Edited Transcript of 3662.T earnings conference call or presentation 12-Jun-20 10:59am GMT

Nagoya-Shi, Aichi Jul 7, 2020 (Thomson StreetEvents) — Edited Transcript of Ateam Inc earnings conference call or presentation Friday, June 12, 2020 at 10:59:00am GMT

Ateam Inc. – President & Representative Director

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

This is Takao Hayashi, President at Ateam Inc. Thank you for watching our webcast for the third quarter financial results of the fiscal year ending July 31, 2020. Let me start my presentation.

First of all, Ateam is an IT company that develops business around the Internet, developing and delivering services for various markets using many different technologies. That is what we do at Ateam.

These are the topics I will be covering in this webcast. I will first describe our medium- and long-term policy, but if you are familiar with this, feel free to skip this portion. Our medium- and long-term policy, beginning with our group management strategy, shown at the bottom in gray is our shared strengths: digital marketing know-how and expertise, business development strategy and technological capabilities. Leveraging these 3 strengths is our Lifestyle Support business characterized by reliable and continuous growth. This is the business in which users are few and sales growth is limited until recognized by the users. But once it exceeds a certain level of recognition, and the ranking of search results improves, the service can enjoy continuous and stable growth in users.

Second is the Entertainment business with high-growth potential. While there are ups and downs in the game business, once the titles succeed, you can expect big sales growth by developing products globally. We see high-growth potential in this business.

And the third pillar is the E-Commerce business, which we are still in the challenging phase. With these 3 pillars, we are to create a business portfolio which optimizes operational stability and growth.

Let me elaborate starting with Lifestyle Support business. Our vision of the Lifestyle Support business is to support various life events by providing convenient services to the market so that our services will always be there for the users from cradle to grave.

The strength of the Lifestyle Support business is threefold as shown here in this slide. The first is web promotion, in such areas as Internet search engine optimization measures and efficient listing operation, we have extensive experience and expertise built over many years. And we have the know-how and capability to do all that in-house. That is one of our strengths. Second is the systems shown in the lower left. They are all developed in-house, so we can start offering a new service quickly and at low cost as it is created based on our own versatile systems. Another strength is synergy. As we are developing and offering services in various markets, we can mutually refer prospective customer assets among those so as to reduce the cost of attracting and acquiring customers. These 3 points are the strengths of the Lifestyle Support business.

Next is a review of subsegments. Previously, we were disclosing the subsegments in accordance with the markets they serve, such as moving-related, automobile-related and bridal-related businesses accordingly. But as you can see here, we have recategorized these from moving-related business to others including Lifedot, Sumai-uru, FindPro and Soldi as Digital Marketing Support business. And this listed below, namely LaLune, Qiita, Qiita Team, Qiita Jobs as Platform business. Simply put, the Digital Marketing Support business is one in which to support businesses in each market in referring prospective and customers by using the Internet. Whereas the Platform business is one in which we are to be positioned as a platform, which provides various services to the users of our own home page who visit and post on that page many times in a month.

As for the Digital Marketing Support business, we envision the growth to come from the continued growth in existing services, such as moving-related automobile-related, bridal-related and financial media businesses and others as well as from new services to be built on top of these.

As I mentioned earlier, in the Digital Marketing Support business, we support the referral of prospective customers to businesses through the Internet. In addition, we will, and in fact we already are, hosting real events such as bridal festivals in the bridal market and conferences where we make presentations on trends for each industry, for example. And in terms of business operations, we would like to provide customer management tools, for example, so that we can provide comprehensive support to business operators in each market. These are the vision we have going forward.

Next, the Platform business. As explained earlier, this is the business which enables users of our various services to engage in communicating with one another in many different ways within that community.

First, LaLune. We are currently enabling users to communicate with one another over issues they face. We are linking this service to e-commerce. Suggesting relevant nutritional supplement to those who may need them, for example, and we are also providing premium member services. Going forward, we are thinking of adding such services as helping premium members with consultation with actual doctors. We envision evolving this to a platform that can help them in alleviate their various health issues.

Next is Qiita. This is a platform for engineers. Enabling engineers to share their technical expertise and findings, what they learned or tried in the blog format so that other engineers can reference them and/or use them for their work. Qiita Team is a tool that makes it easier for a team to share information on such a platform. We also have Qiita Jobs which supports those considering changing jobs. Our vision for Qiita is to offer such new services going forward.

Next is the Entertainment business. This is our business policy going forward. So far, we have specialized on smartphone games. But going forward, we will expand into multidevices covering various machines — various game machines, not only smartphones. We’re also envisioning going global from the very beginning in our marketing rather than being Japan market-centric. With that, we aim to expand the size of our target market from JPY 1.1 trillion in Japan to what is deemed to be about JPY 15 trillion on a global scale.

The strength of our Entertainment business is threefold. One is the technological strengths. We have been developing games for feature phones since 2003, and we take pride in having led the industry since then with the high technological capabilities by developing real-time role-playing games. And we have a strong track record of having distributed Dark Summoner for smartphones in 155 countries around the world since 2012. And we have IP alliance infrastructure on which we have built successful alliances and collaborations on existing titles. By leveraging these 3 strengths, we would like to develop a business along the strategies I mentioned earlier.

Our third pillar is the E-Commerce business. First of all, this is our vision. As shown here, we aim to be an online bicycle store that provides both user convenience and industry development. We have chosen bicycles as the first product. But unlike conventional online service, in which when a customer places an order online, what he or she gets is a semi-finished bicycle, cyma is a service in which bicycles will have been fully assembled by our bicycle mechanics and delivered in a ready-to-ride state.

The features of our E-Commerce business are shown here. First is extensive assortment. From everyday bicycles, such as city cycles, electric bicycles, which are already every — also everyday bicycles to sports bikes. There are over 200 varieties of bicycles that we offer and fully assembled bicycles. And we also offer a peace of mind or safety service in which customers can enjoy repair on flat tires, for example, at bicycle stores nationwide.

As initiatives for medium- to long-term growth, we aim to continuously improve on our operations. We will take the retail operations that we have accumulated since the start of business into a more complete form. And we will make system investments that automate such operations as much as possible. Although the business is still unprofitable at the present stage, we envision improving the profit margin by 30% and further improve profit rate by 5% to 10% starting in 2023.

The image of revenue growth is as shown on this slide. I will describe this in more detail later.

Getting IT done. With this tagline, Ateam will continue to develop various businesses going forward.

Next, I would like to talk about the revision of the fiscal 2020 forecasts. We are announcing the revision of the consolidated financial forecast for the fiscal year ending July 31, 2020. We are revising the revenue forecast from the previous forecast of JPY 35 billion to JPY 31.2 billion; the operating income forecast from JPY 1 billion to JPY 1.17 billion; and the net income forecast from JPY 500 million to minus JPY 410 million.

There are 3 factors behind these revisions, as shown in the red frame on the left. The first is cost control, with which Entertainment and E-Commerce contributed to the upside in operating income. In Entertainment, together with the successful implementation of events, cost control of promotion expenses, subcontractor expenses and other fixed expenses significantly pushed up profits. In E-Commerce, in addition to improving operations, we revised delivery costs and others and made various efforts to increase gross profit. Resulting in higher profitability, which contributed to the upside in operating income.

The second factor is the impact of COVID-19. In the Lifestyle Support business, revenue was far below the forecast due to the declining demand. The impact was particularly felt strongly by financial media-related NaviNavi Cashing, bridal-related Hanayume and Qiita and Qiita Jobs for engineers. In terms of actual figures, the estimated impact of COVID-19 to the Lifestyle Support business is minus JPY 1.85 billion in revenue and minus JPY 350 million in operating income on a full year basis.

The third factor is the impairment loss of goodwill of Increments Inc., the Qiita business provider, which we acquired in December 2017. The impact of COVID-19 has hampered recovering goodwill and trademark rights related to increments along the schedule we had originally planned. Accordingly, impairment loss of JPY 999 million was recorded, resulting in deviation from the forecasted net income.

This slide shows the presumed financial results, excluding the impact of COVID-19. We presume that without COVID-19, the full year revenue forecast would have been JPY 32.67 billion, compared to the revised forecast of JPY 31.2 billion. The operating income forecast would have been JPY 1.457 billion against the revised forecast of JPY 1.17 billion. And the net income forecast would have been JPY 589 million as opposed to minus JPY 410 million. We, therefore, presume that our actual operating results would have shown a big upside in operating income.

Next, I’d like to take you through fiscal year 2020 Q3 financial results. This is FY 2020 Q3 financial summary. Overall, revenue and operating income were down year-on-year and up quarter-on-quarter. Revenue was JPY 8.385 billion; operating income, JPY 708 million; net income, minus JPY 511 million. For Lifestyle Support, revenue and profit were down year-on-year and up quarter-on-quarter. Revenue was JPY 5.466 billion; profit was JPY 830 million; and revenue share was 65.2%. For the Entertainment business, revenue and profit were down year-on-year and quarter-on-quarter. Revenue was JPY 1.943 billion; profit was JPY 169 million; revenue share was 23.2%. E-Commerce business recorded a historical high revenue and profit and a positive profit for 3-months’ period for the first time. Revenue was JPY 976 million; profit, JPY 52 million; and the revenue share was 11.6%. That’s the summary.

Earlier, I talked about the impact of COVID-19 on the full year results. This page shows the impact of COVID-19 on the third quarter results. We have seen some negative impact on the Lifestyle Support business, almost no impact on the Entertainment business and a slightly positive impact on the E-Commerce business. Overall, the impact of COVID-19 was negative for the company. In Lifestyle Support, bridal, financial media service and the Qiita businesses were affected most. In the Entertainment business, there was no impact on gaming user trends or on our new game development activities. In the E-Commerce business, social distancing increased bicycle demand giving some positive impact on bicycle sales.

Next is measures taken by the company to help prevent COVID-19 infections. First, for employees, all employees started to work from home on April 6, and they are still working from home as of today. For users, first for Hanayume, we are responding to inquiries from users online. I will share more details later in my presentation. With partner companies, we are holding business meetings online.

Moving to Page 32, the charts show the trends in consolidated financial results and the forecast for fiscal year 2020. For revenue, progress rate is 78.2%; for operating income, it is 89.9%.

Page 33 shows the results for the first 9 months of fiscal year 2020. Revenue was JPY 24.4 billion; operating income was JPY 1.051 billion. The original guidance was JPY 1 billion in operating income for the full year, but we have already achieved it by the end of the third quarter. So we now have a full year forecast, as explained at the beginning of my presentation.

Next page shows consolidated quarterly trends. You can see the trend of each business here. The decline in the third quarter on a full year basis is mainly due to COVID-19, as explained earlier.

Page 35 shows quarterly trends of key management indicators. I will skip this page because there is no major change.

Page 36 shows quarterly promotional expense trends by segment. Usually, the third quarter is a peak season for our company and we would see an increase in promotional expenses [and others] of the Lifestyle Support business. Due to COVID-19, however, we have curtailed some of the expenses this year, which offsets the seasonal increase for the third quarter. As a result, the trend for the third quarter remained almost at the same level as in the previous year. The Entertainment business continued to control their promotional expenses effectively during the third quarter.

Next page shows trends in the number of employees by segment. One highlight is that up until the previous year, we were including new graduates who joined the company in April in the Others segments. Starting this year, however, new graduates are no longer included in the Others segments. It is because we started to allocate them to each segment in advance before they joined the company. And so the time they joined the company, they are already allocated to each segment. That’s the change from this year. The number of new graduates this year was 57.

Next is the balance sheet. As explained earlier, we have booked extraordinary losses of JPY 999 million related to goodwill and trademark write-off of Increments Inc. As a result, intangible assets decreased.

Now let me take you through the details by segment. Page 40, starting with Lifestyle Support business. This is the quarterly performance trends of the business. Sales declined in bridal and the financial media service due to the impact of COVID-19. Year-on-year, there was a decline of 9.1%.

Next page shows the quarterly performance trends of the Lifestyle Support business by subsegment. There are 2 subsegments: one is Digital Marketing Support and the other is Platform. The breakdown is as shown on the slide. For the Digital Marketing Support business, as explained earlier, the performance was down 9% year-on-year due to the impact of COVID-19.

Here is the KPI trends of the Digital Marketing Support business. Due to the impact of COVID-19, the user count decreased. However, ARPU and CPA remained almost at the same level as previous years.

Next is the revenue trends of the Platform business. Qiita, the website for engineers, saw a decline in revenue in the face of a declining advertisement demand caused by COVID-19. As a result, the subsegment’s revenue was down 12.2% year-on-year.

Next, I will discuss individual services we are offering under the Lifestyle Support business. First of all, we have decided to close the real estate information website, Sumai-uru, in lieu of the market environment and other factors. The triangle-shaped diagram on the left shows the positioning of each service we are offering under this segment. As shown at the top, the higher focus is placed on the Qiita Jobs website. Although this quarter, we have booked an impairment for Increments Inc. It was purely caused by the timing issue, and it doesn’t change our view of the potential that is there with this website. We believe that we can accelerate the growth of this business with the addition of Qiita Jobs in a way that exceeds our original expectation at the time of the merger.

Moving on to next page, the chart shows quarterly performance trends of new services. The top blue bar shows revenue and the bottom gray bar shows operating income. The shaded portions in blue and the gray bars show the breakdown of secondary and withdrawal services in revenue and operating income. As you can see, as a result of defining and focusing on focus and developing services, the amount of operating losses decreased. You can see a steady growth in focus and developing services.

Next is quarterly performance trends of the Entertainment business. As you can see in this chart, the Entertainment business has hit the bottom. We don’t believe that performance will deteriorate any further from where it is now, thanks to the contribution of new titles as well as effective initiatives of the existing titles. The chart shows the direct trends in overseas sales of the Entertainment business. If there was any impact on this business from COVID-19, it must have been on the overseas revenue ratio, which grew to 31% as of the end of the third quarter.

Next is the quarterly performance trends of the E-Commerce business. As you can see, thanks to the improvement in operations as well as the increase in the demand of bicycles driven by social distancing, the business has shown a dramatic improvement in revenue from a year earlier. The segment profit was positive for the first time for a 3-months’ period.

As for quarterly KPI trends, we have seen an improvement in gross profit as well as in inventory turnover. As far as the E-Commerce business is concerned, we are very close to recording a full year positive result. So this year, we are accelerating investment in order to secure profit for next year.

Moving on to segment topics. First, in the Digital Marketing Support business, we have started a Zoom-based online consultation services for Hanayume between our staff members and customers. We have opened the second outlet in Shinjuku on June 11 in addition to the existing one in the same area. The timing was postponed twice from April to May and then from May to June, but we have finally opened the outlet on June 11.

Also, the past Hanayume bridal events were held in large venues. This time, however, in consideration of the pandemic, we have decided to carry out the next event online for the first time using YouTube Live. This is going to be our first attempt, and we will make sure it will be a successful event.

Also in the Digital Marketing Support business, we have just opened our first securities investment website, NaviNavi Securities.

In the Platform business, we are holding a Qiita Summer Festival. It’s a competition among users where applicants contribute articles and win prizes in several different categories.

We are offering Qiita Team free subscription for 90 days, and implement a functional integration with the Microsoft Teams so that we can further improve team communication. These are the initiatives under our Entertainment business.

As for new game title development, as shown on the left, we are going to release a new casual game title using third-party IPs and on smartphone devices, as announced earlier. The name of the title is MikuTap. Another new title to be launched is the largest ever in the company’s history. It will be based on third-party IPs and offered globally on multiple device formats. We are making steady progress towards the launch of these titles.

Next page shows the details of Hatsune Miku-Tap Wonder.

Moving on to fiscal year 2020 guidance and dividend forecast, this has been already discussed earlier in my presentation, so please go to Page 60 which shows a summary of fiscal year 2020 initiatives. Overall, fiscal year 2020 is a year of planting seeds, cultivating and selecting potential new businesses. We will continue to work toward this direction. The guidance of the Lifestyle Support business is based on the assumption that the impact of COVID-19 will continue through the end of this fiscal year. The E-Commerce business will continue to work on strategic initiatives to achieve a positive full year profit, and make investments during this year in order to make sure further growth in the next fiscal year. FY 2020 year-end dividend is projected at JPY 60 per share, unchanged from the previous year.

This concludes my presentation on the financial results for the third quarter of fiscal year 2020. Thank you very much for your kind attention.

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