Istyle Inc

TSE:3660

Earnings Call Transcript 2019-Q2

[Tetsuro Yoshimatsu, executive]

I'm Yoshimatsu, President of istyle. Thank you for attending our meeting, despite your busy schedules. At 3:00 p.m. today, we have announced our financial results for the second quarter and the revised full year forecast of fiscal year 2019. We are sorry for not being able to deliver on the original guidance, but we would like to assure you that we are moving into the right direction. So for today, I hope to show you how far we have come, where we are and where we are going. Without further ado, let me start my presentation on financial results for fiscal year 2019 second quarter ending in June 2019, revised full year forecast and the medium-term outlook. First is overview of financial results for the second quarter of fiscal year 2019. Starting with the results for the first 6 months of fiscal year 2019. Net sales came to JPY 16,225,000,000, and operating profit, JPY 242 million. So while sales grew, profit declined year-on-year. Profit declined mainly due to the substantial promotional expenses in current during Q2. I will discuss the details of each segment later in my presentation. This slide shows the progress, so far, on the forecast of this fiscal year. Our net sales full year target was JPY 36.1 billion, and actual results for the first 6 months was JPY 16.2 billion, so progress is roughly 44%. On operating profit, full year target was JPY 1.8 billion, and actual results for the first 6 months was JPY 242 million, so progress is 13.4%. Next is trends in net sales. Net sales have been growing steadily this year, marking consecutive years of growth. Net sales for the first 6 months were up 17% year-on-year. Quarterly net sales trends in segment. Net sales for Q2 were also up 17.8% year-on-year. In fact, net sales were up year-on-year in all of the segments. Let's take a look at the trends in On Platform segment. The business is basically providing advertising and marketing services. Sales were up 8.6% year-on-year. Steady sales are realized because of our clients earmarked specific budgets for @cosme every year. Next is the Beauty Service segment. The segment's net sales grew 25% year-on-year. Thanks to the event @cosme Beauty Day, strong growth was recorded with in-store sales growing 20%, and e-commerce sales growing 46% year-on-year. In the Global segment, net sales were up 14.3% year-on-year. There were regulatory changes in China, causing some wholesalers to suspend purchases. As a result, e-commerce and wholesale declined to 92.5% of the level recorded previous year. This year, the company has been accelerating store opening overseas, which helped in-store sales and segment sales to post positive growth year-on-year. In the Other segment, strong year-on-year growth was recorded in the temporary staffing agency business. Despite strong year-on-year growth, quarter-on-quarter growth remained flat. We will focus more on this business in order to capture the strong demand in the market. Next is trends in SG&A expenses. Due to a major investment in promotional expenses, SG&A increased 43.4% year-on-year to JPY 4,071,000,000. Ratio of SG&A to net sales is up as well to 47.9%. Excluding the promotional expenses of nearly JPY 500 million, however, SG&A was around a JPY 3.6 billion, and SG&A ratio was 42.4%, generally unchanged from the past trends. Trends in operating income by segment. The On Platform segment was 91.7% of the previous year's level. Despite the growth in advertisement service due to the new service, Brand Official, depreciation expenses increased. We are also expanding the sales force. Beauty Service and Other businesses remained on positive trends. The Global segment is still in the development phase, focusing on expanding sales volume and consequently OP is just above breakeven. The biggest factor was promotional expenses booked as part of company-wide expenses due to the major increase in SG&A, OP fell negative temporarily. Let me move on to the status of operating services. The number of @cosme unique users is still affected by the change made to the search engine algorithm. This is something we take seriously, and we are already taking action so that we can gradually improve the trend. The number of members is increasing steadily. It has exceeded 5 million as of today. The number of page views, which is not disclosed by the company, is actually growing as well. The number of page views per user is also in a positive trend, thanks to the improved site design, contributing to the growth of media page view. This is a number of connections. We started disclosing this marketing support service KPI since the last full year announcement. At that point in time, there were 16 million connections. The number has grown 10% since then to 17.7 million, as of the end of the first half of this fiscal year. Through @cosme Beauty Day and other measures, we are trying to reach our target of 100 million connections. This is the @cosme Beauty Day event held on December 3. It was a 24-hour-only special event dedicated to e-commerce. What's different about this event is that, it is not designed only for product sales. It is designed for brand communication through 24-hour-only special offerings, which are not usually available through e-commerce site. This event provides brands with the opportunity to connect with customers through special offerings, such as limited editions and the revival of additions. As a result, GMV of JPY 400 million was recorded compared with a target of JPY 300 million with 43,000 purchases a day. For the operation of retail stores, under the Beauty Service segment, selection and forecast is our strategy. We will focus on large format stores within our store portfolio, which are more successful in growing sales because they can attract more customers by broader choices of products. That's why we are expanding 2 of the existing stores, whereas the small format stores will be closed. For overseas store network, the fourth store has been opened in Hong Kong. With this, we have 4 stores in Hong Kong, 4 stores in Taiwan and 1 store in Thailand. There is another 1 to be opened in Thailand next month. So the total number of overseas stores will be 10. There were regulatory changes in China. The new law clearly defines obligations of companies and individuals engaged in cross-border e-commerce business to register themselves and pay taxes in China. The law prompted some wholesalers to start inventory adjustment and reduce new purchases. We expect them to come back in 6 months or so after the inventory adjustment cycle is over. Although the market is increasingly turning red ocean and are demanding us to stay alert and they're ready to take action any time. That was my brief summary of financial results for the first 6 months and status of operating services. In view of the financial results, we have revised our full year forecast. This fiscal year is positioned as the investment phase of the 4-year medium-term business plan, where we invest both human resources and the financial resources. We believe it's the right time to invest and accelerate growth towards the goals of the medium-term business plan. The chart shows quarterly trends in net sales in OP. We have demonstrated strong growth in net sales, while maintaining a solid increase in OP and various investment in each segment. One thing we could not anticipate at the beginning of the year was the pace of growth in promotional expenses. In fact, we didn't anticipate we would invest so much, so fast in promotions. However, the management team seriously considered how best to achieve the full year medium-term business plan target and transform the business model. And to conclude it, that now is the time to invest. That's how, we decided to carry out the large-scale promotion. We are announcing the revised full year forecast for fiscal year 2019. Our initial guidance was JPY 36.1 billion in net sales and JPY 1.8 billion in OP, while revised forecast is JPY 33 billion in net sales and JPY 250 million to JPY 600 million in OP, which is given as a range. I regret that we could not maintain the original target, and feel sorry for disappointing investors. Nevertheless, I believe that by making the necessary investment this year, we can make certain of success next year and onward. This slide shows a comparison between the original and the revised forecast by segment. As you can see, the forecast for the Beauty Service segment is not changed dramatically. The forecast for the Global business was revised down from JPY 10 billion to JPY 9.1 billion. The forecast for the On Platform segment was revised down as well, reflecting the progress of the core service Brand Official this time. We are also reviewing the medium-term business plan, and we'll inform you as soon as our review is completed. This is various analysis by segment. In terms of net sales, as mentioned earlier, the Global business and the On Platform business are the major factors pushing down the performance, due to the slow progress of Brand Official, as mentioned earlier. The same explanation applies to OP. In the Global business, the forecast was revised to reflect unclear business outlook of cross-border e-commerce in China. Promotional expenses included in company-wide cost and others is another major factor explaining the gap. The figures here are based on the medium value of each segments forecast range. Let me make some comments on the strategies and initiatives of Brand Official, defined as part of the medium-term business plan. First, I will explain what Brand Official is. It is our key initiative. It's an enterprise SaaS that supports marketing activities of cosmetic brands. The business model is a subscription model. We have been promoting this business since 3 years ago in line with the strategy of focusing on the stock business, in addition to the flow business. What is the value delivered by Brand Official? The business model of Brand Official is different from the advertising business model of @cosme. @cosme generates value by developing apps, increasing the percentage of logged-in users and activating, and connecting with them with brands. Brand Official generates value by capturing and analyzing user behavior data acquired on the @cosme website. Using Brand Official, brands can implement CRM that takes advantage of both online and offline purchase data, and can also deliver personalized information to users. We have implemented various initiatives since FY 2017. Previously, I discussed our vision of regenerating value out of connections. Everything on Beauty will be connected on @cosme, which serves as a Beauty platform. To complete the vision, we developed a new marketing service, Brand Official, which was launched in April last year, though after some delay for about 6 months to 12 months, as I had told you before. But our plan for this fiscal year was to launch the service in April and to accelerate profit growth. This slide shows the initial plan for Brand Official this year. The ultimate goal is to reach 800 brands, and JPY 400 million in MRR, while monthly recurring revenue by FY '2020. MRR is a KPI used by companies with subscription services. The plan for this year was to reach 400 brands. The reason why we set this ambitious goal was twofolds.

First, we received strong positive response during the prelaunch test marketing period, and the new service was seen to be providing solutions to the problems of the brands. Second, we could capitalize on the existing subscriber base of the Brand Fan Club. We thought we could switch the existing 500 brands to the new service without any problems to achieve 400.

Along with these targets, we also defined some actions by Q1 of FY 2019, based on 3 issues identified as a result of the prelaunch marketing. First, some brands said that concept was easy to understand, but it was difficult to imagine specific use cases. For example, when and how to use the service? So we needed to develop and present concrete used cases. Second is timing, which is also a serious issue. Even if customers like the concept, unless there is a sense of urgency, they may not purchase it. For example, the service is like a business card organization tool. People know it's convenient, but they don't know when to -- when is the right time to buy one, whether it be this quarter, next quarter or next year. We needed to provide a clear time line or trigger for adoption. Third, our sales team did not do a good job in identifying and contacting decision-makers of our customers. To address these issues, we came up with some actions. First, provide a specific occasions for brands to connect with users. Second, clarify the time line or trigger for the adoption of Brand Official. It was the beginning of this fiscal year that we formulated these actions with specific time lines. These are the 3 action plans formulated at the beginning of this fiscal year. First is running the first e-commerce event, @cosme Beauty Day, which was already completed on December 3. Second, is setting the timing for switching from the previous service, Brand Fan Club, to the new service, Brand Official, which is scheduled for September this year. Third, is running the second @cosme Beauty Day on December 3, this year. So these are the 3 action plans. We would like to use @cosme Beauty Day as a trigger for customers to adopt Brand Official. So what are we trying to do with these action plans? Brand Official is a service of connecting users with brands. By holding @cosme Beauty Day, we would like to create an awareness among users of @cosme as a place to buy their favorite cosmetic products as well as the awareness among brands of @cosme as a place to sell their products online. That's how we would like to connect them. For the first @cosme Beauty Day event held on December 3, we worked intensely to prepare for the event during a period of less than 5 months after the decision to hold this event was made in July. The target GMV of the first event was JPY 300 million. We would go bankrupt if GMV is only JPY 300 million compared to JPY 500 million promotional expenses. So the target for the second event was set at JPY 1 billion. The event is going to be an important milestone for Brand Official. I'm finding every opportunity to mention it, both internally and externally. The first, @cosme Beauty Day was positioned as a special event to promote awareness of the service among the users. As many as 1,900 brands participated, and 44 of them arranged limited editions for the event, despite the short notice. As a result, we overperformed the budget and recorded JPY 400 million in GMV from 43,000 purchasers. For the next event, we had a kick-off of January 23. We are approaching brands so that 500 brands will arrange limited versions for the event and participate in different joint programs. The target for this year is JPY 1 billion in GMV from 100,000 purchasers. We are already getting positive feedback from brands on this event. We will make sure it will be a great success. Now, let me explain to you why we had these gaps. Brand Official is a stock business. So every month, the gap becomes larger, as you can see on the diagram. The gap in the first half was JPY 100 million, as shown in A. Our full year expectation at the beginning of the year was 400 brands, but we have contracts only with 50 so far, that's why we revised the target to slightly over 100, in line with the current momentum. As a result, the gap for the second half is expected to be JPY 700 million, as shown on B. On top of A and B, we also need to take into consideration the incremental amount of promotional expenses, shown as C. So the total gap, which is JPY 1.1 billion, is the total of A, B and C. In reversing the target and the forecast, we discussed the possibility of minimizing B and C. However, for the medium-to-long-term, we realized it was more important to transform experiences for users and the brands, that's why we made an investment. The milestones are shown at the top. The timing of contract acquisition was pushed forward by 6 months to 12 months, along with service release. Yet, the original target of 800 brands by next fiscal year was kept unchanged, because our action plan should allow us to achieve this. We added the time line for switching from Brand Fan Club to Brand Official to be September 2019. We are discussing with the brands about what kind of user experiences they can provide to users by connecting with them on @cosme Beauty Day, held on December 3, using the data from the previous event. These are the 3 action plans, which we believe will generate the maximum outcome. We are very sorry for this fiscal year, but we do not think the direction is wrong. We will review the medium-term business plan to reflect the present conditions and progress on new services. We will announce the revised guidance as soon as possible.

Once again, we are very sorry for this fiscal year. We realized that the advertising business alone will not ensure a long-term success, and the business model needs to be transformed, combining both online and off-line retail schemes. We have already begun the journey to steer the company in that direction, which we believe is the right thing to do. We will dedicate all of our time and energy to delivering the best results possible rather than just explanation in the remaining 18 months of the medium-term business plan. That's all we have to say for today. Thank you very much for your kind attention.