Macromill Inc
TSE:3978
Earnings Call Analysis
Q2-2024 Analysis
Macromill Inc
Amid an economic landscape where uncertainty lingers, a certain company has reported a commendable performance for the second quarter and first half of the financial year. The results showcase a steady stride towards growth with an 8% increase in revenue and an 18% leap in business profit, bucking their initial forecast which anticipated revenue growth with a profit downturn. This impressive outcome mirrors the company's dedicated effort towards enhancing productivity, reflected in significant gains in the Japan business segment with a 9% revenue growth and a remarkable 19% surge in business profit year-on-year.
The Japan business segment continues its strong trend powered by targeted strategies across its three main business areas. Each area saw robust progress, with Focus Business achieving its high growth goals through expanded outbound sales, particularly in the domain of online research. The establishment of new sales and research integration methods boosts optimism for future large project orders. Future Business and Foundation Business also flourished with double-digit growth rates, affirming the company's direction towards persistent revenue enhancement.
Expenditure remains firmly under management with outsourcing costs kept level despite rising revenues — a testament to the company's meticulous financial stewardship. They maintain that the slight rise in total employee costs is in harmony with earlier staffing expansions, ensuring a well-equipped workforce to drive the company's ambitious targets. These prudent financial decisions, coupled with upfront investment in technology infrastructure, have not derailed the firm from its steady growth.
While the Japan business segment basks in its successes, Korea has faced headwinds with a notable dip in business confidence leading to tempered growth targets. Nonetheless, the Korean segment is not without its silver linings—they’ve executed strict cost controls and strategic emphases on launching new ventures, poised for growth in the coming fiscal year. Such resilience in the face of adversity signals strong management adeptness.
The company’s financial foundations remain solid, with significant improvements in the balance sheet and cash flow, owing chiefly to the strategic redemption of corporate bonds. The balance sheet also reflects the integration of M&A activities, and with careful cash flow management, dividend plans not only remain unscathed but are also on an upward trajectory.
With a resilient performance in the first half of the year, the company aims to maintain its momentum and meet its full-year fiscal guidance. This drive is underpinned by the Japan segment's robust results, which beat initial forecasts despite losses from equity investments. Going forward, as the business heads into its traditionally busy third quarter, strategic moves are underway to bolster market share and profitability, keeping the company on track to fulfill its earnings forecasts.
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Thank you for joining us today. I am Sasaki, Representative Executive Officer, CEO. Today's agenda has 2 parts. First, I will give a summary of the second quarter and the first half of the year and an update on the business situation along with KPIs. So Next, CFO, Hashimoto, will present consolidated financial results and business segment details.
Please look at Page 3. We had very good business results. In the second quarter, we achieved 8% increase in revenue and 18% increase in business profit, which turned significantly positive. Although the plan at the beginning of the year was for an increase in revenue and a decrease in profit in the first half, was revenue and business profit increased in the first half of the year.
We were able to turn profitable by exceeding the plan in terms of business profit. It is a result of our steady efforts to improve productivity.
Let me explain more details by segment. Please look at Page 4. While Korea was soft due to deteriorating business confidence, Japan performed well with 9% increase in revenue and productivity improvements on target, resulting in a significant 19% increase in business profit year-on-year. Equity method loss from Toluna was JPY 580 million in the first half of the year. So the post-merger integration is progressing well, and the loss in the second quarter was trending down compared to the first quarter.
Please look at Page 5. Consolidated revenue growth in the second quarter was 8%, keeping the momentum from the first quarter.
Please look at Page 6. Consolidated business profit grew 7% due to steady improvement in productivity in Japan Business segment. Business gross revenue and business profit exceeded our initial guidance, and we currently see no major negatives in outlook. So we expect the business to perform well.
Next, please look at Page 7 for consolidated total employee expenses and outsourcing expenses. Both total employee expenses and outsourcing expenses are under control as planned. In particular, outsourcing expenses were able to be controlled to the previous year's level, while revenues increased. This is because we have been able to increase in-house production due to the solution of capacity issues in Japan and also because we have been able to control turnover, which has improved the individual proficiency and organizational strength, leading to higher productivity, gradually the improvement also accelerated as we progressed from the first to the second quarter.
The increase in total employee expenses is due to the increase in head count in the second half of the previous fiscal year, and we expect the rate of increase to slowdown in the second half of this fiscal year, both outsourcing expenses and total employee expenses will continue to improve in the second half of the year.
Now let me explain about the details of Japan business segment. Please look at Page 9. This is a slide that we showed before. Starting from the current fiscal year, the segments are divided into Japan business segment and the Korea business segment. For the Japan business segment, we have divided into 3 businesses and set KPIs for each. For details of the business segments and KPIs, please refer to the previous results presentation materials.
Let's look at Focus Business on Page 10. Outbound sales are progressing steadily in line with the high percent growth target we set at the beginning of the fiscal year. In particular, online research is growing steadily as demand from consumer goods manufacturers is recovering, and we are tapping into that demand.
Now I'll explain how we are strengthening outbound sales on Page 11. The chart shows the number of clients and projects per quarter in Focus business. Up until the previous fiscal year, the number of clients and projects was decreasing because we had to decline some projects due to insufficient capacity. But in the current fiscal year, outbound sales have been aggressively expanded, and the number of clients and projects is growing as it was in the first quarter as a result of the strengthening of outbound sales.
We will work to keep this strength. Going forward, we will strengthen our proposal-based sales activities, integrating sales and research operations in order to receive orders for larger projects from clients who we have successfully regained.
Next, please look at Page 12 for operational employee expenses and outsourcing expenses in Focus Business. In the current medium-term business plan, we have adopted a policy of placing more emphasis on profit. The Focus business of Japan segment is an area where profit contribution in Macromill is extremely high. Improving productivity in this area will be a priority for this fiscal year. So we have set the ratio of operational employee expenses plus outsourcing expenses to revenue as KPIs.
The results of the second quarter showed 3 point improvement year-on-year. In particular, outsourcing expenses were reduced by 23% year-on-year and also decreasing on an actual amount basis. Operational employee expenses were kept below the revenue growth rate and the increase was due to the increase in the number of employees in the second half of the previous fiscal year. So it's for Focus business.
Now let's look at Future Business. Please refer to Page 13. Future Business is a highly volatile area, but we have achieved solid growth of 15%. As in the past, in addition to consulting growth in new business is accelerating.
For topics in Future business, please look at Page 14. Consulting increased 26% year-on-year. Global Research increased 11% year-on-year. New business also saw a recovery in Life Science, which had been a bit slow in the first quarter, with 15% increase year-on-year. All the businesses achieved double-digit growth. Despite volatility, we will continue to pursue higher revenue growth than other business areas.
Please look at Page 15 for Foundation Business. In Foundation Business joint ventures such as DMI, is known as Dentsu, and HMM with Hakuhodo as well as Macromill Carenet which provides marketing research to pharmaceutical and medical industries performed well, posting double-digit growth above expectations. We expect the business to continue to grow strongly in the second half of the fiscal year.
Please look at Page 16. The KPI for Foundation Business is the ratio of outsourcing expenses and operational employee expenses to revenue as in the Focus Business. The ratio has improved by 3 percentage points year-on-year and total employee expenses have been kept below revenue growth.
This is the end of the explanation of the 3 businesses in Japan business segment.
Please refer to Page 17. We have set productivity per salesperson as KPI for Japan business segment as a whole. We have increased the number of salespeople by 20. This increase was due to the Monitas M&A and new business and revenue growth led to an increase in revenue from sales growth by about JPY 1.7 million. Revenue per salesperson increased 4% year-on-year and sales productivity has improved. That is all for Japan segment. Next, please look at Page 18 for Korea business segment. Until the previous fiscal year, we achieved solid growth when market and competition struggled. But in light of further deterioration in business confidence, we lowered our growth target for the current fiscal year, although there were signs of improvement from the first quarter with 2% increase in the second quarter. The first half of the year saw only 1% growth year-on-year and 6% decrease excluding foreign exchange effects. Therefore, we replaced the highest priority on cost control and focus on launching new businesses, which we're already working on using eye on the next fiscal year.
That is all for the Korea business segment.
The first half has ended, and the good momentum from the first quarter is continuing. We will keep that momentum and aim to achieve our guidance for the current fiscal year. That is all for my presentation. Next, CFO, Hashimoto, will present consolidated financial results and details by business segment.
Thank you, Mr. Sasaki. I will now explain the financials and details by business segment. Please turn to Page 20. Japan business continued to perform well in the second quarter. Revenue in the first half was JPY 22.1 billion, which was JPY 1.6 billion or 8% higher from the previous year. Business profit in first half, thanks to improved productivity and a significant turnaround in profit in the second quarter, booked JPY 2.96 billion, up JPY 190 million or 7% from the previous year. Both exceeded initial forecasts. Although quarterly profit decreased due to equity method loss, cash flow was not affected, and we will continue to focus on steady growth of our business.
Page 21 shows the breakdown of operating expenses. Costs were better controlled compared to the initial guidance. Total operating expenses in the first half were JPY 19.1 billion, up 8% year-on-year and in line with the sales growth rate.
Panel expenses were 9% higher and outsourcing expenses were nearly flat year-on-year. Total employee expenses increased by 11% and D&A and other expenses by 9% over last year. With capacity in place, we were able to increase in-house production with sales exceeding last year. Meanwhile, we controlled the outsourcing expenses to the same level as last year. Personnel expenses accounted for the bulk of the increase in operating expenses, but this was due to larger number of employees from the second half of last year and is in line with the initial guidance. Rising depreciation and amortization and other expenses is due to upfront investments, such as the renewal of the core research system.
Next, using the waterfall chart on Page 22, let me explain the factors that contribute to fluctuations in operating profit. In the first half of last year, in addition to the effect of increased revenue, the outsourcing ratio declined in all businesses in Japan, especially from Focus business. Meanwhile, employee expenses rose due to one-off life support allowance in Q1 and strengthening sales and talents and subsidiaries, increasing IT costs and the easing of COVID restrictions this year resulted in higher other expenses.
Korea business posted lower first half business profit due to the impact of higher total employee and outsourcing expenses. As a result, overall consolidated business profit increased in first half of fiscal year.
On Page 23, I will explain the quarterly trend in revenue and business profit from Japan business. Our business has seasonality. Since revenues in Japan peaks in March every year, our revenue in Q2 and Q3 are large. We expect the same trend in the current fiscal year. When we entered the busy season in Q2, revenue was strong at 9% compared to last year. Business profit, as shown on the right, also grew significantly by 34% last year, and business profit margin in Q2 improved by more than 3 percentage points.
Please turn to Page 24 on the performance of Japan Focus Business. Focus Business consists of highly profitable online research and digital research. As shown on left, revenue in the first half was up 5% compared to last year. Revenue in Q2 continues to rise on the back of growth in online research. Recovery in online research has had a positive impact on profit. We will continue to aim for steady revenue growth in Focus Business.
In December, we were certified as a third-party YouTube advertising measurement partner. We will further strengthen digital research as well.
Please turn to Page 25 for our performance in Japan Future Business. Future Business consists of a group of businesses that are designed to achieve continued revenue growth over the medium to long term. As shown on the left, revenue in first half increased 15% year-on-year, with consulting increasing by 26%, global research by 11%, and new business by 15%. Future Business is comprised by a highly volatile business with large project sizes per deal, but we will continue to achieve double-digit growth. With the capacity in Focus Business now in place, we will further accelerate new project development through mutual client referrals with Future Business.
Please turn to Page 26 for Japan Foundation business. Foundation Business consists of a group of businesses aimed at building competitive advantage and entry barriers. As shown on the left, revenue in the first half was up 11% year-on-year. Revenue from joint ventures with distributors and other subsidiaries rose by 14%, and revenue from offline research and database by 4%.
Strong performance of the joint venture subsidiaries and Monitas, which became our subsidiary in July, resulted in higher revenue.
Please turn to Page 27 for Korea business. Q2 is the business quarter in Korea and the same trend continues this fiscal year. Business profit in Q2, as shown on the right graph, decreased by 27% year-on-year due to higher expenses associated with new businesses. In Korea business, operating profit and business profit are of the same value. As the impact of deteriorating business confidence continues, we will focus on cost control in the second half of the fiscal year.
On Page 28 is the quarterly revenue trend of Korea business, including numbers on the constant FX basis. Due to the positive impact of foreign exchange rate, revenue in first half were up 1% year-on-year, but when the impact of foreign exchange is excluded, it is down by 6%. South Korea is susceptible to business confidence, declining public research conducted by the government and shrinking research budgets of major clients resulted in revenue softening. In addition, we continue to invest in new business, purchase data provision service with a view to growth in the next fiscal year and beyond.
Next, on Pages 29 and 30, we present our balance sheet and cash flow statement. Regarding the balance sheet, the major change from the end of last fiscal year is that both assets and liabilities have decreased by JPY 5 billion due to the redemption of corporate bonds in July. Furthermore, as a result of M&A in Japan business, goodwill has increased by hundreds of millions of yen.
Net debt-to-EBITDA multiple and ROE have been recovering from the previous quarter. Cash flow from financing activities also decreased due to bond redemption. Cash flow from operating activities has improved significantly due to strong business and the timing of expense payments and the impact of income tax refunds. Since Toluna has no impact on our cash flow and we have sufficient retained earnings to fund dividends, there is no change to our dividend plan. We intend to steadily increase dividends in the future. Finally, on Page 31 is the percentage of achievement versus our guidance. The business strategy for Japan business set forth in the medium-term business plan is progressing well, thanks to the strengthened sales structure and improved productivity, revenue and business profit in first half are exceeding the initial guidance. Meanwhile, equity method loss of Toluna resulted in lower-than-planned operating profit.
However, PMI with MetrixLab is progressing well and fixed costs are steadily coming down, so we are steadily moving towards a structure that can generate profits. As the third quarter will be the busy season for our group, we will implement further measures to boost our revenue and market share by which improve our profit. Through such efforts, we aim to achieve our group's earnings forecast.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]