Trend Micro Inc
TSE:4704
Earnings Call Analysis
Q4-2023 Analysis
Trend Micro Inc
The company's earnings call revealed a mix of achievements and challenges, including the highest revenue on record offset by a significant decrease in operating income and a net loss. Restructuring efforts indicate a phase of transition, with positive growth in the subscription segment and stable cash flow.
The company is focused on returning value to shareholders through generous dividends and a planned share buyback. With a long-term goal of improved operating margins, the company is adapting its financial strategies to ensure growth and efficiency.
There is robust growth in enterprise business in Japan with the deployment of advanced XDR technologies, alongside a heightened focus on delivering modern cybersecurity solutions and catering to important infrastructural needs within the country.
Although the company is navigating financial pressures, the strategic forecast is optimistic with anticipated revenue growth and profitability. Commitment to shareholder returns remains a priority amidst ongoing evolutionary changes in structure and strategy.
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[Interpreted]
And I would like to explain the fourth quarter performance, and this is the overview. 5% increase in net sales, and expenses was up 10% and operating income was minus 45% and then JPY 2 billion net loss. This is probably not in line with your expectation, but I would like to do addition to the bottom. In the fourth quarter, what's really characteristic is that -- the slide is not moving at all. So should I share the screen? I think maybe there's a network problem. This is not connected. The slide is not moving forward at all.
You cannot see the first screen either?
No, this is just a cover page.
Oh, I see.
In that case, yes, Habara-san, please share the screen. Apologies. Habara-san, would your mind sharing the screen from your side?
Can you see it now?
Yes. Let's start the summary page, and I'll repeat. At the top, we have net sales, as I said. And if you could pay attention to the pre-GAAP, post-GAAP versus pre-GAAP, the difference was about JPY 20 billion or more. And as you know, variable expense is related to pre-GAAP. So in the fourth quarter, we explained the same thing last year. So there is more variable cost in the fourth quarter comprising the operating income, and pre-GAAP base operating income is shown at the bottom, which is JPY 23.2 billion in that positive territory.
And the restructuring-related costs also was incurred. And on the next slide -- yes, on this slide, starting from the top. Can you please go back one? Thank you. At the top, JPY 1 billion, you can cost was incurred in relation to the operating income. This is restructuring related, obsolete hardware. We are trying to save expenses costs. In order to do so, we have changed the hardware lineup. And due to that, we had extraordinary losses or expenses.
And on the bottom of the slide, restructuring costs, another item is shown here. This includes retirement expenses. Some of the employees left the company. So this is a related cost. And the reason we're doing this is because, as you'll hear from Evan Chen's presentation, platform sales, sales and support organization, the systems have changed and we are trying to increase efficiency internally. And all of these expenses are posted in the fourth quarter. And I will talk about the forecast later. But starting from 1st of January, we can start fresh. So most of these expenses were accounted for in the fourth quarter. Without that, we would have been profitable.
Next slide, please. On the left-hand side, the revenue, this is yen denominated, 100% achievement. On the right-hand side, as I have explained, there are extraordinary expenses that were posted, and only 94% achievement. And as you can see in the parenthesis in the top right actually, the achievement is 97%, if you exclude the restructuring costs, but we are under by 3%. In terms of revenue in the fourth quarter, consumer sales in Japan and also overseas on-premise sales were lower than expected. So this explains the 3% under achievement.
Next slide, please. As I've explained before, this is pre-GAAP versus total costs. You can see the trend. In the third quarter, pre-GAAP, post-GAAP were mostly in line. But in the fourth quarter, we have JPY 58 billion and costs have also gone up. The red line indicates excluding the restructuring costs, pre-GAAP operating profit was -- margin was 29%, which is the same as last year.
Next slide, please. Consumer and on-premise sales were worse than expected, but the subscription is showing 2-digit, double-digit growth, 19% growth. especially Vision One platform sales is showing a sustaining high growth.
Next slide. Cash flow status has not really changed, around JPY 10 billion. We may be in the loss but in terms of operating income, but there is no change in cash flow.
Next slide. This slide shows costs. Compared to the prior year, it's higher. But as you can see in the red part of this bar, JPY 2.6 billion of weak yen impact is accounted for and other expenses have gone up somewhat. So cost trend without the impact of FX will be shown in the later slide. This is a summary of highlights.
First of all, we had highest revenue ever, and also double-digit growth in subscription ARR. And we have also implemented cost-saving measures. Not just one-off measures, but in order to grow revenue for the future, we are building the ground so that we can maintain the cost level into next year.
This is the full year total, 100% net sales achievement, but operating income is only 94%, but it's actually 97% without restructuring costs.
Net income is much lower, but this is due to the restructuring costs. And also in the third quarter, there was a lot of tax burden, and extraordinary dividend was paid. And in addition to that, there was some extra tax in the third quarter.
As you can see in green, we have a special dividend. It's usually JPY 56 but we are adding JPY 682. So per share, we are paying JPY 738. And of course, this is subject to approval at the AGM on the 28th of March.
Next slide. Weakening impact, how big is that? And where is it? Maybe this is difficult to see from a perspective, so we are showing some of the key cost items at constant currency rate. And as you can see, COGS, this is a hardware-related inventory write-off, included and the cloud-related costs as we can from the bottom.
Last year, we built regional data center. And this year, we believe that we can keep it flat. And other than that, third one from the top, this is the biggest one -- sorry benefit, headcount costs. In '23, this was 5%, and this is lower than the growth of revenue. But in this coming fiscal year, we will keep it flat. So we will try to control this.
Next slide. And this is forecast. In terms of revenue, low single-digit growth in Japan and in the Americas, slightly high end of the single-digit growth. And in Europe and Asia, 10% or more double digit.
In terms of profit, we will attempt to maintain the cost level, same as the prior year, which should contribute to the improvement of profitability.
Next slide, please. And this is the forecast, 9% increase on unaudited basis in net sales, JPY 271 billion, so 6% growth without the FX impact. And operating income is a 62% up. This is because this time around, the situation is different.
And another topic, shareholder return. In the third quarter, I have already explained this. But in the end, the accounts, the books have been closed and we can disclose specific numbers now.
Dividends. JPY 101 billion. So JPY 738 per share. As I've explained, this includes JPY 56 of the regular and the JPY 682 of onetime dividend.
Other than that, JPY 40 billion share buyback will be implemented starting from the 26th of the month until end of November. We will be buying back our shares.
Dividend for this fiscal year. Well, as you can see at the bottom of the slide, usually, we are ending at a 70% payout ratio, and we will maintain the 70% target. And as I have explained before, net income will not be retained. Basically, the total amount will be returned to the shareholders as a basic policy.
Well, the slide is basically the same as before, and this is included as a reference. And during Q&A, I'd be happy to provide some additional explanation.
And in terms the shareholder return, this is going to be my last slide. Shareholder return is achieving levels that they never did before. And with that, I would have to conclude my remarks. Thank you.
[Foreign Language] This is Eva. I'd like to discuss about Trend Micro after the [indiscernible]. Trend Micro has been in the business for more than 30 years. We've been always innovating for customer cybersecurity problem based on their infrastructure change, customer behavior change and the threat landscape change. With those innovation engine, Trend Micro at the end of 2023 [ will grew ] in USD 1.9 million company with more than 7,000 [indiscernible] worldwide. But I must say, in the past 3 years, Trend Micro [indiscernible]a major transformation never happened before. This major transformation come from -- at first, we were looking at the ransomware or the direct landscape change. At the time, we realized that ransomware has changed all the security defense landscape a lot because customer and cybersecurity company will be we always look at the cybersecurity in a line items, means that we design security based on the end point security, the network security or the e-mail security vulnerability management is all based on the line items like this. But ransomware and attacker, they don't see the infrastructure like this. They see the customers' environment as a map. They enter through an e-mail and then travel through the network, attack on a certain end point and then elevate the right into the administrator account and then finally, they ransom the whole company's operation. And even, they go do that, the supply chain and to ransom other customers' environment. So this change will force us to make sure we need to innovate and change our customer and to [indiscernible] at zero trust concept, which means you need to constantly monitor and evaluate the risk of the overall environment, provide visibility and make sure you put in your best risk management to reduce the risk being attacked and also rebuild the cost when you're getting affected by these cyber threats. That's why, in this environment, Trend Micro starting 3 years ago start to move into a platform, digital platform is a platform for customers to have a full visibility and monitoring system for their risk, risk management, attack service risk management. So this platform will enable our customers to be able to monitor, [indiscernible] modernize their cybersecurity platform and able to design their cybersecurity based on risk, what is the risk, and that is how they can achieve the zero trust cybersecurity management.
But I must admit that during this transformation, even we, ourselves, didn't expect it. This is not just a technology or product innovation or transformation. It was an overall company operation and organization transformation, in need to transform our product license technology into a platform technology company, and also our go-to-market need to transform from selling user-based license to a platform concept price model. And also our marketing and our sales commission need to be fully [indiscernible], and how we see forecast the organization structure also needs to be transformed.
So Trend Micro, after we do all this transformation, our revenue composition change into mainly subscription business model and mainly focused on first wave of focusing on Trend Micro customers.
Now Trend Micro's business still have about less than 40% [indiscernible] of the business. That is on the smaller business and on [indiscernible] business. But 60% more is focusing on enterprise and capital-based [indiscernible], this type of subscription will create a totally different [indiscernible] and customer. So I must to say, in the [indiscernible] when we move to the enterprise focus and subscription-based model, it changed how we [indiscernible] look like. unlock. Because enterprise business model has 2 very important characteristics. One, per customer's transaction size is bigger. Second, the customers' payment tend to be more -- not like the one [indiscernible] it's more hockey stick at the end of the quarter. And because [indiscernible], when we close at the end of the quarter or close at the beginning of the quarter, the [indiscernible] revenue will have a huge [indiscernible]. If you have 100 and same $100, but if you close at the end of the quarter, then you probably recognize only $10. But if it is beginning of the quarter, then you recognize $30. That's 3x it gets. However the cost, no matter is the salary or the commission we pay or the hardware cost we pay does not get deferred. It's still recognized in the same quarter. And that's why during this transformation, you might find Trend Micro whenever we do quarter-to-quarter year-on-year growth report, you will find our post-GAAP revenue and our post-GAAP profit margin change fluctuation a lot.
Additionally, I think after the transformation our business will become much more robust. And let me explain why and how Trend Micro after this transformation, how our financial and how our operations look like.
First, now our revenue are composed by perpetual license and subscription business. And as you can see, 62% of our overall company's revenue at the end of 2023 are subscription business. And our -- the perpetual license business are composed as 3%. This transformation mainly happened in what we call value business, which is the enterprise, big enterprise customers' environment. And that part of the revenue, we can see, for the blue line, first one is when we sell the new perpetual license, the revenue has been declining and now it composed of 19% of the revenue. The revenue come from the perpetual license by renewal, which is 30% of the renewal business. It was the most profitable business. But the problem of that renewal, perpetual license, 30% renewal revenue is very hard to explain in the same customer base. That revenue has come down to now is 27% of the total revenue. And what is growing is before, when we were doing all this platform transformation, our first year subscription business are growing. However, that business is most costly because there's cloud cost, there is acquisition cost and there's subscription base revenue recognition make the initial costs look really high. So when you see this blue line come down and red line coming up, that's where you see -- look like Trend Micro's profit margin gets screens. But the good news is when this subscription goes to the second year, then we're starting to see the renewal subscription and also the expansion capability of the subscription revenue, and that is that green line. In 2023, that green line now become the highest percentage of the total revenue for the enterprise business that is 32% of the revenue of the enterprise business. And that's where the new scalability of Trend Micro's business start to appear.
Although, this new subscription and expansion business, we actually formally launched it on July 1, 2023, so 6 months, but we've seen the great momentum. And based on those numbers, we can see our long-term customer value increased more than 3x for our big enterprise. And even for smaller enterprise, it increased 6x. Every customer will spend more money with Trend Micro. And our new business, we call it attack service risk management, which is the overall visibility of customers, risk measurement this service, we just launched. And during this time, we've seen within 6 months, already more than USD 100 million credit that the way we count this credit is almost like on credit equal to USD 1, and that revenue has grown more -- grown over USD 100. So this momentum growth shows that Trend Micro's platform way of selling increased per customer revenue as well as the expansion capability where we can expand into new business much faster.
The volume business is another story. There's 40% of them, and we have been -- it's flat, but I believe in 2024, what we see is we can use the AI to improve the profitability because the support costs can be reduced. And also, we see that AI might be a new wave of PC shipment because now the AI chips can be embedded into the PC, and people can use the so-called local AI to generate much more sufficient productivity. So we see the possible business momentum come from this AI for our 40% of the volume business. So these are what we see the transformation of Trend Micro's business and revenue and cost structure.
So talking about organization. Actually, Trend Micro, our operation before was -- I kind of call it the franchise model, where our global organization produce the same product, the same product selling to different regions and in different regions based on their operation to select different type of products that is best for them. For instance, in Japan, they sell the most end point security product, while in U.S., they sell most the Cloud One, the cloud security product. That is a different organization structure. And the organization structure, it looked like there's global with RB product management, order management, marketing and then finance. That's a global operation. And then each region, they have different organizations for their sales, tech support, marketing, channel management or different organizations. That was the original Trend Micro's organization look like.
But once we move to a [indiscernible], then we need to actually integrate all of this organization into a customer-centric organization. What type of customer are you? Are you a big enterprise customer, small enterprise customer? And at what stage are you in adopting Trend Micro's platform? And what is the best opportunity to upsell and expand our business within this customer? So organization need to transform into the product that tech support, the sales, the marketing or into what we call a web organization, looks like a circle of web organization.
This is the major transformation that we've done. And you've seen our restructuring of the organization is not just a headcount reduction. It's an actual customer environment and our customer service and our customer-centric organization restructuring. We believe with this new web organization, Trend Micro's scalability and innovation for a customer can even more enhance. So personally, I be I'm very proud of Trend Micro able to do this type of transformation organization without major disruption to the business because most of the time, this type of organization restructuring everybody will be saying, "Oh, this is my reporting right. This is my territory," and then there will be a lot of inner fighting, but in Trend Micro that doesn't happen. We were able to do it very structurally and very smoothly.
And I think that was based on Trend Micro's, global culture. Trend Micro's corporate culture. Everybody is emphasizing on empathy for customers, and we will gain our wisdom and analysis from the data, real data. And finally, everyone needs to be free to make their own decision and take their accountability. We were able to achieve this type of reorganization.
So at the end, I would like to say Trend Micro, we always believe in 1 basic strategy that is Hedgehog strategy from good to great, the book of Good to Great. A company need to integrate what they are best at, what they're passionate about and what is their growth, innovation. Those growth engine is we believe Trend Micro after the transformation.
We still have the same passion of solving customers' cybersecurity problem. We still have the same strength in our defense threat expertise, and we transformed our growth engine from global and local operation to a platform growth strategy. So with that, Trend Micro after transformation, we are the same Trend Micro headcount but with much more robust business model.
This picture is what we did -- the AI contest in Fukuoka last year, and that event shows how passionate Trend Micro people implementing AI to power our transformation.
So thank you very much, and please come with Trend Micro into 2024, the new transformed Trend Micro.
Hi, everyone. My name is Kevin Simzer, and I'm the Chief Operating Officer for Trend Micro. I'm here to provide some additional insights on our Q4 and our 2023 fiscal year financial performance.
If you manage to join us during our December 1 investor conference, we laid out this corporate strategy, which talked about moving more and more towards a recurring revenue stream, increasing our operating margins by driving our hybrid platform across that enterprise customer base, better predicting our revenue growth and ultimately increasing our shareholder value.
From a 2023 financial highlights perspective, Mahendra already went through these numbers. And I thought what I would do is highlight a little bit more around our Q4 performance overall.
We executed on a lot of good things in terms of driving our platform into our installed base accounts, which is what we had laid out as a strategy. However, we did see weakness in 3 different areas. Number one was around our consumer business. We did see that our consumer business declined for the quarter. The second was in our -- globally within our small business, small enterprise business, in particular, we saw that decline by 7% for the quarter. And then finally, in the enterprise space, we saw some weakness in the Americas, an area that we have identified as an area that is one that we we'll be restructuring and refocusing and retooling for 2024. We really saw our perpetual base business fall off faster than what it had been.
Overall, we continue to show that we know how to grow revenue. And if you look at this overall track record back to 2013 of revenue growth, this is actually an 8% compounded annual growth rate. So we continue to increase our overall share of wallet.
From a driving subscription sales standpoint, this recurring revenue. Our recurring revenue across both our consumer and our enterprise business now represents 65% of our total revenue. This is a 12% compounded annual growth rate. So we're very serious about moving to more and more of a recurring revenue model.
Let's double-click on each one of the businesses. The first is enterprise. We're really taking a data-driven approach. We have this 28,000 enterprise customers and we're going to be fixated on getting our hybrid platform adopted within those customers as broad and deep as possible. We're going to prioritize high potential larger enterprise within our customer base, and we're going to drive growth in both the top and bottom line in doing so. We have the most comprehensive hybrid cybersecurity platform on the planet. And we recently were awarded with a couple of new certifications, which we think are going to help us in a certain set of market.
Number one was FedRAMP help us with U.S. Fed, state government suppliers to the U.S. federal government, is map in Japan and then C5 in Europe. All those will allow us to better embrace and serve our customers in those markets.
Innovation has never stops, and we continue lots of AI with our built-in companion capability, lots of cloud and container security capability, more stuff with AWS, lots of innovation and that will continue.
Industry Analysts awarded us with some new things in the quarter. Gartner published their Endpoint Magic Quadrant, and we showed up in that leaders Quadrant again for over a decade. Our Gartner Peer Insights, these customer-specific choice nominations, and we ended up with a large basket of awards in Q4. And then finally, Canalys, which really recognizes our leadership in the channel ecosystem and how we work with our channel partners and giving us that top spot in the Champions Quadrant.
If you look at our business from a segment perspective, you can divide it up into large and smaller enterprises. And you can see the majority of our business is in larger enterprises. However, we did in our smaller enterprise business, as I mentioned upfront, that we did see a decline in our smaller enterprise business. That was -- that did impact us across the globe, but in particular, in Japan, where we have an appliance offering, that our channel partners are just retooling up and getting ready for 2024.
From an enterprise hybrid ARR perspective, this takes both our subscription-based ARR and adds to it on top the perpetual-based renewals. And you can see that all of this is a renewal -- is a recurring revenue stream, but you can see that we have been increasing in our overall subscription base and declining in our overall perpetual renewal base. That's honestly by design. We do have customers that will end up staying with us in our on-premise business. Cloud is not for everyone. However, many of them will be moving towards the subscription-based model. So that's definitely the motion that we see. And in the Americas, we saw the perpetual business fall off a little faster than what we had been seeing and anticipating.
From a subscription annual recurring revenue standpoint, up at $784 million. That's a 19% year-over-year growth. And you can see that relative to the expansion in particular, we're doing a nice job and we plan to do even more going into 2024 in terms of increasing through expansion. We're doing that on the back of our wonderful Vision One platform that's -- we're fixated on attaching. We're up to a 34% attachment rate right now. If you look at the 9,592 customers that we have across the 28,000, that's a 34% attachment. We know when we attach, we can increase our overall ASP.
We did really nice for the quarter with adding 535 new customers. Their gross sales were up 64% year-over-year. Nice solid NRR at 113%, and we added 20 new managed service partners, including Kindra and Arctic Wolf. These managed service partners now are connected up to us, and we're jointly providing services to our end customers.
Once we get attached, then we're fixated on expansion. We have 14 modules across our platform. We know that we can add more and more value to our installed base accounts if we get more and more modules deployed. 51% of our customers have 1 module. How do we get more? That's what we're going to be fixated on in 2024. We know the retention rate increases and the AR impact also increases.
Also new for Q4. We've been tremendously successful with transacting through the AWS good place. And we've taken that success, and we're looking to copy it with both Azure and GCP. So Vision One credits are now fully available within both those marketplaces. So we see that as opening up new opportunities for us to land and transact through those respective supermarket places.
We're going to use a very data-driven AI-driven approach in order to go after our customers and identify where we can attach, how we can increase the usage, where we can get the expansion and point our resources off to the highest potential and the highest probability for moving a customer, advancing them on our Vision One platform.
Finally, 3 customer examples in the Americas, a hospitality customer going for increased visibility across their entire environment. They were an existing customer, and we went in and they wanted to see that expansion potential. So it was the breadth of our platform, which won the day up against CrowdStrike.
This next one is in Europe, and it's a large, large software company with a massive physical data center and public cloud infrastructure, and they were looking to consolidate vendors, so we ended up replacing Trellix there with a massive container security win for us.
And then finally, in EMEA, and the oil and gas vertical, an existing customer. Compliance played a big factor. They really wanted to have some solid visibility across their entire environment, including 24/7 and our MDR capability won the day.
In our consumer business, our, our strategy has been to maintain some steady top line growth, not increase, but maintain, but fundamentally to improve our profitability over time. We're going to do that by growing some next-generation offerings and increasing our ARPU, increasing how much we get from our existing customers. That's our way we're going to grow but also improve our profitability.
Highlights are a nice year overall. We did have a soft quarter, as I alluded to, overall. Fundamentally, the core of the business ends up being an attachment to personal computers. When PC shipments declined, so too will this. We've been shoring it up with additional capabilities that go beyond protecting a PC. They're more fixated on protecting the identity itself, consumers' identity. And those are growing at 9x. We've got some really nice new initiatives that we're working on. So we're looking at expanding in that direction.
In terms of the next-generation capabilities, we're definitely fixated on some future innovation and driving that operational efficiency across the overall consumer business. And we do have some additional channels that we're bringing forward.
Finally, let's finish with the road to 2027. We said that we would adopt a zero-based budgeting in 2023, and we did, and we ended up with substantial savings as a result of it. Currency did not swing in our favor, but we did, in fact, drive those savings.
In 2024, we said that we would remove $50 million in operational expense. And you can see by the restructuring charts that we did do that. And we have, in fact, implemented those. It's not about just cut, cut, cut. It's about finding ways to automate and finding more efficiencies within our overall model using AI, using a number of different techniques.
Of course, we're not going to stop in 2024. Our long-term plan is to drive for 29% to 31% operating margins is our long-term goal.
If we look at this corporate evolution of our high-level P&L that we laid out December 1, no real change here with the exception of on the top line. We originally thought at the time that 10% was the right number on the top line. It turns out it will be 9%, but there's really nothing to that. The only difference is that we did make a change to an agreement we have with one of our subsidiary companies and that is impacting the post-GAAP revenue. There's no change in the dynamics of the business at all. There's no change at all. But just the way that particular agreement is structured, it does have an impact on our post-GAAP revenue. So that's the 10 to 9.
From a long-term plan perspective, we've laid out $2.7 billion in gross sales, up 30% and. Operating margin with $1.7 billion in ARR and a 60% Vision One attach. Vision One is the way we're going to get there.
Thank you, everyone, for your time. Look forward to your questions. Thank you.
[Interpreted] Can you see the slides? Then please allow me to ask talk about the fourth quarter FY 2023 Japanese region business. First of all, I have already touched upon this. Last year, we talked about what we wanted to realize for the enterprise market. And especially here in April of last year, we had completed a solution and the delivery started. Also, there was an explanation that in the Japanese market, there has been some delay compared to the global market for the platform approach. So compared to the other regions, Japan is slightly behind in this area.
As for the consumer market, we have the beyond device security that will be pushed further.
As for the Enterprise business in the fourth quarter, as mentioned, we have a platform strategy. And first of all, we have XDR that we have focused on the larger enterprises on, and we have some slight delay in starting in Japan, but for this technology, Japanese companies have been behind in adopting this kind of technology, and we have started delivery here in Japan. And so compared to the previous year, there has been a growth by 55.5%.
As a result of this, when it comes to the companies that have deployed XDR, there is managed detection and response service that has been provided as Service One. From Q3, we have started our activities, and we have seen steady growth here. And among the customers compared to the previous year, it has grown by 0.2x. And when Service One and XDR is used, then we see that the sales by the customers has increased by 54%. When they start using this for security operations, there are more requirements they come up. And so there are these orders that come in as a result of their adopting this technology. Also in Japan, the AWS Marketplace was started in Japan after other markets, but we are seeing steady growth here. And in the AWS marketplace, we have seen growth so that compared to the prior year, there is a growth by 35%.
There still remains a large demand for on-premise. And when it comes to the public sector and the financial industry, we have the on-premise deep security business that still is growing steadily.
And for the SMB customers, overall, it was mentioned about the appliance situation, but the appliance replacement cycle has started, and there has been some delay in the delivery so that compared to the prior year, there had been some drop in the hardware sales. We have grown the number of customers and the managed service area has grown as well. And furthermore, we have the XDR function for the SMB market. And we have made available service in this area. So we have added XDR functions, and we're seeing more business in that area.
And especially in Q3 and Q4, for NTT West and so on, there has been announcement was made. In Q4, there has been momentum in the increase in the number of customers there. Once this takes off, then the service value per customer will increase. This will increase our menu offering, and that will increase the income per customer on our part.
And as we head towards 2024, Trend Micro Vision One. We will be moving forward with a modern stock by using Vision One. We want to enhance the ROI benefits. So we'll continue to promote the cybersecurity platform. And in the incident response of XDR, we need to get the message out accurately and correctly.
And there is also the attack service risk management that will be deployed in Japan, then there's going to be many security steps that we've taken. And there are 240 companies that have been specified as important infrastructure companies. And there's also the supply chain customers in that area. So we need something like an attack surface risk management because there's much attention focused in this area. We want to continue to appeal this and get the market, and we'll be using generative AI as well. And we will be taking advantage of this technology for our Japanese customers as well.
And with Vision One as already mentioned, from a single service, the customer requirements increase, and there are new sensors that we are able to deploy to our customers. And there's also a, CNAPP, and we are offering a solution in this area.
For the SMB market, we have a partner that is collaborating with us to expand our XDR sales. And through the partner, we want to target the SMB market. We have already seen growth in this area. But with the addition of XDR, and as we increase the customer satisfaction here in Japan, we believe that partners will be active even more from here onwards in selling this. And so there's also the new cloud edge where the deliveries are going to be increasing. And in the consumer area, there's the beyond device security. And with new materials, we have been able to increase the business by 28%. And as mentioned there's going to be sales is for Japan as well.
Device security products. PC shipments are going down, but with new sales expansion, we are seeing growth.
Security covers all the different types of operating systems. And again, using a new channel, we're trying to offset the shipment decline of PC. Of course, the smartphone sales is also declining somewhat, but we are trying to offset that.
And out of 47 prefectures, we are collaborating with 22 prefectures law enforcement. We are a trusted partner, and we are going wider and deeper into this.
For FY '24, we will be utilizing AI including chatbot in order to increase the efficiency of our communication with our customers, making the communication easier for our customers to understand, and we also want to implement the measures against expanding risks. There are specific risks or specific features about the risks in Japan. And therefore, we would like to continue to provide new products and services that will suit the customers' needs, and we will continue our awareness raising activities together with public organizations in order to enhance Trend Micro's trust so that people will feel safe and protected using our products and services. That's all for me. thank you.
This is Tanaka Mr. Morgan Stanley. Can you hear me?
[Interpreted] Yes.
[Interpreted] Now I'd like to ask about the plans for this fiscal year. First, this top line growth of 9%. And if we look at just the fourth quarter, we see the sales revenue increased by 1%, and pre-GAAP, it was about 2%. So it seems like you're slowing down in momentum. So when it comes to this 9% increase in revenues, how certain are you of this?
And also for costs, you mentioned that you're going to be keeping down the cost to current levels, but the JPY 1 billion extra costs incurred. And aside from that, there was the currency factor that increased the cost because of the depreciation of the yen. So I didn't feel that you'll be able to achieve your plans that easily. But what is your certainty of achieving this? If you could talk about that, that would be appreciated.
[Interpreted] Perhaps Kevin is the one who's spending the money. So perhaps you can explain.
Thank you, Mahendra. Yes. So we feel very good about it, quite honestly, like Eva was suggesting. Our business is one that Q4s are seasonally just very high for us. And what we certainly found is that sometimes it can be a little bit difficult for us to predict when we're going to close all of those deals. And I highlighted in Q4, a couple of different areas where we slowed down. One was around Cloud Edge. That's the appliance in small enterprise in Japan, and it was really a an unintended consequence from raising the prices. So what we found was our channel partners. We raised the prices early last year, and our channel partners took advantage and did large buys just before that price increase. So we ended up with some softness. But they're retooling up, and we see that resuming as we go into 2024, we'll see that start to come back.
In the other area that I'd highlighted was around the Americas. And we had identified this in our December 1 investor conference that, that was an area that we were really focused on. We wanted -- we've done really well in the Americas and in the U.S., in particular, at attaching Vision One. But where we need more work is how can we expand by doing more, as Eva said, platform selling. And what we did was we have a region, the EMEA region, which is very good at doing platform selling. And we've assigned a number of those people to take on the U.S., and we've made those changes already. We've put those changes in place. So we feel like we will be able to step up to more platform selling in the U.S. and start to get more of our fair share of the U.S. market. So we feel really good on the top line.
On the bottom line, I actually feel even better. We said that we would through automation, through AI, through some reorganization and restructuring that we would find ways to remove just over USD 50 million in operating expense. And we've done that. So I know going into it, our operating margins will be substantially higher as a result of that.
And may I have that? Well, we'll make forecast in dollars in yen base. In 2023, despite whatever currency movement and despite what was -- we probably don't like the composition of the currency. But at the end, we meet 100% of our forecast revenue growth in EM base. And our cost has been impacted by the exchange rate a lot, but as you can see, we -- our analysis without the restructuring cost and without the actual tax payment, we made -- we actually still have ordinary income growth, and we met our profit, operation profit target. So we have very high confidence that in 2024, based on what our forecast is, I think we can do both of those forecasts in 2024.
[Interpreted] [Operator Instructions]
[Interpreted] This is Sato speaking. Can you hear me?
Yes.
I just have one question. Your guidance for this fiscal year is -- I guess, if you divide the [ 17.5% ] up on profit margin, yet, you said that you're going to be forecasting 20%? Is this 50 bps difference should I care or should I not care? Or is there some message in between?
Mahendra, did you...
Unless I divided the numbers wrong.
No. I think you're doing -- it's just over 19.5%.
Does basically CFO saying, I want to be a little bit more conservative.
And it's just simple rounding in...
It's just simple rounding.
Yes.
All right. I just wanted to make sure because your message. So maybe there was a little bit of a message from the CFO. My second question, actually addition to those is the Tanaka is saying, just looking at the fourth quarter results, especially the top line, I know that you said that Japan is look at a single digit, 2%, 3%, I guess. And the other one is U.S. looking at upper end and the rest is [indiscernible]. And only basically presented that Japan is finally, moving forward with enterprise areas with all of your signature product for 2024. So isn't Japan should be accelerating a little bit more this fiscal year? Because you also have like 2%, 3% guidance last fiscal year and Japan hasn't really been growing. So I'm a little bit worried about Japan, especially like we're supposed to be getting the PC replacement cycle maybe toward the end of this year. So that should also help move some of your consumer figures hopefully with the PC replacement cycle. I don't know. Is there -- are you looking at it conservatively for Japan where the whole country is supposed to be shifted to DX? In U.S., I mean, I know you have a lot, you want lots of award over there that we just don't see the sales numbers. So can you talk about these 2 regions for 2024?
I'd like to volunteer to take that. First, for Japan, yes, I share your optimistic about Japan, and I feel we should do better. But frankly, the reason that we're being contacted is Japan's sales structure, sales through the channel and also just the adoption of the new technology speed traditionally in Japan is not the fast. So we didn't they're to make that very optimistic progress. But we believe it's the right direction is just the distribution channel and the speed of customer adoption, we cannot be that optimistic about Japan. So no problem about the Japan operation. It's just the speed adoption that we were concerned.
And for U.S., as you can see from our December 1 Investor Day, we did announced -- Kevin introduced our new structure in U.S. And we are -- a lot of this restructuring was happening in U.S. that we did do, so whole sales force and our tech support services or the refreshing of the U.S. operation. And we believe after this new structure, U.S. should go back to better growth stride momentum. So those are the two things that I think I'm aligned with you. I do believe these are the 2 regions, that we should be more domestic and have more growth, and that's what we lay our investment in.
And actually, the final question for me is restructuring, especially the people. I'm looking at Page 36, and I know this is like a combined number of hiring and letting go. But the number of people for research and development is actually less. And also, it looks like you cut numbers from America and also APAC EMEA areas, but kept the rest of the areas as it is. So did you cut engineering resources more than sales or technical support. Where is the resource restructuring happening? Because I thought globally, getting engineers, hiring engineers is quite difficult with the resource, especially in the security software space. Where was the actual people restructuring happened?
[Interpreted] Well, the this number, some of them basically left in January and that's not reflected yet. So this is going to be clearer at the end of March.
And yes, people leave and people join without us restructuring sometimes.
[Interpreted] Oh, I see. So people reshuffled in a balanced way across the board?
[Interpreted] Yes. By March, you will know better, okay?
[Interpreted] So cost reduction is mostly in the first quarter impact of that.
[Interpreted] Yes. As Kevin has just explained, of course, there is some costs associated in terms of retirement allowance, but most of the costs were accounted for in the fourth quarter. And then in the next quarter, we will see the impact.
[Interpreted] Now I will unmute the next person.
[Interpreted] This is Kikuchi of SMBC. There are two questions. In recent results, Page 32 of Mr. Negi's presentation, there is the active customer account, and it mentions subscriptions were flat for this quarter. If that's the case, then subscription revenues will not increase is the feeling that I get. However, for subscriptions, when it comes to the number of accounts, even if you don't see an increase, does that mean that subscription revenues can still increase? And if that's the case, then I believe that you would be able to achieve your revenue plans, but could you tell us the structure there?
I think the overall structure is that we focus on the existing customer and put more effort on the core and expansion, and those expansions are subscription revenue. So yes, you're right. We are -- even if we don't add more subscription customer number, we were still able to expand our subscription revenue.
[Interpreted] Was that understandable?
[Interpreted] What about perpetual then, for the fourth quarter? There was a major decrease in perpetual revenue. And do you believe that this decrease will continue to accelerate and continue? Or is it just a onetime temporary phenomenon? Could you tell us about this?
[Interpreted] The perpetual customers are definitely decreasing, and there is about 500,000. But when it comes to the value customers, it's about 38,000. And so even if we see a decrease in the smaller accounts, if we can continue to increase, then we believe that we should be able to achieve the revenue goals in this area.
[Interpreted] I see. Let me ask again about this aspect. For the fourth quarter, there had been a temporary decrease. But for this year, you're going to increase by 9% of sales. And do you think that they will be equally distributed overall 4 quarters? Or will you see more increases in the second half? Do you have any targets in this area of how you intend to achieve your goals?
Kevin? Do you have any comments on that?
Well, we don't give quarterly guidance, right? And we've already talked about how our business can, in fact, move up and down. But we do see already that Q1 is looking quite healthy. So we do see the normal distribution that we would normally see across our business, and that's definitely the plan.
[Interpreted] Add to that. I mentioned this when I explained the pre-GAAP results. When it comes to the larger deals, there may be a concentration of that towards the end of the quarter. And so there are fluctuations by quarter. But we believe that the annual outlook holds.
[Interpreted] Yes. Then in regard to revenues, I have a second question. In -- the target for 2027 in Kevin's material, when it comes to 2027, OP is going to be JPY 100 billion. So it will double. Between revenue and fixed costs, I think that you can control the fixed cost, but can you really increase the revenues. That's an important point. And by region or by segment, or between subscription and perpetual, this 10% increase in revenue. Is there a breakdown? Or is there some explanation about how this will be realized if it's by region? There is an expansion by region. In Japan and America, how can you achieve growth is something that I'd like to ask about.
Kevin?
Thank you for -- it sounds like you liked our road to 2027, so thank you for that. What we wanted to do is share with everyone that we do have a long-term plan. We have lots of details that are built underneath that plan. And we wanted to give this as our North Star. This is where we are moving towards. It does include revenue growth across our segments, so it does include actually some incremental headcount along the way. So it's not -- we are not telegraphing that we will be flat in terms of headcount out through to 2027. So it's not unrealistic. We will be hiring some along the way. So we built that model and that plan in order to give us that North Star.
So that's what we are working towards. But we do feel like -- Eva said it really well when she started to talk about what trend used to be like very franchise oriented. And now the entire company in the enterprise space is absolutely fixated on Vision One on landing and expanding our Vision One platform. And I've been here for 15 years. I've never experienced that before where we have the entire company leaning into one area. It's a hot market. We feel we've got the #1 platform. We feel like we have a big installed base, and we're going to be going after it much more methodically. And yes, so we think we're in a really good spot to be able to achieve the growth numbers that we're talking about.
And I do think that Trend Micro's globalization or our global distribution of the business provide a natural hedging and a natural complement to each other. So maybe just for instance, last year, we totally lost Russia, Ukraine all those business. And also the second half, in Israel and all the Gaza -- out of those business we lost, but we're still able to grow and achieve our annual growth. So first, I would say, focusing on the annual plan is much better than just quarterly fluctuation comparison. And also, I believe our global operation is much more resilient than if we're just focusing -- focus on certain areas role, and that's why we don't provide specific range in growth.
[Interpreted] Further more to explain, as Eva has mentioned, we have a large customer base in Japan. Japan is a unique case, but there's some who have only a single solution. But before the global market, there is the know-how, which is AI-based, which we're starting to deploy in Japan, and we can offer accurate advice so that per customer, I refer to them as sensors, but now we're seeing more and more necessity for this kind of approach and since we have this base. And furthermore, now as a result of the focus on economic security, finally, Japan is starting to make efforts in this area.
So the head office lagging behind, now we are seeing things ignited and here in Japan. We have the formula in place, and we can take advantage of all the activities on a global basis here in Japan.
Now we are doubled. We know how to hit higher fee rate in the enterprise business as well as running the run rate business in Japan. So they can do both.
[Interpreted] I will unmute you the next person.
[Interpreted] It's M. Tsuruo. I have two questions. Page 19, [indiscernible] question, and I just want to clarify. Operating income under JPY 40 billion for this fiscal year. And you buying back shares worth JPY 40 billion and 70% payout ratio, but sometimes you may not achieve that. And the dividend for this fiscal year is going to be lower than 70% payout ratio? Or you don't know?
[Interpreted] Thank you very much for your question. This is a complicated explanation, but we repatriate profit from overseas. We have to close the books in December, and the dividend may not make that deadline. So with the profit coming from what is the structure, how do we would patriate the profit, what has happened to profit in Japan on a stand-alone basis. So generally speaking, we can sustain 70% payout ratio, but if there is a big profit for a specific subsidiary, but the dividend is not paid or the account closing timing. In that case, we cannot account for that profit. So this is one factor -- problem that we have. So this is why I'm explaining this on this slide. But it is an exceptional situation. So we believe that 70% can be at.
[Interpreted] I see. So for this fiscal year, excluding irregular situations, it's going to be more than 180%.
[Interpreted] You're talking about JPY 180 -- no 180%?
[Interpreted] JPY 40 billion plus 70%, after tax.
[Interpreted] Well, if you combine last year's the dividend plus share buyback, if you combine the 2 fiscal years.
[Interpreted] I see what you mean.
[Interpreted] Well, the total payout ratio will change depending on how you combine from which fiscal year. For FY '24, we have the net income. And then the dividend will be paid out based on that. And also, as BLD resolved, we have the JPY 40 billion share buyback. So we are actually adding them up to calculate total return payout ratio. So depending on what kind of combination you make from which fiscal year, maybe there may be some discrepancies.
[Interpreted] I see. My second question about execution, headcount reduction is not rare in a global company, I understand. But in Trend Micro's case, I think this has been very rare, and you have a radio web organization. You use AI for your sales activities. And what about the motivation program for the employees or the transition of the sales force, do you think that would endanger the profitability or the performance of the company?
Kevin, do you want to address that?
[Interpreted] I mean I think if we make the right decision, actually, the people who stay will have higher motivation and that is the case that we see.
[Interpreted] Understood. Understood. Thank you very much.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]