Ateam Inc

TSE:3662

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Takao Hayashi, executive]

Thank you for coming and listening to our webcast. We would like to begin our financial results briefing for the second quarter of fiscal year 2024.

Here is the agenda for today's briefing. The first item is completion of business transfer of a consolidated subsidiary and the payment of a special dividend. It was back in 2010 when we began this business of Female Health Management App, Lalune. The business grew steadily to have a membership of about 8.5 million. We have completed the transfer of the business to MEDLEY, Inc. As shown on the slide, going forward, we will promote the optimal use of management resources through reallocation of funds. The proceeds from the sale of Lalune business will be used for investment into our future growth strategy as well as payment of a special dividend. Specifically, in addition to the ordinary dividend of JPY 16 per share, we have added JPY 4 per share this time to make the total annual dividend JPY 20 per share.

Next, I would like to talk about initiatives to meet the criteria for maintaining listing on the TSE Prime Market. This is the same slide as in the last meeting. Let me reiterate the 2 key points at this time. First is execution of the revamped growth strategy. Through M&A or inorganic investment, we will acquire more media and functions to accelerate further business growth, especially in and around the Lifestyle Support business, targeting those channels where we can capitalize on our strength in digital marketing. This is where we are today out of 769 names on the initial list of potential targets. We have narrowed down to 2 companies to have detailed discussions. So this is a progress so far as of today.

The second key point is growth of our investment businesses we have cultivated over the years and turnaround of businesses with waning profitability due to the COVID-19 pandemic and other reasons. This, we believe, is the next growth driver. In concrete terms, we are looking at these investment businesses. Obremo, the pet food business and lujo, the cosmetic business are both e-commerce businesses shown in green. They should be able to grow to recover the initial investments and generate more earnings going forward.

We are also investing to turn around profitability of Qiita and the Insurance business. This should also grow to recover initial investment. Businesses with waning profitability include Hanayume, the wedding venue introduction site business, where profitability is gradually recovering. With the growth of these investment businesses as shown in the left half of the slide, and point number two, growth of investment businesses should add more substantial operating income on top of JPY 500 million we had for fiscal year 2023, as well as execution of revamped growth strategy under point #1, including M&A. With these profit contributions, the expected OP for FY 2025 is between JPY 2.6 billion and JPY 3.1 billion, as shown on the right most column in red.

This is a new slide we have added from this time. It shows our business portfolio in 4 quadrants, where the growth rate is shown on the x-axis and the profitability is shown on the Y axis. This is how we are conducting portfolio management and formulating strategy for each business.

This slide shows the flow of cash. On the left is cash and cash equivalents available for investment as well as fund finance from outside, both of which are invested into potential and driver businesses at the top. And then cash generated by fundamental businesses in the bottom right corner, largest cash [ count to date ] will also be invested into those 2 categories of businesses.

Turnaround businesses on the bottom left corner may need either exit or restructuring through partnership with other companies to transition into the new stage. Cash generated by these 2 will also be returned to shareholders as we did in the past.

Next is the second quarter consolidated financial results. For the second quarter, sales were JPY 594 billion. Operating income was minus JPY 15 million, and net income was JPY 5.1 billion. This represents a year-on-year decline in sales and the profits, mainly due to the transfer of bicycle e-commerce site cyma. Other than that, operating income was generally in line with expectations.

This slide shows progress so far in this fiscal year. As of the end of the second quarter, sales of 41.5% of the full year guidance, while OP and net profit are still in the negative territory.

Next slide shows progress on the full year OP guidance. So far, in conclusion, we have the progress in line with the expectations. As you can see, gray bars show forecast operating income, while the red bars show actual OP results. So as we go through the third quarter and the fourth quarter and then full year operating income is expected to reach JPY 60 billion.

This slide shows sales by segment. Lifestyle Support business accounts for approximately 70.1%, Entertainment, 19.7%, and e-commerce, 10.2% as of today.

This slide shows a summary of each segment, but let us explain them more in detail later in our presentation. From here, the Head of each business will take you through the details, starting with Mr. Mase of Lifestyle Support business.

[Fumio Mase, executive]

Thank you. I'm Mase of Lifestyle Support business. I would like to start with the results for the second quarter. Segment sales were 88.2% of the last year's level. The table on the right-hand side shows major drivers. Double circles indicate 10% or higher growth, single cycles, less than 10% year-on-year. Triangle, 0% to minus 10%, and cross, minus 10% or lower. I will discuss the details on next slides.

Here is the highlight of each business vis-a-vis the external environment. First, Financial Media had a more than 10% decline, both in sales and profits, as you saw on the previous page. Profits are down due to the impact of Google's core algorithm update on our SEO acquisition. Sales were down mainly because clients reduced their advertisement spending. So that was a major reason behind the decline in sales.

Every year, normally, Japanese companies tend to start their fiscal years in April and make substantial investments at the beginning, and they sometimes tend to have less and less funds left over towards the end of the year. And this year happens to be such a year.

On the other hand, car business enjoyed a special demand and appreciation of used car prices during the COVID-19 pandemic due to semiconductor shortage and other reasons. However, we have faced the fading of this benefit during this quarter. Although the number of users acquired was more than in the past due to more intense competition and the slowdown of used car markets, profits are down year-on-year.

As for Moving, revenue is down year-on-year because we have suspended customer referrals to PPS or power producer supply players and telcos, telecommunication companies.

HR media are up year-on-year, both in sales and profit. As announced earlier, the business achieved a cumulative positive earnings in August 2023 and entered into a phase of profit contribution.

In Bridal business, revenue is up year-on-year. However, profit decreased due to an increase in ad expenses, including TV commercials. We will make a decision on whether to execute further spending on TV commercial in the future in view of investment efficiencies and market conditions.

In Insurance Agency business, the customer base has been steadily expanding, along the sale of ad spaces on our own sites, which we didn't have in the past. We are focusing on sales efforts on increasing the number of partners at the moment.

Next slide shows trends in ad spend and other expenses. The percentage of ad ex to sales has been declining. Thanks to the efforts to cut back on mass advertisement spending, which tend to have lower return or impact on the immediate cash flow.

Next is trends in KPIs such as user count, ARPU and CPA. User count is up 7.4% year-on-year. As mentioned earlier, however, the number of users with high ARPU is down year-on-year. That's why the overall ARPU is down. CPA at the same time is declining as well because high-ARPU businesses tend to have high CPA at the same time. Towards the second half, we will focus on more profit generation going forward by controlling costs of the Lifestyle Support business as a whole. We will continue to control our spending during the second half as we did in the first half when ad spend was kept under the budget compared with the initial forecast.

That's all I have to say about the Lifestyle Support business. Let me pass the microphone to Mr. Nakauchi, for an update on the Entertainment business.

[Yukimasa Nakauchi, executive]

Thank you. So far, the Entertainment business has been stably securing profits through a combination of efficiently managed existing titles and the collaborative development projects. Losses have already bottomed out, as shown on the slide as a result of stable profit contribution from existing titles as well as contribution from collaborative development projects where we receive payments and expenses during the development period. Though in the past, we only incurred costs on our side. We intend to use more collaborative approach going forward to control costs and secure profits.

The slide summarizes the ongoing market trends and our responses. The market is characterized by skyrocketing development costs, forcing players in the smartphone game industry to focus more on hypercasual and NFT games. They are making various different challenges.

In the meantime Ateam has been focusing on the following 4 points: Existing titles, which are showing improved profitabilities, development of blockchain and hypercasual games instead of smartphone games alone in order to control game development costs. Third, combination of in-house development for original IP titles and the collaborative development for others to drive down costs because we can share the cost between the entities. Finally, application of numerical criteria and the verification of profitability to start the development of new hypercasual games. We have not identified any projects yet, but are getting closer to finding ones, which can meet the criteria. So that's the situation in terms of the performance trends.

Although revenue is down year-on-year, we were able to return to a positive profitability for the second quarter.

Next slide shows the overseas revenue ratio. It's almost unchanged at 38% or nearly 40%.

Next is the pipeline. For a mainstay multi-platform games under #1, we have one more title to make the total 3 under development. For hypercasual games, we have already released 1 and have been testing several more based on the criteria mentioned earlier. For Web3, based on the game title released last time, we are conducting researches to understand the needs of the current ongoing market more -- looking at the overall market situation.

The slide shows our image of how revenues are ramping up in several years. That's all for the Entertainment business. And next is e-commerce update from Mr. Mochizuki.

[Kazuhiro Mochizuki, executive]

Thank you. I will now begin my presentation on the EC business. This is the same chart as the last time. We have been promoting a subscription-based business model so that by expanding the number of subscribers, we can enjoy a stable growth in revenue.

This slide shows our performance trend quarter-to-quarter. Revenue grew 53.4% year-on-year. This is due to the transfer of the cyma business on March 1, 2023. On the other hand, our cosmetic brand, lujo and dog food brand, Obremo has continued to see an increase in the number of customers, growing revenue by more than 20% year-on-year. Operating losses were reduced year-on-year mainly due to the transfer of cyma. Lujo posted positive profit for the third consecutive quarter. So this is contributing to profits.

Here is the KPI trends. The EC business monitors 2 KPIs, mainly the number of repeat customers and CAC payback months. The number of customers has been increasing steadily since the inception of both services, while the CAC payback months are maintained at a constant level to some extent, meaning efficiency is maintained.

This is the same slide as last time for our cosmetic brand, lujo, which has been expanding the product lineup to expand the top line sales. Under such a policy, we have released 2 new products, Night Pack and the Cushion Foundation, which help us grow sales further going forward.

That's all for the EC business.

[Takao Hayashi, executive]

Thank you. Lastly, let me recap you on financial forecasts. As we showed to you last time, FY '24 net income forecast has been revised upward. We have revised dividend forecast upward from JPY 16 to JPY 20 per share, as mentioned at the beginning.

Last but not least, Ateam was established on February 29, 2000, and celebrated the 24th anniversary this year, also on the leap day. We could not have made it without the support of investors. So we thank you for all your support and ask for your continued support and guidance. Thank you very much.