts. However, we continue to face pricing pressure from clients as well as from competition. So we'll continue to negotiate tenaciously. Now let me move on to the regional breakdown on Page 20. On the right is a quarterly sales trend. And You can see that all the regions achieved year-on-year sales growth in all 4 quarters with just one exception of sales decline in the U.S. for Q2. In sum, as indicated on the left, for the full year, revenue was up 18% in the U.S., 36% in Europe and 41% in rest of the world. Sales in all regions grew substantially. Sector-wise, FMCG, Media & Advertising and Alcoholic Beverage industries led the revenue growth. That conclusion update for each segment. Last but not least, I'd like to offer some details on the earnings guidance for the current fiscal year as well as an update on the progress of our midterm business plan. Please turn to Page 22. The fiscal year ending in June 2023 is a bridge year to the final year of the midterm business plan. As for our current progress, although revenue is affected by the macroeconomic situation, all of our entities are making daily progress in capturing strong client demands. New challenges, such as the Data Utilization Support business in Japan are also making good progress. Therefore, we believe that we are on the track to achieve the JPY 57 billion in revenue as stated in the midterm business plan. While on the profit side, there were some delays, we remain focused over the last fiscal year on the expansion of the capacity of the Research business and improvement of productivity in order to make catch-ups. Based on the above assumptions, here is our guidance for the fiscal year ending in June 2023. Please turn to Page 23. For the fiscal year ending in June 2023, we are forecasting double-digit growth in both revenue and profit. We are targeting at JPY 56 billion in revenue, up 12.4% year-on-year; and JPY 6.55 billion in operating profit, up 12.7% year-on-year; and JPY 3.72 billion in net income, up 18.2% year-on-year. In addition, we plan to increase the dividend by JPY 4 per share for the full year, that is JPY 2 per share each for the interim and the year-end dividend, assuming 22% of consolidated payout ratio. To add some commentary to our profit guidance, we plan to continue to make significant use of outsourcing, respond to increased client demand. In addition, with the lifting of the COVID-related restrictions, other expenses, including travel expenses, office-related utilities, system-related expenses for the future, security enhancement and M&A expenses are expected to increase more than the growth rate of revenue. Meanwhile, total personnel expenses will be kept below the growth rate of revenue by shifting the focus to productivity improvement. Page 24 shows the breakdown of the first and the second half of the year. In the first half, revenue is expected to increase 11% year-on-year to JPY 27 billion with operating profit down 26% to JPY 2.7 billion. In the second half, revenue is expected to increase 14% year-on-year to JPY 29 billion with operating profit up 81% to JPY 3.8 billion. We expect a significant decrease in profits in the first half of the year followed by a significant increase in profit in the second half. Please turn to Page 25 for an explanation of the cost restructure for improving the profit margin in the current fiscal year and achieving the targets of the mid-term business plan. The 3 steps for profit improvement described in the past, are to curb outsourcing costs fast and then to reduce the total personnel expenses. We would like to revise this approach as shown in this page. In the first half fiscal year, both outsourcing and total personnel expenses will increase faster than revenue growth because the capacity shortage has not yet been resolved in response to strong client demands. The increase in total personnel expenses is due to the significant hiring that took place last fiscal year. The new hires are currently in the training process and will naturally become fully operational in the second half of the year, which will expand the capacity and improve the productivity. As a result, the pace of increase in total personnel expenses will be less than that of sales revenue growth in the second half of this fiscal year. In addition, since we will gradually increase the ratio of internal operational capacity, the pace of increase in outsourcing expense, which will grow faster than revenue throughout the year, will be more contained in the second half of the year. On the back of the aforementioned outlook for this fiscal year, we will move in the next fiscal year to the statistic, where both total personnel and outsourcing expenses will grow more slowly than the rate of revenue growth, and profit margin will improve significantly. Although we are behind our initial expectations, we believe that we can make up for the delay if this momentum continues as client demand is greater than we expected, so much for our view of the earnings guidance for fiscal year ending in June 2023 and our midterm business plan. Next, I will explain our strategic policies for the fiscal year ending in June 2023. Please turn to Page 26 for Japan Business. The Research business grew 5% last year, a little short of the growth rate targeted in the midterm plan due to lost opportunities with some projects being declined. We continue to see strong client demand. And so in this fiscal year, we take management initiatives to expand order capacity and to improve productivity, which will be the drivers for profit margin improvement. In Digital & Other New businesses, we expect continued strong growth, especially in the Data Utilization Support business and the Life Science business. In the digital domain, Google has announced the discontinuation of third-party cookies would be postponed by 1 year from 2023 to late 2024. But we believe that if the situation remains the same in which cookieless solutions will be necessary, we will continue to strengthen our relationships with platformers in anticipation of the cookieless environment. Now I'll explain each of these strategic policies in details. First, please turn to Page 27. With the capacity expansion and productivity improvement for our Research business, in April, I made an internal announcement that this is an important management issue and that we will work to improve it. After that announcement, we had on-site interviews for a month. And in May, a training camp was held with the participation of managers and members of the relevant divisions. Of course, the executive officers, including myself, also participated. As a result, we have begun to review the training system for early startup to increase capacity, introduce retention measures to reduce turnover, introduce incentives to increase productivity, improve workflow and invigorate communication. Although it is still too early to say how effective these measures will be, please take a look at the graph on the right. This graph shows the forecast of operational capacity for each quarter of the current fiscal year, assuming the capacity for the first quarter of last year being 100. As a result of various measures, the turnover from research directors in July and August has remained at 0, which is below the expected level. Thus, capacity is increasing. We expect to see capacity increase about 1.5x in the third quarter, our busiest quarter. We will continue to report on capacity increase with the status of projects that we could not undertake. Next, regarding Digital & Other New businesses. Today, I'd like to report on the topics in the Data Utilization Support business. Please turn to Page 28. The Data Utilization Support business is a new challenge for us as it is an expansion of our business capability, necessary to evolve into a professional marketing services company. During the last fiscal year, this business grew faster than we had expected. In order to further accelerate the speed of its growth, we're pursuing M&As. I'd like to talk about the 3 companies for which we have closed the deals. First, Acclimate, which became our wholly owned subsidiary on April 1. The company's strength lies in its talent bank with a large number of registered professional human resources required to promote new businesses and DX. As diverse work profiles are promoted in the future, Macromill Group aims to expand the services it provides and increase its human resource capacity to support the evolution of our business. Second, the M&A with SOUTH Inc., which was reported when we announced the third quarter results. As of July 1, we spined off our Data Consulting Business, which has been integrated with SOUTH to form a new company called 800. Macromill's stake in this newly established company is 71%, and we plan to increase it to 100%, depending on its business performance. It is this company, which underpins the rapidly growing new Data Utilization Support business. The merged company itself is an entity comprising professionals, which handles a wide range of areas, from strategy to advertising and planning. And we will continue to expand performance in the area of data utilization support. The last one is Citation, which became an equity method affiliated company in which we hold a 40% stake as of August 1. The company was established in 1985 and is an industry pioneer in the area of research consulting with a focus on marketing research. It provides high unit price, high value-added services with customer satisfaction at a very high level. Macromill has owned a little less than 15% stake in Citation since 2008 and has built operative relationships with the company, which has been very reliable. Through the acquisition of additional equity interest, we will further strengthen our operative relationship. This amount is included, we are aiming for revenue of JPY 3 billion in this area during the midterm business plan period. Next, please turn to Page 29. I'd like to report on trends in the industry. First, some supplementary comments to the global market trends mentioned at the beginning, In 2020, ESOMAR, the global marketing research industry trade association, announced a change in market definition and the new market side, stating that the traditional marketing research industry will become an insight industry. The major changes include the addition of technology-driven data collections, such as martech, and marketing consulting to the traditional research market. As a result, the global insight industry market is estimated to be about twice as large as the traditional research market. This slide shows the market size of the Japanese insight industry. As announced in May this year at the conference of the Japan Marketing Research Association, JMRA, which publishes market data for the Japanese marketing research industry, if the market definition is expanded to include the insight industry as in the global market, the market size is expected to be about 1.5x larger than the traditional marketing research market. I'd like to draw your attention to the figure of about JPY 80 billion for digital data analysis, management consulting and think tanks. When we announced our third quarter financial results in February last year, we reported that the size of the serviceable obtainable market, a market that we can approach, is between JPY 20 billion to JPY 30 billion. According to JMRA, however, the actual market is about 3x larger than that. Although the market in this area is not yet clearly defined, we believe, based on our current performance that there are ample opportunities for a company, which possesses a wide variety of data to leverage our unique advantages and significantly expand sales revenue. I have provided this explanation in the hope that it will help you understand the trends in the industry clearly. Against this backdrop, we will aggressively pursue the expansion of our Data Utilization Support business, so much for the policies of our Japan Business. Next, I'd like to explain our policies for the Korea Business and Other Overseas Business on Page 30. Both Korea and Other Overseas businesses are performing well. Naturally, we expect high revenue growth in the current fiscal year. As you can see, we have been able to achieve growth that exceeds our midterm targets, namely 16% of CAGR for Korea business and 9% for Other Overseas business. And with a strong client demands, we believe that potential risks are limited. In terms of profit, Korea business will make an upfront investment in order to launch a service that provides purchase data, which is already highly appreciated in Japan. In Other Overseas business, we intend to review the prices of our services as our sales revenue expands. Let's wrap up. Please turn to Page 31. Earlier, we reported a change in the definition of the market. But these changes also mean that industry boundaries are disappearing and there are needs for a partner who can address the needs and challenges facing corporate clients. Once again, we believe that transforming the business model is essential to achieving the targets of our midterm business plan. And it will not only help our clients solve their problems, but also enhance the career path of our employees. As it will help us build a stronger business foundation, we believe that this is an extremely important challenge, which will benefit our investors and stakeholders. We hope to promote this transformation and steadily realize our evolution into a professional marketing services company. Thank you for your continued support. And thank you for staying with us to the end of the presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]