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

I am Sato. Thank you very much for joining us for our business results briefing. Today, I will mainly explain the full year results for the fiscal year ended September 2022. I will explain the full year results review; consolidated earnings overview for the quarter from July to September; overview of each segment; updates on the medium-term policies; and lastly, change of accounting period and earnings estimates. First, earnings highlights for FY 2022. For consolidated results, we reported record highs for both revenue and non-GAAP operating profit. We increased the capital in this fiscal year under review, and the number of shares outstanding substantially increased, but earnings per share was not affected by the capital increase, and EPS was well above the last year results. Revenue was JPY 28.819 billion, up 34.8% year-on-year. Operating profit was JPY 5.855 billion, up 54.2% year-on-year. And EPS was JPY 30.54, up JPY 9.95 year-on-year. Page 5 is about FY '22 earnings highlights for each segment. In Digital Marketing Business, revenue and profit significantly increased due to organic growth and effects of new consolidation. In Media Platform Business, revenue increased driven by the Manga Content Business, and its losses were reduced despite investments in new segments are included in this business to indicate steady business operations. Financial results are as shown on the slide. Page 6 shows an overall picture of the full year consolidated income statement. I touched upon revenue, operating profit and net profit earlier. And revenue and non-GAAP operating profit slightly fell short of the revised estimate, and net income significantly exceeded the estimate due to a substantial increase in equity in earnings of affiliates and financial income. Please refer to the figures for each item on the slide. The graphs on Page 7 show earnings trend by business segment for 5 fiscal years. Over the last 5 years, revenue has grown approximately 1.9x, and operating profit has grown approximately 5.8x, indicating operating profit growth is much stronger than revenue growth. The trend for each segment is shown on the slide. This slide shows the full year overview for Digital Marketing Business. The collaboration with the Dentsu Group that we have been focusing on expanded steadily in the fiscal year under review, and domestic brand advertising declined year-on-year due to seasonal factors. It grew larger than usual in the previous fiscal year with a large-scale event, and this fiscal year recognized a slight decrease year-on-year as a rebound effect, but it was significantly higher than FY 2020 result. Page 9 shows the overview for Media Platform Business. Each revenue item of our Manga Content Business, GANMA!, grew steadily to maintain high revenue growth. On the other hand, D2C business, that is physical EC business, declined its revenue due to changes in the online consumption environment affected by economic reopening. Page 10 describes some topics related to expansion into new business domain. In our human capital management, we embrace the technology for human and organizations as our core value. And we have established a new business of this HR technology, and its product market fit is steadily progressing. It is well received by our customers and developing successfully. Next is about quarterly consolidated earnings overview for the period from July to September. Page 12 shows consolidated income statement for the July-September quarter. Equity in earnings of affiliates and financial income grew significantly in this quarter. Financial income was JPY 824 million, and equity in earnings of affiliates was JPY 282 million to record a significant year-on-year increase. As a result, net income increased about 4.7x year-on-year to recognize much larger growth than the top line. This slide shows quarterly consolidated earnings trend. This has also been growing steadily. Revenue and profit increased due to organic growth and the effects of new consolidation. Operating profit margin also improved. Page 14 is about constitution of consolidated expenses. Subcontract costs increased significantly year-on-year due to the new consolidation of subsidiaries, the same as we saw in the previous quarter. Page 15 is about SG&A trend. Other expenses increased due to expansion of organizational scale, but it is a slight decrease from the previous quarter. Next part is about the business overview by segment with quarterly results. Page 17 is earnings overview of Digital Marketing Business. Revenue and non-GAAP operating profit increased year-on-year to show steady top line growth. On the other hand, the revised earnings estimates were missed with the progress rate to the full year estimate of 97.6% for revenue and 98% for operating profit. Page 18 is quarterly earnings trend of Digital Marketing Business, and top line has grown steadily. And for future growth, recruiting human resources is progressing steadily to strengthen our human resources for future top line growth. Page 19 is about the progress on business alliance with the Dentsu Group in Digital Marketing Business. Alliance sales remained almost unchanged year-on-year in Q4, and this is due to a seasonal factor of the significant growth by a large-scale event in the summer over the previous fiscal year. And with the absence of such an event in this fiscal year, we recognized almost flat growth year-on-year. Current orders received is making a steady progress. Next is about earnings overview for Media Platform Business. Revenue reached a record high due to the expansion of the Manga Content Business, and its top line has grown steadily. Its margin mix has improved as well, and the gross profit growth was larger than the revenue growth. SG&A was almost flat year-on-year, therefore, profit improvement was large. Despite the record high revenue, it fell short of the forecast due to slowdown in D2C business, as I mentioned at highlights, and it did not grow much in summer and could not achieve the forecast. Page 22 shows quarterly earnings trend. Media Platform Business grew its top line steadily, and losses incurred by advanced investment decreased significantly. Page 23 shows our revenue trend in Manga Content Business. Charge revenue grew significantly, mainly in commerce revenue, to contribute to the record high revenue of the Manga Content Business. And it also recorded strong year-on-year growth. Advertising revenue had seasonal volatility, but expanded steadily due to delivery of anime projects in Q4. Page 24 shows the subscription revenue trend in Manga Content Business. This is also growing steadily by accumulating recurring revenue and recorded approximately 1.5x growth year-on-year. Page 25 shows the commerce revenue trend in Manga Content Business. This shows strong growth as well, and increase in IP value of popular GANMA! titles led to an increase in sales mainly for e-book. And commerce revenue grew significantly by approximately 2.2x year-on-year. Next slide is about topics. We announced GANMA!'s popular title, My Love Story with Yamada-kun at Lv.999, will be made into TV anime. We expect this will increase the value of our IP to support our business. Information about this anime is just provided on the slide. From this page, I will explain some updates on our medium-term business policies. First, we provide explanation about the current medium-term business policies, again, on the slide. Compared to 2 years ago, deepening capital and business alliance with the Dentsu Group was added as a new initiative we started last year. We are implementing these medium-term business policies under the theme of Domain Expansion. On Page 29, we explain the update on medium-term business policies. We set Domain Expansion as a medium-term theme since FY 2020, and we list updates on the policies for each segment and management foundation as we start a new fiscal year. In Digital Marketing Business, for strengthening DX supporting area, we set policies to expand on-off integrated services by deepening the alliance with the Dentsu Group and to strengthen development of AI products and data and solutions services. In Media Platform Business, we will accelerate the growth of IP Platform Business. This is currently called Manga Content Business. But as we have expanded the business and set new policies, we decided to change the name to IP Platform Business. We will accelerate the growth of this business in this segment, to be more specific, by enhancing values of IP we own and strengthening webtoon production system, which is a new business domain. Next is expansion into new business segment, that is to enhance the capability for business growth in HR technology domain as well as to promote business development for DX and entertainment and sports domain. For reinforcing management foundation, we will enhance growth potential for each business by stronger foundation for entire management, and we have revised corporate philosophy that will be explained later. Also, as a company with human resource management, we have embraced the philosophy that human resources are our most precious asset since the establishment of the company. And we expect to improve human capital value by updating the human resources systems. This is the reinforcement of the management foundation we want to execute in this fiscal year. Page 30 is to explain the update on HR system I mentioned earlier. We have decided to strengthen human resource investment, including raising salary levels from April 2023 with the aim of increasing human capital value. We will implement this, as described on the slide, mainly for fixed salary increase. With this update, we expect to strengthen our competitiveness in the recruitment market and aim to maximize human capital value, which is our core value. We will enhance the human resource investment through other initiatives as well in this fiscal year onward. Regarding the impact on this fiscal year, as we will start implementing this update in April, a short-term impact will be recognized from Q3 onward in the form of increased expenses. For full year FY 2023, we plan to invest about JPY 680 million in human resources. We have enhanced human capital initiatives and reviewed working conditions in the past as well. These initiatives lead to increased cost in the short term, so the direct impact would be reduced profits in the short term. However, in the long term, they lead to increase in human capital value, which will enhance the value provided to our clients. As a result, sustainable business growth will be achieved, shareholders' equity and corporate value will be enhanced and shareholder return will increase. Making investments will deliver more reasonable growth and return than not making investments. The effects of the previous initiatives are also shown on this page. The last time we updated the HR system was in fiscal 2018. 5 years later, both sales and profits have grown significantly. Productivity has also improved with sales per employee rising about 35%. By increasing investments into human capital, more value was provided by the business to clients, and shareholder and corporate value increased. As we are advancing our HR technology as a business management base, we have been able to confirm that this is a reasonable investment based on scientific simulations. This page is about human capital initiative that has already been announced. Kamiyama Marugoto College is a private technical college that will be established. The company has invested in the scholarship fund of the college as a scholarship partner. As Kamiyama Marugoto College aims to develop entrepreneurs with advanced technology, design and entrepreneurial spirit as the foundation of education, the philosophy of this new 5-year private technical college resonates very well with our corporate philosophy. Therefore, we plan to provide proactive support in the areas of business and human resources, mainly in the HR area from the start-up phase. By doing so, we expect that our brand equity will increase, and we will be able to contribute to developing entrepreneurs based on our corporate philosophy of: to inspire the world with entrepreneurship. With the belief that this will significantly contribute to the growth of our business, we decided to participate as a scholarship partner. The amount paid to the scholarship fund as a scholarship partner is 1 unit or JPY 1 billion, but there is no direct impact on the P/L statement. The cash contribution to the fund will be reflected on the balance sheet as investments in securities. Let me move on to initiatives in the Digital Marketing Business. With the aim of strengthening the DX supporting area, we concluded a capital and business alliance contract with and factory, inc. This company has a strong business foundation with its manga apps. In particular, they have a track record in enhancing the value of the IP owned by publishers and promoting DX. We expect this alliance will contribute to the business growth of the clients of the Digital Marketing Business. To closely collaborate with each other through third-party allocation of new shares and the transfer of shares from the founder, we acquired a total of 21.29% of voting rights. With this transaction, and factory becomes an equity-method affiliate. Next is the IP Platform Business, which is the new name for the former Manga Content Business. Today, we announced a new initiative. As a corporate action that contributes to enhancing the corporate value of Septeni Holdings, the company will procure funds from external sources to strengthen the growth potential of its IP Platform Business. The issuer will be Comicsmart, Inc. of the former Manga Content Business which operates GANMA!. On this page is the background of external fundraising. Over the 10 years since the launch of GANMA!, we have made investments with funding from within the group to establish and strengthen products, IP content and our client base. This was upfront investment to strengthen the business. With this investment, the business model and growth strategy were established, and we saw steady progress. Options for further strengthening of growth potential expanded. Our vertically integrated business structure of developing IP of manga and anime and distributing through our own digital platform is attracting growing interest recently, while the environment surrounding our business changed. The participation of outside investors will strengthen the implementation structure of our growth strategy. To enhance corporate value, we decided on this new policy. We had rounds of discussions at our Board meetings over a period of time and came to the conclusion that this is the preferred decision. Page 35 is the overview of the financing scheme. Our consolidated subsidiary, Comicsmart, Inc., will implement a third-party allocation with a total of JPY 710 million worth of new shares being issued to outside investors. The aim is to maximize corporate value in the future and proceed with capital policy and carve-out measures. The outside investors are B Dash Ventures and Incubate Fund. We are encouraged by the fact that they are both top-tier VCs with track records of investing in venture companies and are looking forward to working with them. The use of the funds are listed here. The funding will be used for IP and contents development, marketing and sales promotion, recruiting and other investments for growth. Page 36 discusses the revision of our corporate philosophy to strengthen our management foundation. In order to increase corporate value amid changes in the group's and society's environment, the corporate philosophy is revised, including the new vision. We used to have the mission, vision, code of conduct and creed. The mission and creed remains unchanged, while the vision and value are new. Because of the change in the environment surrounding us and the expansion of our business portfolio, with the revised philosophy, we wanted to communicate our emphasis on impact on society. Details of the background and aim of revision will be found on our web page, so please take a look. With this revision, we now have a group vision. We verbalized what it aspires to be and the contribution to society that it wants to fulfill through business in the medium to long term. The new group vision consists of 3 points: to be a place where people are empowered to create a new era; to open the door to a nameraka future with creativity and technology; to make a complex world bright and simple through the power of digital. This group vision is what we want to realize in the long term. On the right-hand side is a visualization of the vision. This is all for the revision of the corporate philosophy. Page 38 is the numbers for the rolling 3-year plan of the medium-term business policy. Numbers before update is on the left, after update is on the right. We disclose a 3-year rolling plan of the medium-term business policy every year. The black bar on the right is the actual result of the fiscal year ending September 2022. The bars in green are the plans for the following years. The closing month will be changed. And for the year ending December 2025, we forecast JPY 50 billion in revenue and JPY 9 billion in operating profit, significant growth from the current numbers. As I mentioned before, in the current fiscal year, we are proactively investing in human capital, so there will be some upfront investments. On the other hand, business growth will lead to shareholder and corporate value enhancement. In our case, due to the HR tech platform, we are able to do very precise simulations. This means we can make investments based on a clear understanding of how these investments in human capital will lead to enhanced corporate value. Therefore, the revised numbers partly reflect the forecasted investments. Again, please note that the closing month of the current fiscal year, fiscal 2023, will be December instead of the usual September. So it will be a 15-month fiscal year. On Page 40 onwards, we have some slides on the change of accounting period. Assuming that the amendment to the articles of incorporation will be approved at the Ordinary General Meeting of Shareholders, we will change the accounting period. The end of the fiscal year will be changed from September 30 to December 31. Therefore, this fiscal year will be an irregular year with 15 months. Please note that with this change, the schedule for the General Meeting of Shareholders, the publication of financial results and results meeting will change, as you see here. Page 42 is the full year earnings forecast for fiscal 2023. We have revised the guidance. This is an irregular year with 15 months, and the forecast for the year ending December 2023 is JPY 42.5 billion in revenue, JPY 7.5 billion in non-GAAP operating profit, JPY 5.95 billion in profit attributable to the owners of the parent, JPY 28.42 in earnings per share and, for reference, JPY 180 billion in net sales. Expected growth rates are 47.5% in revenue, 28.1% in operating profit, 3.8% in profit attributable to the owners of the parent, minus JPY 2.12 in EPS and plus 37% in net sales. Please note that the EPS for the fiscal year ending September 2022 includes the cumulative financial income. This is not a recurring item that you will see every year, and it is not included in the forecast for 2023. Financial income is included in the actual results, but not in the guidance. The last page, Page 43, is the full year earnings estimates by business segment. The numbers broken down into Digital Marketing Business and Media Platform Business are shown on the slide. This concludes my presentation. Thank you for your participation. We look forward to your continued support.