Septeni Holdings Co., Ltd. (4293) Earnings Call Transcript & Summary

Thank you for participating in our business results briefing today. This is Sato speaking. Today, I would like to go over the business results for the fourth quarter and for the full fiscal year ended September 2020. The agenda will be as follows: I will begin with the full year fiscal 2020 review; then cover the quarterly consolidated earnings overview; then I'll move to the overview by business segment and an update on the mid-term business policies; lastly, but not the least, I'll then cover the earnings estimates for the fiscal year ending September 2021. First, the review of the business results for the fiscal year ended September 2020. I will begin with the impact of COVID-19 on the group's business performance, changes since the last business results briefing. Regarding the impact on the overall market conditions, we started to feel the impact of COVID-19 around the end of the first half of our fiscal year in March, mainly through a declining trend in demand for digital advertising. And with the declaration of the state of emergency in April, the slowdown in demand turned full fledged. And then after hitting the bottom in May, the advertising demand showed signs of gradual recovery. And the pace of recovery has continued through September, the end of our fiscal year. In terms of the impact on our business, the expansion of COVID-19 has brought about a significant expansion of the online space in people's daily lives and, along with that, a rapid shift to online consumption in general at a much faster pace than in the past. And as online consumption expanded, we saw a steady progress in capturing the associated growth in demand. As a result, we saw the expansion in projects. In addition, it's been more than 6 months since we started to encourage our employees to work from home. And accordingly, we made a progress in cost management. These, in summary, are the impact on our business. Page 5 shows the impact of COVID-19 on our consolidated earnings shown on a monthly basis, how monthly net sales compared to those in the corresponding month of the previous year. Last time, at the third quarter results announcement, we reported on the changes from April to June. This time, we are showing the trend for the 6-month period from April to September. As you can see, the year-on-year change was negative April through June. But owing to the strong demand from July, the growth rate turned positive July onward. The growth rate continued to rise in July, August and September. And since July, significant recovery has been achieved as we actively captured strong demand from online consumption. Next is the highlights of the consolidated earnings. The highlight of the results for the fiscal year ending September 2020 is that revenue and profits increased year-on-year, with revenue reaching record high. Revenue was JPY 17.938 billion, up 6.8% year-on-year. Non-GAAP operating income was JPY 2.452 billion, up 18.8% year-on-year, both marking a year-on-year increase. Moving on to highlights of the results by segment. The Digital Marketing Business was affected by COVID-19 partially during the period. But after that, it got on a recovery track and revenue and profit both increased for the full year. As shown on Page 7, revenue increased by 4.8% year-on-year and operating profit increased by 9.9%, representing strong results. Next is the highlight of the financial results for the Media Platform Business. It was also affected by COVID-19, particularly the media business in which advertising revenue decreased while revenue from charge on users was firm. So the results were mixed. The rate of growth in revenue was slightly lower than planned at around 24%. As a result, the operating deficit increased slightly. The following is a review of the full year consolidated income statements. Compared to the guidance, the revised full year estimates, revenue, operating profit and profit for the period all exceeded the guidance. If you remember, we revised the original estimates downward at the end of the second quarter and then revised them upward at the last earnings briefing. The full year results exceeded the estimates revised upward 3 months ago. Page 10 is the graph of full year results by business segment. As explained earlier, the Digital Marketing increased both revenue and operating profit, while the Media Platform Business ended the year with higher revenue and an increase in operating deficit. Page 11 shows the review on the areas of focus of the Digital Marketing Business. There are 2 areas. The first is the progress of collaboration with Dentsu. The graph shows the year-on-year comparison for the fourth quarter, showing a big increase in the volume of clients in collaboration with Dentsu, from 16 companies in the fourth quarter of last fiscal year to 54 companies this year. Domestic Brand Ad is the other focal area. As you can see, the transaction of Domestic Brand Ad also increased steadily. In fiscal 2020, it totaled JPY 6.35 billion, accounting for 8.5% of the Digital Marketing Business, both representing a year-on-year increase. Turning to the Media Platform Business. Shown here is the overview of the focal areas in the Manga Content Business. The highlight here was that COVID-19 had an impact of decreasing advertising revenue, in particular, during the period. And as a result, application revenue for the year decreased slightly. On the other hand, revenue from charge on individual users grew very steadily. And thus, the ratio to the total segment revenue reversed between the 2 this year. Revenue from monthly flat rate subscriptions increased significantly. In addition, crowdfunding increased significantly, supported by the enthusiasm of the fans. And revenue from sale of goods based on crowdfunding grew steadily. That's all for the overview of the full year results. Moving on to the quarterly consolidated earnings overview, starting with Page 14, the consolidated income statements for July to September. The top line grew significantly over the previous year. Revenue and non-GAAP operating income increased significantly, thanks to the expansion of projects. Revenue increased by 20.8% and non-GAAP operating income increased by 132%, an approximately 2.3-fold increase. Both have grown significantly. Quarterly operating income exceeded JPY 1 billion. Page 15 is a graph of quarterly consolidated earnings trend. You can see a big change from the previous quarter. From April to June, it was negative due to the adverse impact of COVID-19. In the fourth quarter, the impact of online consumption worked positively and a significant V-shaped recovery was achieved. You can see the transition from the graph. Page 16 is the constitution of consolidated expenses. The cost of sales has increased slightly due to the expansion of projects. Page 17 shows quarterly changes in consolidated SG&A expenses. SG&A expenses were almost stable and there were no major fluctuations in expenses. Next, I will report on the overview of the results by business. Page 19 shows an overview of the results for the Digital Marketing Business. It's similar to the overall highlights with both revenue and operating income exceeding the full year earnings estimates, representing very steady quarterly results. Both net sales and revenue grew by more than 20%. Page 20 shows the quarterly results for the Digital Marketing Business. In terms of domestic versus overseas, the domestic business grew significantly in the fourth quarter. Quarterly segment profit was JPY 1.745 billion, the highest quarterly profit ever. Next is Digital Marketing Business, the trend of transaction volume of domestic brand advertising. We are now on Page 21. The volume dropped due to COVID-19 in the previous quarter, but it is on a recovery track. 42.9% increase Q-on-Q and 38.1% year-on-year. So both grew significantly. Page 22 is Digital Marketing Business, describing our business alliance with Dentsu. This is the same material that we have been using to explain the alliance. We are showing it to you once again. The progress of the alliance has been advancing and we have enjoyed increase in the number of projects. We have been disclosing the number of clients from the past in the form of graph. And in this fourth quarter, the number was 54 with a solid growth. Although not shown on the slide, the unit price has also increased year-on-year basis. So both number of clients as well as unit price have grown, indicating steady progress of the alliance. That was the overview of Digital Marketing Business. Next, I'd like to move on to the overview of Media Platform Business by segment. This is the highlight of fourth quarter financial results. Revenue went up from the same period of last year, whereas non-GAAP operating loss increased somewhat. The overall performance was slightly behind the revised estimate and revenue landed at 99.5%. Page 26 shows quarterly earnings trend of Media Platform Business. In terms of the trend, fourth quarter was slightly below the previous quarter. This is due to COVID-19. Advertising revenue with higher margin decreased, which led to bigger deficit. Page 27 is the revenue trend of Manga Content Business. Overall, there was a drop in the previous quarter, but a small uplift this quarter. In this breakdown, you can see revenue from charging the users is showing a solid growth. Under the current environment, we have shifted our policy from advertisement, which is susceptible to economic volatility, to charge. This is a reflection of the shift in our policy, leading to increase in charge revenue. We are also disclosing the trend of subscription in Manga Content Business. In the quarter that ended, subscription increased steadily by 1.6x. That was by segment overview of Media Platform Business. Next, I'd like to give you an update on our mid-term business policies. Our mid-term plan is annual rolling plan. Therefore, this will be an update from a year ago. The slide on Page 30 is the domain expansion, describing our direction as to how deep and broad we want to grow our domains. I am showing you the same slide from a year ago. As for the update in terms of expanding the existing domain in Digital Marketing Business, we have 2 pillars: one is to strengthen the development of e-commerce ad domain and second is enhancing the group system of data and solutions. Lately, especially due to the expansion of COVID-19, consumers' lifestyle is significantly changing. And as I mentioned at the very beginning, there is a big wave of consumers going online. Also, businesses are focusing on digital transformation and demand for digitization is indeed progressing. Thus, we are to focus more on e-commerce ad and data solution domains. As for Media Platform Business, as I explained in segment overview, charge on users or revenue from individual users will be our focus area, particularly D2C, or direct to consumers. In other words, developing our own brand and marketing them through e-commerce. This type of business is growing. Therefore, we hope to continue to strengthen the business development of D2C. As regards to expansion into the new domain, many businesses are starting to place digital in the core of their management and shifting their management system to digital first. More and more, we are being approached by these potential clients. We will make sure to capture these DX or digital transformation demand. So that was the update, and that is how we hope to expand the framework or broaden our domains going forward. Like I said, our 3-year mid-term plan is a rolling plan being updated every year. Therefore, you can see in the graph on Page 32 how the forecast will change from before the update to after the update. The graph on the left is the forecast before the update, 3 years running from 2020 to 2022, whereas for the graph on the right shows after the update. Fiscal year 2020 is the actual against the plan we formulated at the beginning of the year, and this is followed by 2021 to 2023, 3-year forecast, which have been updated. As you can see, in fiscal year ending September 2023, our revenue forecast is JPY 24 billion and operating profit is JPY 4.3 billion. COVID-19 has brought about significant change in the environment. Nevertheless, we will adapt and respond quickly to the changes and continue to grow. The revenue expansion is expected to take a little longer. However, we are confident about our profit. Therefore, we hope to accelerate profit growth. Now based on our mid-term business policies, the outlook for each segment is being provided with more granularity. We are on Page 33. You will find outlook for Digital Marketing Business and Media Platform Business, respectively. First of all, Digital Marketing Business is expected to sustain its growth with increase in both revenue and profit by adjusting to the environment. Like I said, especially e-commerce and data solution domains are expanding. Therefore, we will develop the 2 domains into growth drivers. In addition, collaboration with Dentsu Group has been successful. We will further promote the cooperation and aim for market share expansion. Meanwhile, as regards to Media Platform Business, this business is comprised of several of our products. So we will leverage our group network to increase revenue of each business. Currently, this business is generating operating loss. It is in red, but our goal is to minimize the loss and turn to surplus in 3 years. That will be the target in this mid-term plan. There are 2 points. One is focusing on charges from users and the other is strengthening business development of D2C domain. This overlaps with what I covered in mid-term plan update by segment. But by expanding these 2 domains, we hope to ensure revenue growth. Up to now, I have given you the update on our mid-term policy. Next, I'd like to share with you earnings estimate for fiscal year ending September 2021, that is the current term. We are on Page 35. This is the group consolidated earnings estimate for fiscal year ending September 2021. Revenue is JPY 20 billion and non-GAAP operating profit is JPY 2.85 billion. Net profit is JPY 1.785 billion. Reference net sales is JPY 85 billion. Revenue is expected to grow by 11.5% and operating profit by 16.2%. Thus, our forecast is increased in both revenue as well as profit. That was a group consolidated earnings estimate for the year ending September 2021. And now on Page 36, you can find earnings estimate by business segment. Both the Digital Marketing and Media Platform are expected to show growth in terms of revenue as well as profit or reduce its loss. On that note, I'd like to conclude my explanation on business results for fiscal year September 2020. Thank you for your attention until the very end, and I look forward to your ongoing support extended to Septeni Holdings. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]