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Edited Transcript of 3660.T earnings conference call or presentation 7-Aug-19 7:00am GMT

Full Year 2019 Istyle Inc Earnings Call

Minato-Ku, Tokyo Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Istyle Inc earnings conference call or presentation Wednesday, August 7, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Tetsuro Yoshimatsu

istyle Inc. - President, CEO & Representative Director

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Presentation

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Tetsuro Yoshimatsu, istyle Inc. - President, CEO & Representative Director [1]

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I am Tetsuro Yoshimatsu, President and the CEO of istyle. Thank you for joining us despite your busy schedule.

I present on the financial results for FY 2019 and the progress of midterm business plan that we announced 3 years ago. In particular, as we made a revision in forecast during the previous fiscal year, I will elaborate how we will achieve the midterm business plan.

Without further ado, let me start with the overview of financial results for FY 2019 ended June 30. Net sales were JPY 32.193 billion and operating profit was JPY 476 million. Details of segment information will be presented later.

Progress to our target. Revised plan of net sales was JPY 33 billion, and the result was JPY 32.193 billion with the achievement of 97.6% of target. Both of operating income and ordinary income were within the planned ranges. However, as for net income, it was a loss of JPY 519 million, marking a substantial gap from the plan. It mainly consist of software asset impairment loss, impairment of stores and the reversal of deferred tax assets.

Trend in net sales. Top line has been growing steadily. Trends in segment sales. Fourth quarter sales were 105.4% of the same quarter of the previous year. By segment, On Platform was 93.9%; Beauty Service was 110.3%; Global was 109.7%; and Other was 93.4% of the previous year. Notable point was that On Platform was down year-on-year. I'd like to elaborate on the next page.

This slide shows the year-on-year quarterly comparison of On Platform. Net sales were JPY 1.838 billion from JPY 1.957 billion of the previous year, down to 93.9% of the previous year. There are 2 major factors behind. Firstly, we didn't conduct events that make substantial contribution to the sales this time. Annually, in the fourth quarter, we conduct major event related to @cosme, but we didn't conduct one in this fiscal year.

Secondly, this is related to the absence of the major events are in this fiscal year. We are currently shifting our sales policy to new service Brand Official. Conventionally, sales team have been striving hard to achieve the annual target around the end of the fourth quarter. But this time, we have been concentrating our efforts on Brand Official. And as a result, the sales were down year-on-year in the fourth quarter. When you compare the first, second and the third quarter year-on-year, they were all clearly above the previous year. But in the fourth quarter, we focused on Brand Official.

Beauty Service. Net sales in stores were 103.8%, and E-commerce was 140.1% of the previous year. In stores, we rolled out 1 store in FY '19, but we had refurbishment and a closure as well, and the total number of stores remained unchanged, but due to the growth of existing stores, sales increased.

E-Commerce was very robust. Despite of our aspiration to be a trigger in e-commerce @cosme industry, we were unable to realize that for some time. But due to the Beauty Day event on December 3, in FY '19, we increased the user base substantially, and so it turned to the stable repeaters. That will be repeated in FY '20 as well. And the strong E-Commerce business growth is highly achievable.

Global. Net sales were 109.7% of the previous year. As a whole, positive growth was marked, but in EC and wholesale, sales were 86.7%, down year-on-year. This is due to the large transaction in FY '18. On the other hand, the stores grew first half total sales of Global segment. As for EC and wholesale, the prospects of EC-related laws are uncertain in China, and we will keep on a close watch to continue to grow our business with due caution.

Other. It is mainly temporary staffing agency business. Due to emerging competitors in recruitment advertising business, we are focusing on staffing business. And as the extension of staffing business, we deem that the store operation outsourcing business will be a great growth potential. To that end, we increased the temporary staff on regular employment that pushed up expenses and the profit went down.

SG&A. For the mid- to long-term growth, the cost is up in this fiscal year, in particular, with headcount increase. Recruitment for the next fiscal year is almost complete, and we will prioritize education and training of employees over recruitment. And the system-related costs have been increasing with further depreciation. With the launch of Brand Official, we have upfront cost increase in depreciation cost.

Operating income by segment. Profit is down in On Platform due to upfront depreciation cost increase in software asset in Brand Official. So far, I have covered the overview of financial results for FY '19. I will explain each operating service.

Number of @cosme's monthly unique users is 13.3 million as of today. In August in the previous year, we were affected heavily by the change of Google algorithm. But in this year, we responded properly in terms of SEO. And from the trend of the year, unique user has been on the steady growth track. But recently, there was another algorithm change. However, we believe that the growth will be sustained by SEO, and the structure is being built to that end. Therefore, it will continue to grow steadily.

Membership of @cosme is 5.4 million, showing steady growth. Our important KPI, the number of connections, has been growing steadily. We are to achieve drastic growth with a medium-term target of 100 million connections. I will explain how we will achieve the target later.

So far, I have been through the overview of FY '19 and operating services. The third year of midterm business plan, Road to 2020, is complete. And FY '20 is the fourth year. Let me explain the progress in how we achieve the plan by segment.

Medium-term business plan rolled through 2020 has 3 major policies and extends for 4 years. We expanded possibilities going through choice and focus and expansion of investment, and ultimately, we will have harvesting time. Targets are JPY 50 billion in sales and JPY 7 billion in operating income, whereas sales in FY '19 were JPY 32.2 billion, and operating income was JPY 0.48 billion, showing considerable discrepancy.

Let me go through discrepancy by segment. On Platform, initial sales target was JPY 15 billion. And at the end of the third year of the full year plan, sales were JPY 7.6 billion, which is the interim figure.

By service, ad/solution services sales were JPY 5.2 billion versus target of JPY 8.4 billion; B2B service was JPY 1.5 billion against a target of JPY 4.5 billion. Target of combined services sales is JPY 13 billion. The slow start of new service Brand Official in B2B service caused by the delay in service release and the development affected sales heavily. As service has been already launched and become operational, they are marked as acceptable with triangle mark.

As for B2C service, it has been through service restructuring. But as of today, B2B service shows better prospect, and that is prioritized. So it is marked as no good with cross mark. Transaction services are affiliate service, but now we are trying to increase traffic to all EC site and marked as acceptable with triangle mark. As a result, against the target of JPY 15 billion, result were JPY 7.6 billion with a progress of 50.9%.

Beauty Service. Target for the next year for 4 years is JPY 24 billion. E-Commerce sales target for the fourth year is JPY 5 billion. And as of the end of FY '19, sales were JPY 3 billion. The progress was 61.6% and JPY 5 billion is achievable, and the rating is good with circle mark.

As for stores, against the target of JPY 14 billion, we achieved the sales of JPY 11.1 billion with a steady progress. And as we will roll out a store in Harajuku and the target is fully achievable, so the rating is good with circle mark. As for salons, et cetera, noncosmetic business, we have not worked on this yet, and the rating is no good with cross mark. In private brands, we launched several brands, and some of them began to attract attention and the rating is acceptable with triangle mark.

Global. As a whole segment, the progress toward the sales target is good. In EC and wholesale toward a target of JPY 6.6 billion, we achieved JPY 6.3 billion, with a progress of 95.6%. In media and other and stores toward a target of JPY 3.4 billion, we achieved JPY 2.4 billion, with 83% progress. Toward a target of JPY 10 billion, we achieved JPY 9.1 billion, and within FY '20, we will reach JPY 10 billion target.

The rating for EC and wholesale is good. And in stores business, we opened about 10 stores in Taiwan, Hong Kong and Thailand. But performance is mixed with success and unsuccessful stores. And with regard to profitability, we need to go through some closures and the new openings, so the rating is acceptable with triangle mark. In media and other, to make it profitable, there's 2 other things to be done, including the post-merger integration.

Bearing those situations in mind, we would like to extend medium-term business plan. Major policies and the strategies will remain unchanged. Based on the Beauty platform concept, we continue to connect cosmetic brands and users. And we will pursue strategies of each segment, as shown on this slide. Biggest issue is that they remain unattained objectives. We believe that addressing them properly will lead us to come closer to the target. In particular, with regard to Brand Official, which will be earnings pillar of On Platform segment, we'll make sure to address every unattained objective.

This slide describes different phases. And we recognize that investment expansion phase extended 1 year. IT system development and the launch were delayed by almost 1 year in total, and we will catch up with the plan during this upcoming 1 year.

Based on the current conditions, this slide shows total sales and operating income. Sales in FY '20 will be JPY 39 billion. And in FY '21, we would like to aim for JPY 50 billion-plus.

Operating loss for FY '20 is expected to be JPY 1.24 billion. And in the following year, with sales of JPY 50 billion-plus, we'd like to turn profitable top line. JPY 50 billion seems achievable, but the timing of achieving operating income of JPY 7 billion will be examined further. We'll let you know in other occasions.

This slide shows where and how much loss is incurred in FY '20 with operating income and the main investment areas of each year. Before the current midterm plan, istyle was based on @cosme advertising business. IT system costs related to the business has been spent for JPY 0.3 billion to JPY 0.4 billion annually. However, by launching Beauty platform concept this time, IT system investment and other investment costs have increased. In particular, in FY '20, cost for IT system investment @cosme Beauty Day and @cosme Tokyo in Harajuku was substantially different from the initial forecast.

Investment in @cosme Beauty Day was JPY 0.48 billion in the previous year. And this year, it will be JPY 0.26 billion, with a sales of JPY 0.3 billion in the previous year and the target of this year is JPY 1 billion. And despite the growth in the sales, we are not able to clear the investment cost yet, and we will have some negative impact on profit. Store in Harajuku would incur a loss of JPY 0.75 billion, partly because of its initial year. And prior to opening in December, staff training costs and others will start from September.

Software depreciation cost is spent not only for @cosme, but for the entire platform. And IT system-related depreciation has been increasing. And as a whole, operating loss will be JPY 1.24 billion. For the next fiscal year, in order to achieve profitability, we aim to clear the cost for @cosme Beauty Day and 4 stores.

As for yearly comparison of new service Brand Official sales and software depreciation, the gap between sales in Brand Official and the softer depreciation affects operating income of this segment. Previously, the maximum gap was about JPY 0.4 billion, JPY 0.5 billion, but in this fiscal year due to the upfront depreciation of software, the gap or the profit is contracting. That said, in the following year, the profit will be record high by boosting sales.

Current software asset balance, including software in progress, is about JPY 2.9 billion. It is true that we are heavily investing on software in this year. How do we plan to recover investment? As this is B2B service business, we believe that we will fully recover investment with the increase in contract. As of the end of June, contract number was around 110, and the latest is 150-plus. With 300 contract, MRR will be about JPY 150 million and ARR will be about JPY 1.8 billion. With 500 contract, investment will be recovered fully. So we'd like to recover the investment steadily with sales.

This JPY 2.9 billion includes apps development costs among others, apps for Brand Official and the database coordination per se, and not generating ad sales yet. I'd like to ensure that our expenses for the whole IT system will be covered by the Brand Official alone.

As for earnings focus for FY '20, ending in June, as shown before, net sales are JPY 39 billion; operating income is minus JPY 1.2 billion; ordinary income is minus JPY 1.3 billion; and net income is minus JPY 1.72 billion.

Breakdown by segment is shown here. Sales and the operating income are shown in the following Pages 33 and 34. So please take a look for comparison.

Sales in On Platform were JPY 7.6 billion, and the forecast for this year is JPY 8 billion. Brand Official contribution will be a key driver. In advertising, we will secure the existing business, and additionally, propose customized sets of advertising and promotional services. As a result, with the upfront software depreciation and relevant labor cost increase, the gap with the sales is about JPY 1 billion. And accordingly, operating income will be JPY 1.25 billion.

Sales in Beauty Service will grow substantially. But due to large losses in the first half related to store opening in December, full year profit will be almost 0. Sales in Global will increase as well, but it is still in the investment phase, and the loss will slightly increase.

One of the key takeaways is a substantial gap in the first and the second half operating income. In the first half Beauty Day, we booked minus JPY 0.26 billion, and for Harajuku store opening in late December, rent payment will start from September. And the software depreciation cost will be spent for Brand Official, and the aggregate is as shown here for the first half. But due to those upfront investment, businesses will grow to attain profitability in the second half and further down the road.

To achieve profitability in FY '21, we need to expand Brand Official, turn flagship store @cosme Tokyo profitable and make @cosme Beauty Day profitable. And they are indispensable to achieve substantial earnings improvement. As for mid- to long-term perspective, let me reiterate that with 1-year extension of the plan, we aim to achieve sales of JPY 50 billion and a turn to profitability.

Finally, I'd like to explain the rationale why new service Brand Official will be successful and respond to questions on the monthly fee of new service Brand Official, with a view that JPY 500,000 per month seems rather expensive. We prepared another handout to explain Brand Official and why we rolled out a flagship store in Harajuku.

As you know, we established 3 business models of media, EC and stores with @cosme at the center. Essential part of istyle is to connect users and brands. Running beauty media of @cosme, we are managing EC @cosme site and physical @cosme stores. However, from the client's perspective, they are all separate services. And we were not able to enjoy synergy by achieving sales in each separate service, which led to simple addition to the aggregate. With a steady sales of mainstay business of advertising service, we regarded it necessary to maximize the value of database coordination among media, EC and the stores to increase earnings. That does materialize through enterprise SaaS Brand Official, which is offered to brands by charging JPY 500,000 monthly fee.

Previously, @cosme was based on the advertising service, and our key focus was page views and unit price-per-page view. But now we are offering value of connecting with users. And under the concept, we announced the new KPI connections in FY '18.

As Brand Official has a number of features, we released first in April 2018 as a CMS in a way. And in December, we released new version that enables user trend analysis. And with this, istyle services will be changing substantially. Then what are we doing in Brand Official? We are developing the relationship between users and brands. We have an enormous user base in @cosme, and we categorize users by engagement ranks.

Users who simply gather product information are ranked E. Those who practically gather information through user review, among others, are ranked D. Those who follow brands and like brands are ranked C. Those who experience brands offline are ranked B. Those who purchase products are ranked A. And those for review products or repeat purchases are ranked S.

On the side of clients, they have data of ranks S and A users only through their CRM. But they can capture and analyze the data of future users through @cosme, and this is a very significant benefit. For example, at drug stores, similar price range products are purchased, but we can inform clients that the same customers are viewing the luxurious brands as well. And we can inform the clients of other brands there are potential customers who are actually viewing. And you can send a questionnaire to those users through the updated version. @cosme is not a simple media, but enables to take actions to future customers that are not covered by other CRM. And that is the most important feature of @cosme.

Previously, there was a great distance between having a view and purchasing products, but through our platform, clients can have communications with users. Then our competitors are CRM players, including Salesforce and SAP and adware players of Google, among others. And recently, in connecting marketing automation, various tools are emerging as well. But in @cosme, we are providing those services, creating future customers with monthly fee of JPY 500,000.

Now how does that relate to @cosme Beauty Day? There are about 500 brands that offer a limited edition product on December 3. They prepare 100 units of limited edition products available only on @cosme Beauty Day through applications. If there were 2,000 applications made, then on December 3, there will be lotteries and the sales of 100 units we achieved. And previously, that was the sales on that day. But by offering coupons and others to those who missed chances, they can be developed into future customers.

Then how can we maximize the number of the first applicants? Rather than sending the information of limited edition product on that @cosme Beauty Day, by providing detail, the presale information in advance through close communications, we can encourage users to make applications. Through the entire process, we can make @cosme Beauty Day a key driver from the client's perspective. In addition to the sales achieved on that day, they can acquire future customers. And this is a key focus for us on the December 3.

The data shows that the connections between users and brands are stronger in @cosme than in any other SNS. We expect clients to leverage that benefit more effectively. On the @cosme Beauty Day, in the previous occasion, limited edition product SKU was 44, but this time, we aim to achieve 500. We had to have significant number of participating brands and GMV target is JPY 1 billion. Expected number of purchases is 150,000. Last year, with 44 SKUs of limited edition products, customers traffic was close to 0.9 million. This time, you can access to the limited edition product page through apps, and by that, we would like to boost monthly apps users to 1 million.

@cosme Tokyo in Harajuku. It is possible to create connections with future customers through offline as well. Counseling and the distributing samples @cosme Tokyo are done through IDEs in apps. Floor space is about 400 [tables] featuring a variety of brands line up comparable to those of the department stores. The store provides a contact point with new customers and the event stands to -- nurture the collection is also available.

Business structure of istyle is a major transformation. In addition to conventional advertising, we will grow enterprise SaaS recurring revenue model which will account for about 40% of total sales.

Plan for Brand Official going forward. As of the end of June, we had 110 brands. And as of today, 150-plus is to be achieved. With the 500 brands that are participating at @cosme Beauty Day, we aim to achieve 300 brands at the end of this fiscal year. And in the following year, the target is 500 brands, bearing the target of 800 brands in mind in near future. To that end, we'd like to focus on the sales and acquisition of future customers on @cosme Beauty Day.

We are encouraged by the current brands of 150-plus achieved in the short period of time. We would accelerate the growth and with the combination of 3 factors of apps, Beauty Day and store, we'd like to enhance the service even further.

In this year, we are very sorry for the discrepancy from the initial midterm business target, but we are confident that we are on the right track and we will achieve the target. With the extension of 1 year, we will endeavor further and go forward.

That concludes my presentation. Thank you for your attention.

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