Hengge

Hi, I am Kazuhiro Ogura, the CEO of Henge. Thank you for watching our video today. Today, I would like to go through our financial results of the third quarter of fiscal year 2021. Let me first explain about our results of the third quarter. Our consolidated net sales expanded steadily, as shown on this slide. This is the summary of our consolidated financial results. In the third quarter, we performed steadily compared to the full-year forecast disclosed on November 13, 2020. Gross profit margin remained high and consistent to the previous quarters. Our year-on-year net profit fluctuation is as shown on the slide. Our year-on-year fluctuation of operating expenses by nature is as shown on the slide. The chart on the slide shows quarter-and-quarter fluctuation for the breakdown of operating expenses. As for advertising expenses, unlike the second quarter, there was no large-scale event nor accompanying TV commercials conducted during the third quarter. Therefore, it has decreased considerably quarter-and-quarter. While the sales of Hengewan increased steadily, the sum of the cost of sales and R&D expenses increased only by 5 million yen quarter-on-quarter due to the improvements in the efficiency of the cloud service infrastructure for Hengewan. This chart indicates quarterly trends in net sales and operating expenses. As to the employees, currently we have 206 employees. Breakdown by function is as shown in the pie chart. The transition in the number of employees is as shown in the bar chart. As initially planned, recruiting activities for Hengewan sales and customer success positions are on track. As for Hengewan R&D employees, currently over 70% of the team member is composed of non-Japanese employees, and we have mainly hired them from overseas. The number of Hengewan R&D employees decreased slightly in the quarter, and this is mainly due to some of prospective employees living outside of Japan are unable to cross the border because of COVID-19. For now, we believe that there will be no significant impact on R&D activities, However, we will keep our close attention to the situation. In terms of our organizational structure, we have made a change in the third quarter in order to further enhance our product, and as a result, part of customer success employees are integrated into business development section. Furthermore, we will continue to actively recruit in each function. Now I will explain our business activities in the third quarter. This is an overview of our business highlights during the third quarter. We held a number of online events to follow up on Hengenau, a large digital event held in the previous quarter. For example, we held an event together with two of our current customers who won the grand prizes in the Tokyo organized Tokyo Telework Award. They gave a speech in our event about the promotion of telework by using Hengewan. In addition, we held various seminars focusing on highly interested themes to the potential customers, such as about Zero Trust or how to utilize Hengewan effectively. Next, let's see the results of KPIs in the third quarter. This slide shows a year-on-year fluctuation of KPIs for Hengewan. The progress of KPIs for Hengewan from the end of the previous fiscal year is as shown in the slide. The average monthly churn rate rose by 0.06 points from the end of the previous quarter to 0.24%, which is continuously very low. This slide shows the quarterly trends in the number of contracted companies and users. As you can see from the charts, both the number of contracted companies and users increased steadily.

ARPU is continuously on an upward trend, together with steady growth in ARR. Next, turning to our full-year outlook for fiscal year 2021.

Our target for fiscal year 2021 is to aggressively invest on the marketing activities in order to capture the expanding business opportunities under the new normal and help accelerating Hengewan's midterm ARR growth. There is no change to our full-year forecast from the announcement at the beginning of the fiscal year. As for Hengewan business, we aim to create an inflection point to achieve a sustained annual growth of above 20%. In order to achieve it, we are aggressively investing in marketing activities. Thus, our operating income is expected to result in a decline compared to that of previous fiscal year. These charts show the transition of our sales by business over the last few years. Hengewan business and professional service and others grew steadily. This slide shows the progress of actual advertising expenses and operating expenses excluding advertising expenses against the forecast for this fiscal year. As I explained in the second quarter, advertising expenses increased significantly due to the large-scale event and series of accompanying marketing campaigns. We are still looking into further investment which would bring us benefit in the future during the fourth quarter, such as on marketing and recruiting, and as a result, we are expecting our financial results to remain consistent to the forecast. Finally, please let me explain our growth strategy and also about our overall structure on sales and marketing activities. Our corporate philosophy is liberation of technology. We believe in the power of technology, we love technology, and we strongly believe that technology will make our life better. We want to deliver the power of technology to as many people as we can, to change the world into a better place. We established Henge more than 20 years ago, and since then, we set our philosophy as liberation of technology, which we actually have demonstrated liberation of technology in various areas. From the experience we gained, we think that SAS is the most fair and sophisticated approach to liberate technologies. We want to promote the use of SaaS among our customers, and we also provide our software as a service. The total amount of technology that we provide to the customer and the total amount of liberated technology are the measure to prove our progress on our philosophy. This is expressed as LTV, lifetime value, which in another word, a total value arising from the current contract with customers. Our growth strategy is aimed in maximizing this LTV. As explained in the previous slides, our average contract period and gross profit margin is already in a high number. Therefore, in order to maximize LTV, we think that it is essential to maximize ARR. For this reason, we do not focus that much on the result of short-term operating profit, but rather invest aggressively for the future and aim to accumulate ARR as much as possible. ARR can be broken into three factors, large N, small n, and ARPU, which represents the number of contracted companies, average number of users per contracted company, and average revenue per user, respectively, and can be analyzed based on those three factors. This slide shows the actual progress of those three factors, large N, small n, and ARPU. You can see Hengewan's ARR is steadily and stably increasing year on year. However, if you focus on the growth ratio, you can see that it is decreasing year on year. If we are to say what is our challenge, then it is the growth rate on ARR. Including our main service Hengewan, our group mainly operate a subscription model business. Barring any cancellations, the contracts secured this year should continue to generate sales and become the foundational sales from next year onwards. Basically, our subscription business will grow steadily, as shown by the solid black line in this chart, but the growth rate will gradually decline if we are to grow linearly and denominator getting larger and larger year on year. If we just continue what we are doing, the growth rate will go below 20%, and we don't want to make that happen. We want to provide more value to the customers, liberating technology. I do understand the difficulties of making this happen. However, considering when is the right timing to have an opportunity to accelerate our business, I strongly believe it is now. COVID-19 pandemic has changed the ways of working, including how company operates, and there definitely will be a situation where SaaS and cloud adoption will be expanded. In order to capture such an opportunity, we are investing aggressively on marketing activities, which would lead the acknowledgement on further strength of Hengewan and brand value of Henge to the decision makers of the company, partner companies, and more. What we are actively working on this fiscal year will lead to create an inflection point for both Large N and ARPU. We are frequently asked about how does the large-scale marketing activities contribute to the growth of Hengewon's Large N and ARPU. Therefore, let me explain about our marketing strategy on this slide. Our business model is to build up a potential target list which contains thousands of potential target company information, stimulate the potential customers coming out of that list, and to keep refreshing the information. It's something like an agricultural model. Services that we provide may last more than few decades for our customer. Therefore, in order for the potential customers to implement the service, it is necessary for them to consider thoroughly for a certain period of time. What we need to focus is to understand when the potential customers are moving on to the cloud and approach those potential customers at the very right timing. We believe that almost all of the companies will move on to the SaaS at some point. So the most important information that we need to capture is not who will be moving on to SaaS, but it's rather when the customer will move on to SaaS. Due to the nature of our business, it's difficult to describe our business in a funnel model, which mainly focuses on who is buying the service. Instead, what we are doing is to maintain a potential customer list and have a nurturing cycle to harvest business opportunities. Our marketing activities start from conducting a large-scale event where we bring up a wide variety of themes to present and discuss. We aim to create broad relationships with our main sales target, which is IT managers or IT people. Those contacts created through these marketing activities will grow our potential customer list. For the customer who is listed on our potential customer list, we are approaching them from the beginning of their SaaS implementation stage conducting smaller follow-up events to deep dive into the specific information that they are looking for and visiting customers to support their SaaS adoption. These nurturing activities will facilitate us to understand when the potential customers will be moving onto the cloud and let us approach them at the right timing with right set of customized proposal for them. It will also create a basis of trust between the customer and us to do so. Consequence of holding a large-scale event and linking to nurturing activities is a fundamental key to increase our large N. There's also other good things. When holding a large-scale event, there will be number of advertisements, not only limited to targeted web, but also including mass advertisements through TV commercials or public transportation ads. The main purpose of conducting these advertisements is to attract potential customers to the events. But at the same time, we also expect to affect on the acknowledgement and improvement of the brand Henge within our customers and potential customers. In mid to large-sized companies in Japan, it is common that the decision to implement a system like Henge-1, which applies to the entire company, will be made not only within the IT department, but more among multiple management people. This means that it is important for us to improve our acknowledgement among the decision makers other than the IT department, so that they can familiarize themselves to our products and our company. These advertising activities would ultimately help to accelerate our existing and new customers to use higher value-added plans, which will lead to the improvement of ARPU. Henge Now, that we've held in the second quarter, was a complete online event with more than 10,000 participants, first time ever to achieve such number of participants in Henge's history. This event was 10 times larger in terms of participants compared to that of ordinal physical events we used to hold. In order to succeed in this event and marketing campaign, we have invested in a huge amount which we have never invested previously. We are anticipating an expansion in the cloud adoption in the post-pandemic era, which should lead to our large-end growth and also contributing to ARPU. For the latter, in order to capture the opportunities, we have recently announced the new features in Hengewan, and these are to correspond to the new demands that were recognized during pandemic, which will add higher values to the customers. As of now, we are at the activated stage where we have largely grown and refreshed our potential customer list by making investment on advertisement and holding an event with more than 10,000 participants. To make the most out of this situation, we have announced new features to correspond to the customer demands, conducted smaller events to nurture our customers and strengthen the relationship with customers to create future leads. Our expected model is that the current activities that we are aggressively working on should gradually impact our financial results from next year onwards. We've considered how this activated situation can be expressed and reached to a point to count a number of events that we have announced to hold. Light gray bars indicate the number of offline events held in the pre-pandemic good old days. While there were advantages that we could meet face to face and deepen relationships with customers during pre-pandemic, while there were advantages that we could meet face to face and deepen relationships with customers, the preconditions were different from now, such as it was necessary to secure the venue every time, and there is a limit in the number of visitors per session. The black bars represent events during the pandemic. We are unable to meet our customers face to face, but we can effectively reach to a large number of customers in a wider area by holding online events. You can see that the number of events has decreased significantly after the announcement of the first state of emergency. This is when we went through a lot of trial and error to establish our online sales and marketing approaches. Around Hengenau in the second quarter of fiscal year 2021, the number of events begun to increase again, and we have steadily held the follow-up events, including nurturing events, in the third quarter. And those are also planned to be held during the fourth quarter. As a result of these activities, the number of events is expected to be four times more in the second half of fiscal year 2021 compared to the same period of the previous fiscal year. Nurturing activities are not only conducted through public follow-up events that are counted on this chart. They are also conducted through our sales members visiting our customers or holding private events that are not announced on the website. But as a whole, you can get the sense that our online sales activities and follow-up activities are conducted actively than before.

So those were about the large end side.

What about the ARPU side? As for the measures to improve ARPU, we were able to make more companies and sales partners aware of the value of Hengewan through the large-scale event accompanying TV commercials and other advertisements. Especially, we have been communicating a lot with our sales partners before and after the event, and we are willing to further accelerate the enhancement of the partnership with them. And, we are extremely pleased to finally announce the new features of Hengewan in August 2021, which we are planning to launch them from October 2021. I won't go into the details of new features today, but it got equipped with three wonderful new features to meet the demands newly recognized under the pandemic. We are proud that we can now provide more values to our customers. We have announced that the license lineups of Hengewan will be updated from October 2021, in line with this big version up. While we are mainly targeting to sell high-value added suite plans, as a new attempt, we will also set up single-function plans that would be attractive to Lite users to let us approach a wider range of customers. Since launching Hengewan as a service with a single feature in 2011, we have gradually added new features in response to the customer's needs and grown it as an IDaaS consisting of five main features and one option. This time, we are adding three new features, but this is not the end of Hengewan's evolution. We will continuously add more and more essential features that will help our customers' digital transformation led by SaaS utilization. We will pursue our corporate philosophy of liberation of technology, maximizing the amount of technology that we provide to the customers. Hengewan is an IDaaS which brings higher and higher value to the customers as those customers get powered by more and more SaaS's. We will continuously stimulate further expansion of cloud service adoption in Japan and at the same time collaborate more and more with other SaaS companies to form a SaaS platform bringing further growth in the market. This concludes our explanation of the third quarter of fiscal year 2021. Thank you very much for taking your time to watch our video.