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Edited Transcript of 3662.T earnings conference call or presentation 13-Mar-20 8:30am GMT

Nagoya-Shi, Aichi Mar 17, 2020 (Thomson StreetEvents) — Edited Transcript of Ateam Inc earnings conference call or presentation Friday, March 13, 2020 at 8:30:00am GMT

Ateam Inc. – President & Representative Director

Hayashi Takao, Ateam Inc. – President & Representative Director [1]

Thank you for watching the Analyst Meeting video of Ateam Inc on the financial results for the second quarter of fiscal year 2020. Let me begin with the report on the 20th anniversary we have celebrated on February 29, 2020. I would like to take this opportunity to thank you for your support and guidance and ask for your continued support as we make further progress in the next 20 years.

Ateam is a comprehensive IT company that develops business around the Internet. We offer services over the Internet, capitalizing on our IT capabilities to a diverse range of markets. That’s our intent. The agenda shows what I would like to cover today.

First of all, I would like to take you through our medium- to long-term policy, once again, in order to supplement what had been explained in the past. I’ll start with the management strategy of the group as a whole, which is shown on the slide. Based on the shared strength shown in gray at the bottom of the diagram namely digital marketing know-how, business development strategy and technological capabilities, which constitute the foundation of our businesses. We have the Lifestyle Support business, which provides stability with continuous growth; the Entertainment business, which may be affected by the market trends but has the potential to show explosive growth in the global market; and EC market, EC business, which was newly added as a business segment. Those are 3 pillars of the entire group.

First of all, I will explain the medium- to long-term strategy of the Lifestyle Support business. Our vision is to focus on the important life events of consumers, such as employment, marriage and childbirth, as you can see on the slide, and provide values at each juncture.

These are the 3 advantages of the Lifestyle Support business. Web promotion refers to efficient advertising over the Internet. System refers to the system development environment, where new websites are developed relatively at low cost. And the synergy refers to cross-selling opportunities realized among different services. Those are the strength of the business.

Now let me make comments on the revision of subsegments. In the past, we had a subsegment for each service such as moving, automobile and the bridal. Starting this year, however, we have integrated those websites whose focus is referring users to business partners, into the Digital Marketing Support business. While those websites which are visited by users like every day, such as LaLune and Qiita are defined as the platform business. Those are the 2 subsegments.

Let me elaborate on the medium- to long-term development of the Digital Marketing Support business, which started with the moving-related website, kept adding other services such as automobile, bridal and financial media, and it will continue to expand with the addition of real estate, insurance and others going forward. The Digital Marketing Support business is not aimed only at referral of users to business partners, but the business is also providing a wide range of support to the partner companies, as shown in the diagram.

For example, in the area of bridal, we not only introduced users to business partners, but we hold offline bridal events called Bridal Fest to refer our users to bridal companies. We also conduct business seminars to share information on market trends, provide consulting services to moving companies and others and also publish market updates, so that we can keep our business partners always up-to-date on the trends of the market. Thus, we are supporting our business partners by providing comprehensive support.

Moving on to the Platform business. These services are not intended to be like life event services, but they are designed to be used in the daily lives of consumers. These services constitute the Platform business. One example specifically is LaLune, which is a female health management service or application, which is visited and used by more than 1 million users per month. In addition to offering a health management function, the LaLune platform allows users to buy nutritional supplements or even receive advice directly from medical doctors.

Next, the second example of the Platform business is a service called Qiita, the largest knowledge-sharing platform for engineers in Japan, with several million users visiting each month. Based on such a platform, we also provide various tools such as Qiita:Team for information sharing among team members; and Qiita Jobs, which helps engineers searching and finding new jobs. They are already in operation at the moment.

Next is the Entertainment business. In the past, as shown on the left, we were providing in-house game titles, mainly in the domestic market through smartphone devices. Going forward, we will focus on a broader market using licensed IPs from other companies and the distribute titles to the global market through multiple formats of devices, not only smartphones but also game consoles and other types of devices in order to access a broader market with these 3 elements.

As for the strength of the Entertainment business. First of all, we have a technology called edge attained through many years of experience, leading to 3D, online and various other technological capabilities. Another is global development know-how, which was demonstrated with smartphone games since 2012. Today, we have direct distribution to 155 countries worldwide. We also have relationships with various IP holders, leading to a development of IP alliance or collaboration infrastructure. These are the 3 advantages we have for the business.

Next is the EC business. We are offering bicycles in a nonconventional way, where a bicycle ordered online is delivered fully assembled to the homes of consumers. Our EC site has 3 strengths. One is an extensive assortment with more than 200 models. Another is delivery of fully assembled bicycles instead of preassembled bicycles. The other is after sales service available at bicycle shops of — all over Japan, which provide peace of mind to consumers. Those are the 3 unique features of the E-commerce business.

As for initiatives for the medium- to long-term, currently, we are focusing on initiatives to improve inventory turnover and other areas of operations. And in the next phase, we will be improving the overall supply chain, including procurement and the logistics functions to improve margin in 2 stages.

Medium- to long-term growth of revenues, this year, we are expecting JPY 2 billion for the full year. The revenue should grow thereafter, as shown here. And at the moment, our profit level is impacted by investment. However, as soon as possible, we would like to generate positive profits.

Based on the theme of getting IT done, we will continue to promote businesses by fully leveraging information technology.

Now let me change the gear and talk about the second quarter consolidated results. Please turn to the fiscal year 2020 Q2 financial summary. Overall, revenue is down Y-o-Y and Q-o-Q. OP is down Y-o-Y and up Q-o-Q. Revenue was JPY 7.866 billion; operating income, JPY 192 million; and net income JPY 50 million.

In Lifestyle Support, revenue is down Y-o-Y and down Q-on-Q. Profit is down Y-o-Y and up Q-o-Q. Revenue, JPY 5.148 billion; segment profit, JPY 481 million; and the share of revenue, 65.4%.

In Entertainment, both revenue and profit are down Y-o-Y and up Q-o-Q. Revenue, JPY 2.112 billion; profit, JPY 196 million; and the share of revenue, 26.9%.

As for E-commerce, revenue is up Y-o-Y and down Q-o-Q. Segment revenue, JPY 606 million; profit, negative JPY 53 million; and the share of revenue, 7.7%.

Next page shows trends of consolidated performance as well as progress on guidance. As for revenue, as against the target of JPY 35 billion, progress is 45.8%. As for operating income, progress is 34.2% compared with the target of JPY 1 billion. Our seasonality is usually skewed towards the second half so we should be able to catch up in the remaining period from the current progress rate of 34.2%.

This is the summary of the second quarter year-to-date results. Revenue for the first 6 months was in JPY 16.014 million; operating income, JPY 342 million; and ordinary income, JPY 350 million. For the second quarter 3-months results, please refer to the right-hand side table.

Next page shows consolidated quarterly financial results. I will give you more details by segment later in my presentation. Quarterly trend of key management indicators does not show any major movements, let me come back to this later.

Quarterly promotions expense trends. Lifestyle Support saw a slight decrease in promotional expenses due to seasonality along with the downward revenue trends. Entertainment kept trend flat by focusing on efficiency. The number of employees for the quarter has not either increased or decreased in a major way. It’s been staying almost at the same level.

The balance sheet does not show any major change either. Let me on to fiscal year 2020 Q2 business results by segment, starting with Lifestyle Support business performance trends. There was a slight decline on a Y-o-Y basis due to the exit from the moving-related air conditioner business. That’s why the Y-o-Y growth rate is on decline. Another factor is new services. I will elaborate on this later in my presentation, but investment in new services was the main factor behind year-on-year decline in segment profit.

Next page shows Lifestyle Support business quarterly trends by segment — subsegment. The chart shows the relative size of business between Digital Marketing Support and Platform.

Next page shows quarterly trends of the Digital Marketing Support business. As explained earlier, revenue was negatively affected by the withdrawal from the air conditioner business as well as the decline in the revenue from the loan product comparison site caused by seasonality.

Despite the decline in the number of Loan users, thanks to the smooth start of new services, overall revenue remained flat year-on-year.

Next page shows Digital Marketing Support business KPI trends. The bar chart shows the trends in user count. Affected by the decline in the number of users for the loan product comparison site, ARPU and CPA are down year-on-year.

Next is Platform business revenue trends. From Q3 of FY 2018, there was a major increase. This is due to the acquisition of Qiita, a knowledge-sharing website for engineers explained earlier. Because LaLune experienced a decline in advertising revenue due to lower unit prices, revenue remained flat year-on-year. By reinforcing on premium member services through the use of AI, artificial intelligence, for health-related projection functions, we would like to respond to this. This is a new table added to the deck. It shows the outcome of resource allocation after the launch of new services in the Lifestyle Support business. At the top is focus businesses, namely Qiita Jobs and — job search service for engineers; and NaviNaviInsurance, an insurance information website. These are the key growth drivers that the Lifestyle Support business is focusing on.

Next category is businesses for continuous development. Those are NaviNaviMortgage Loan, a mortgage product comparison site; Sumai-uru, real estate property information site, and FindPro, a booking engine for termites and pest control services. These businesses are to be continuously developed. The other businesses are either noncore or candidates for closure. Those are the businesses which we did not — which did not work out as we had expected.

Next is Lifestyle Support business, new service quarterly trends. Solid blue shows focus and developing service revenue and the shaded blue, secondary and withdrawal service revenue. While the focus and developing service is expanding in revenue, we no longer have revenue from the secondary and withdrawal services. However, costs are still being incurred, and this is going to continue until the businesses are completely closed but should be eliminated shortly.

Next is Entertainment business quarterly performance trends. Both revenue and profit increased quarter-on-quarter, helped by the contribution from the year-end event conducted for the existing major game titles. The Q-on-Q growth was 6.2%. On the other hand, due to the development costs incurred for new titles, profit is down on year-on-year basis. I will come back to this later. This shows the quarterly trends in overseas sales. The overseas revenue ratio remained around 30%.

EC business quarterly performance trends. For the second quarter, despite the slow season for bicycle products, revenue grew significantly by 51% year-on-year, mainly driven by the revised delivery charge and end-of-year express delivery services.

EC business quarterly KPI trends. Gross profit and inventory turnover are the 2 major KPIs the business is monitoring. In gross profit, we had a record high result for second quarter. And in inventory turnover as well, the result was extremely positive, as you can see here on the slide.

Next is topics by segment. In Digital Marketing Support, there are 2 topics. First, an insurance information website, NaviNaviInsurance has been officially released. And Hanayume, which provides a free-of-charge consultation desk is going to open the second outlet in Shinjuku on the west exit side. The new outlet should help reducing missed opportunities that we had in the past due to insufficient capacity.

These are the topics for the Entertainment business. For the Entertainment business, one of the major titles, Valkyrie Connect is going to be distributed on a global basis through the PC-based platform, called Steam. The official release is scheduled for early April for the global version and for mid-April for the Japanese version. We are expecting a positive contribution from this as well.

This diagram shows the pipeline of new game titles. Previously, we had announced that there are 3 titles in the pipeline. One of them is based on in-licensed IP and are distributed through smartphones. This is a conventional and rather small-scale title release to be realized shortly, as announced already.

On the other hand, large-scale titles using in-licensed IP to be distributed globally through multiple device formats are still under development for planned release in fiscal year 2021. This is what had been announced recently. Hatsune Miku-Tap Wonder is the title. It should be released shortly on a global basis.

Moving on to fiscal year 2020 full year forecast, for 2020, revenue of JPY 35 billion and operating income of JPY 1 billion remain the target and guidance. These are the initiatives for fiscal year 2020, which had already been explained in the past. Overall, fiscal year 2020 is the year of seeding and cultivating for carefully selected growth drivers in which we are making strategic investment to flourish in the future.

Lifestyle Support will try to increase revenue further from the existing services and develop and invest in new services. Entertainment, as mentioned earlier, will focus on new title development in line with the modified policy. E-commerce will focus on strategic initiatives to improve operations and achieve positive profit full year in FY 2022.

There are supplementary points on the fiscal year 2020 guidance. This year, we are planning to make around JPY 1.218 billion investment into new businesses. The other factor is an increased expenses for the development of new game titles in collaboration with partners. For these titles, we will be booking JPY 678 million as expenses instead of capitalizing it as intangible software asset, like in the past. So expense recognition has been changed. The amount is JPY 678 million. As a result, instead of JPY 2.896 billion, which is operating income assuming no investment into these areas, we are forecasting JPY 1 billion, which is operating income after considering these 2 factors.

Next page shows supplementary points on the second half of FY 2020. Overall, we will continue to review the cost structure, while responding flexibly to coronavirus pandemic and the accompanied changes in the external environment. Some impact from coronavirus is expected. However, we believe we can absorb the impact by continuing to work on the cost reduction activities going forward.

Specifically, our Lifestyle Support business has announced the cancellation of bridal events. Also in anticipation of a declining number of visitors to come to our support desk, we have started online support service using a teleconferencing system, with which we can maintain the quality of service, basically on par with the offline support desk.

The Entertainment business is planning to compensate for the declining sales of existing titles with the introduction of the new title, Hatsune Miku-Tap Wonder. The EC business anticipates some delay in bicycle imports since they are manufactured in China. That is a challenge. However, we are trying to manage the product supply using all available sources so that we can avoid inventory shortage.

This is the FY 2020 year-end dividend forecast. The forecast is JPY 16 per share.

With this, I would like to conclude my presentation. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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