Makuake, Inc. (4479) Earnings Call Transcript & Summary

Hello, everyone. Thank you very much for taking time out of your busy schedules to attend our financial results briefing for the second quarter of the fiscal year ending September 2025. I'm Ryotaro Nakayama, the President and Representative Director. In today's presentation, I will explain the second quarter business results overview, the full year business forecast and the measures to be taken. And in the second half, I will explain the medium-term business plan step by step. Thank you for your attention. Now without further ado, let me begin by discussing the financial results for the second quarter. First, I'd like to provide a summary of the second quarter. First, our performance. In March, we generated a large number of major projects, leading to an increase in total transaction volume. Net sales exceeded our plan with 54% progress toward the full year target in the first half, a solid half year. However, with increased advertising agency sales, procurement costs rose, resulting in a 15.5% increase in the cost of goods sold compared to the previous quarter. Additionally, because the efficiency of ad delivery did not improve as expected, it impacted the growth of GMV relative to the volume of ads delivered, causing a slight decrease in the gross profit margin to 75.9%. In terms of SG&A expenses, personnel costs have decreased due to changes in the executive structure and a reduction in the number of employees. On the other hand, due to the strengthening of marketing initiatives in January and March, advertising expenses slightly increased. Additionally, expenditures related to training programs for management aimed at strengthening organizational capabilities and the hosting of offline events were postponed to the second half of the year. Combined with steady sales progress and lower-than-expected SG&A expenses, operating profit reached JPY 260 million in the first half, significantly surpassing the full year target of JPY 120 million, leading us to revise our full year forecast upward. Next, regarding KPIs, the active project count tends to decline during the second quarter, which has fewer business days and indeed fell by 9.2% compared to the previous quarter. However, we implemented several initiatives, including campaigns targeting project owners during the March new life (sic) [ lifestyle ] season, encore projects encouraging additional purchases for popular projects, extending the project publication periods, changes to our new and repeat acquisition structures and hosting acquisition events specialized by genre. These various initiatives and efforts to increase the number of projects are slowly but surely starting to show results. In addition, regarding the project unit value, steps like the distribution support for project owners-funded advertisements and coupons and revamping the manual for maximizing unit price on the first day of a project have proven effective, resulting in a significant 17.2% increase compared to the previous quarter. The medium-term plan I will discuss in detail in the latter part of the presentation. Regarding the external environment, we believe that the environment for new product development in the manufacturing industry continues to be challenging due to factors such as the weak yen, rising raw material costs and soaring shipping fees. At the same time, the frequent changes in U.S. tariff policies are making it difficult for manufacturers to formulate stable plans. Additionally, we observed that individual consumer spending has significantly declined compared to the same period in previous years due to the pullback from year-end and new year consumption as well as the impact of rising prices. Next, I would like to explain the key items related to our business performance. First, regarding the total transaction volume, the second quarter typically sees a decline in total transaction volume due to seasonality as there are fewer business days and the active project count tends to decrease. However, in the second quarter, thanks to initiatives aimed at increasing project unit values and the successful creation of numerous large-scale projects in March, the total transaction volume increased by 6.4% compared to the previous quarter. Next, regarding net sales. In addition to the increase in total transaction volume, net sales from ancillary services, including advertising agency sales, also grew, resulting in a 9.1% increase in net sales compared to the previous quarter. Furthermore, higher ancillary service revenue increased the take rate by 0.7 percentage points compared to the previous quarter. Next, regarding gross profit, the cost of goods sold increased in proportion to the rise in advertising agency sales, leading to a 15.5% increase in cost compared to the previous quarter. Additionally, due to advertising delivery efficiency, the gross profit margin slightly declined to 75.9% compared to last quarter. As for SG&A expenses, while total personnel costs decreased due to changes in the executive structure aimed at speeding up decision-making and strengthening on-site strategy execution as well as controlling the total number of employees, advertising expenses slightly increased due to the reinforcement of marketing initiatives in January and March. Regarding operating profit, various investments related to human capital, including training programs for managers aimed at enhancing organizational capabilities, which had been planned as expenses for the first half of the year, as well as promotional expenditures related to the execution of offline events, were postponed to the second half. As a result, operating profit continued to significantly exceed the plan, reaching JPY 160 million, following the trend from the previous quarter. The cumulative operating profit for the first half, combining the first and second quarters amounted to JPY 260 million. We believe this profit exceeds our expectations, partly due to the postponement of planned investments to the second half. For the investments that were delayed, we intend to make thorough preparations and carry them out in alignment with the investment plans for the second half. This item, which we consider our most important KPI, showed a decrease in the active project count. Due to the fewer business days in the second quarter, there tends to be a decline, and the number dropped by 9.2% compared to the previous quarter. The project unit value grew significantly, increasing by 17.2% compared to the previous quarter due to the success of various support initiatives to improve unit prices. Going forward, we will continue to enhance the advanced standardization of the Makuake service, refining our systems and operations so that every business partner can fully leverage the power that Makuake offers very effectively. Next, here are some of the standout projects from the second quarter. Within Makuake, projects featuring high-priced items, particularly in the highly popular categories of gadgets, leather goods and electric mobility, generated significant amount of support preorders. Usage among large corporations has also continued to expand. And across various genres, numerous attractive projects brimming with innovative ideas that appeal to consumer-specific preferences have been launched. Additionally, this project is strongly focused on the SDGs. And products born from the passion of those tackling social issues are contributing to the future by supporting cultural preservation, promoting employment and protecting the environment. Next, I will discuss the earnings forecast for the fiscal year ending September 2025. As of the end of the first half, net sales reached 54% of the full year forecast, while operating profit exceeded 200% of the target. In addition to the generation of large-scale projects during the second quarter, boosting net sales, a shift in expenditures led to lower-than-expected SG&A expenses in the first half, resulting in profits that significantly exceeded our forecasts. Regarding the investments that were delayed, we definitely intend to firmly carry them out in the second half to drive future growth. As I have thoroughly explained, based on the results of the first half, we have carefully revised our full year performance forecast. We have set the full year revenue at JPY 4.04 billion, combining the first half results with the initial forecast for the second half. As for operating profit, taking into account the costs that were delayed from the first half as well as planned additional investments, mainly in AI, new businesses and human capital management initiatives, we expect it to land around JPY 310 million. Compared to the initial performance forecast, we have revised this terms projections to reflect a plus-6.3% increase in revenue, a plus-158% increase in operating profit and a plus-314% increase in net profit. Compared to the previous fiscal year, net sales is expected to grow by 10.6% and operating profit is projected to turn positive, improving from a loss of JPY 62 million to a profit of JPY 310 million. Additionally, we expect the operating profit margin to reach 7.7%. As for total transaction volume, following the decline in the second half of the previous fiscal year due to various environmental factors, the second half of this year will focus on implementing initiatives aimed at boosting year-over-year growth like the second quarter. Since the revenue structure has changed significantly from the end of last fiscal year to the beginning of this fiscal year, direct comparisons are difficult. However, by first establishing a minimum profit margin, we now aim to efficiently leverage our available cash to roll out the next phase of our strategy. Regarding investments, in addition to regular SG&A expenses like hiring, we are planning for a delayed cost of JPY 30 million originally scheduled for the first half. Furthermore, we are planning an additional investment of around JPY 40 million aimed at strengthening the growth foundation for the next fiscal year and beyond, including initiatives in AI, new businesses and human capital management strategies. We aim to advance the structural reforms of our company and businesses and to build a solid foundation for corporate growth in the coming years. As for the strategy to achieve our goals in the second half of this fiscal year, in the Makuake business, we plan to strengthen stable operations by acquiring projects from high-quality project owners and reducing the impact of seasonality. At the same time, we aim to solidify our revenue base and build a track record so that we can expand the scale of revenue from ancillary services in the next fiscal year and beyond. Additionally, we will work to enhance our support capabilities for business growth by utilizing Makuake Insight, which we recently announced, to better assist business operators. We will also begin implementing various new initiatives aimed at significantly enhancing the ability to sell new products and services. Next, I would like to move on to an explanation of our medium-term management plan, explain the plan focusing on the period from the fiscal year ending September 2025 to the fiscal year ending September 2027. First, regarding the achievements we have built up so far and the challenges we face in aiming for the next stage, as shown in this diagram, the total transaction volume for new products and new services in the debut e-commerce market has fluctuated due to the strong environmental impact compared to the pre-COVID period, but we have managed to expand it threefold. While we have secured what can be considered the largest position in this unique niche, the flagship business itself operates under a structure where consumers make selections at each individual purchase opportunity. And for businesses as well, transactions typically occur only for about 2 to 3 months each time a new product is launched. Because it is a flow-type business, it is highly susceptible to external environmental influences. Therefore, building a structure that encourages businesses to continue transacting with us and creating value offerings has become a top priority. In this context, when we look at the challenges faced by businesses, we see that, as Japan's working population continues to decline, small- and medium-sized enterprises and regional companies, which make up the majority of our clients, are particularly at risk of experiencing labor shortages. As a result, businesses are increasingly being forced to focus solely on their core competence of creating good products. On the other hand, as I mentioned earlier, by indeed establishing a unique position through operations and flow-based business models that other companies cannot easily replicate, we at Makuake have been able to accumulate distinctive assets that are unique to our platform. First, the number of connections we have with businesses that continue to take on new challenges. In terms of the total number of connections with businesses, we believe there are plenty of companies that have more clients than we do. However, when we narrow it down to businesses with a strong spirit of challenge, we recognize that the volume of these high-quality business connections is a unique asset. And thirdly, when it comes to new products and new services, Makuake has established a certain level of brand strength with an image and recognition as the go-to company for such innovations. This, too, has become a unique asset for us. We believe that these unique assets, which are distinctive to our company, operate very effectively in providing precise solutions to the challenges faced by businesses. By leveraging these unique and valuable assets of ours to provide innovative solutions across the plan, debut, growth stages of a product, we believe that businesses will be able to focus on their core competencies in a seamless manner while, at the same time, enabling us to support them efficiently and effectively over the long term. As for the needs of businesses, as I mentioned earlier regarding the labor force, there is indeed an increasing necessity to rely on external support for marketing and sales operations. By combining the unique assets we mentioned earlier, those 3 key points, with the needs of businesses, we aim to provide end-to-end and comprehensive solutions for the plan, debut and growth stages of their new products and services through data, marketplace and know-how services. In doing so, we believe we can not only solve the challenges faced by businesses, but also build a unique structure that increases the number of touch points, long-term contracts and sustained relationships with them. Through this transformation, we will shift from a corporate value model centered primarily on the debut of new products to one that continuously supports businesses from the planned stage through to growth with our insight capabilities at the core. By doing so, we aim to establish ourselves as a game changer with a unique and powerful selling capability in the vast retail distribution market. By using Makuake Insight, businesses can create and develop new product concepts with a high potential for success. And through surveys and interviews with users, they can further enhance the reliability of their concepts during the plan phase, such as adding more detailed feedback. Building on that, businesses can develop high-quality general sales strategies by analyzing customer data and insights. Furthermore, in general sales, Makuake will leverage its capabilities to enhance product growth by providing additional support such as facilitating sales on e-commerce malls, connecting with distribution wholesalers and offering other promotional assistance. Then by combining the data from general sales and feeding it back to businesses through Makuake Insight, they can identify areas for product improvement and develop ideas for new product planning. This enables the continuous looping of the plan, debut, growth cycle, what we call the PDG cycle within our company, using Makuake Insight. As a result, businesses can build a structure that consistently and effectively increases their sales and profits over time. This structure is actually referred to as information manufacturing and retailing at UNIQLO, but now even small local businesses can adopt the business model that was once only possible for such large corporations. At the same time, there are still many major companies that have not yet properly established their DX, digital transformation, or manufacturing and sales systems in this era. With this approach, even those companies can build a structure that enables them to successfully run consumer-facing product businesses. By continuously enhancing our comprehensive services, we can significantly amplify Makuake's selling power, which we believe will lead to an increase in businesses that see the benefits of ongoing transactions with our company. Furthermore, this structure will also increase the number of attractive publications on the Makuake site, thereby enhancing its appeal to consumers who use Makuake, creating a synergistic structure that contributes to the growth of Makuake's flagship service itself. Based on these strategies, the step-by-step goals for each fiscal year are as follows. For the current fiscal year ending September 2025, we are focusing on rebuilding our revenue structure, strengthening our management foundation and initiating new strategies. Then, for the fiscal year ending September 2026, we aim to fully launch investments into building a PDG cycle that will drive Makuake's renewed growth, grounded in the strength of our operating cash flow. Then, for the fiscal year ending September 2027, we aim to achieve a unique position within the domestic retail industry through the full operation of the PDG cycle while also strengthening our influence in the market. In terms of revenue outlook, through business expansion in the plan and growth areas, we aim to increase the range of services provided to each client, thereby boosting revenue per client. At the same time, we intend to establish both flow-based and stock-based stable revenue structures. Our goal is to achieve JPY 5.2 billion in net sales and JPY 700 million in operating profit for the fiscal year ending September 2027 and to use this as a foundation for accelerating further expansion thereafter. We envision this as a midterm period of significant progress. As for the diagram, it is presented as a reference to help investors and other stakeholders form a broader image. So please understand that it may change depending on circumstances. In order to realize this plan, we believe that the growth and maximization of the capabilities of our people and organization are essential, and we are once again formulating a human capital management strategy. In particular, we recognize that improving productivity is an essential challenge, and we believe it is crucial to maximize the power of individuals and the organization through the development of systems utilizing AI in various operations and tasks as well as through digital transformation, DX. Additionally, as we are still very much a venture company, we recognize that there are significant challenges in clarifying and instilling standards for work values and methods. We believe that by strengthening this area, we can greatly enhance our organizational capabilities. We also see improving the alignment between evaluations and compensation based on these standards as a key challenge. By addressing these challenges, we will significantly hasten the pace of improvements toward building the PDG cycle and effectively enhance the speed of upgrading new business initiatives, thereby establishing a unique position in the market. At the same time, we believe that this will lead to an increase in executive level and senior level talent, which will positively impact the enhancement of our corporate value. In line with the structure for enhancing human capital, we also intend to continue making unique investments that are characteristic of our company, specifically investments that sustain the strong passion of our officers and employees to support the sincere challenges undertaken by entrepreneurs, which serves as the source of their energy. For example, in the past, we have invested in real-world events such as factory tours, meet-up events with project owners and marché. Through these opportunities, we have created a structure where the source of energy for our officers and employees continues to be fueled. We intend to keep devising such unique initiatives of our company going forward. Through these efforts, we aim to furthermore realize and achieve our medium-term plans and make significant progress toward our vision. Rather than rushing to advance our human capital management strategy within just this fiscal year, we intend to firmly embed it within the organization by steadily following milestones like these. This fiscal year, we aim to first launch our medium-term human capital management strategy and initiate the formulation and dissemination of various work values and policy guidelines. In 2026, we envision that these policies are embedded and education cycles based on these standards occur naturally at the front line. We also aim for employee engagement that increases with upgraded evaluation and compensation systems. Then, by fiscal year 2027, we aim to establish a state where the PDG cycle is autonomously driven and strengthened by the frontline teams and where our ability to attract and retain top talent has significantly improved. Through this, we intend to build the organizational strength needed to support our next stage of growth. That indeed concludes my presentation. As I mentioned in the first half, I believe the first half of the year marked significant progress in the reform of our revenue structure. On the other hand, as I also mentioned, there are still many challenges we must overcome in order to better capture the needs of businesses. We will continue to execute our medium-term strategy toward that goal and establish a unique and original position in the vast retail distribution market, one that existing players have been unable to achieve. Through this approach, we aim to evolve from a company whose contribution was limited to merely maximizing debuts into a continuous and valuable business growth partner for challengers. We aspire to take new steps toward realizing a world where what should be born is born, what should spread is spread, and what should remain is preserved. We would be truly grateful if you could look forward to and support our unique game-changing efforts in the retail distribution market. We sincerely appreciate your continued support. [Statements in English on this transcript were spoken by an interpreter present on the live call.]