Hengge

Hi, I am Kazuhiro Ogura, the CEO of Henge. Thank you for watching our video today. Today, our CFO Haruo Amano will explain our financial results for first quarter of fiscal year 2022 and the outlook for this fiscal year, and then I will explain our growth strategy.

I'm Haruo Amano, the CFO of Henge. First, let me explain about our financial results of the first quarter for FY 2022. This is a summary of our consolidated financial results. In the first quarter, we performed steadily compared to the full year forecast disclosed on November 12, 2021. Our quarterly trends for consolidated net sales is as shown on the slide. Slight decrease in the consolidated net sales is due to the system integration service sales included in the professional service, and others' business was higher in the previous quarter due to the timing of project completion. Sales for Henry Wan business is composed of recurring revenue and leads growing steadily quarter on quarter. Year-on-year fluctuation for consolidated net sales is as shown on the slide. Sales for handgun business is steadily growing. As explained in the previous earnings course, sales for professional service and others business is decreasing due to the downsizing on some of the existing services. Our quarterly trends for gross profit and gross profit margin are as shown on the slide. Year-on-year fluctuation for gross profit and gross profit margin are as shown on the slide. Gross profit margin remained high and consistent through the previous quarters. Our year-on-year fluctuation of operating expenses by nature is as shown on the slide. The chart on the slide shows quarter-on-quarter fluctuation of operating expenses During the first quarter, in accordance with our policy for FY2022, we focused to invest on the activities which are expected to contribute for the further growth. As for the advertising expenses, like in the last quarter, in order to accommodate the demands from our customers for the new features, we've continued to hold events and advertisements. Also, we've increased the outsourcing resources in order to support our sales and customer success activities, which resulted in increase for both expense. As for the other SG&A, we continue to actively carry out recruitment activities during the quarter. However, as it was quieter than last quarter for advertisement and new grads hiring activities, the other SG&A has decreased. For the personal expenses, we've given additional support to the employees, such as for remote working in last quarter. However, such one cost has not been incurred during the current quarter. such as a decrease in the personnel expense. The sum of cost of sales and R&D expenses decreased queue on queue due to the timing of completion of the project, which corresponds to the sales of professional services and other businesses. This chart shows quarterly trends in net sales and operating expenses. The transition in the number of employees is as shown in the bar chart. While recruitment is progressing well in this quarter, the number of employees decreased by one from the previous quarter due to the changes in the employees' joining and leaving ratio. As we explained in the previous earnings call, team members for H1 Nalandin employees are mainly hired from overseas. Under the current COVID-19 restrictions, we are still experiencing our prospective employees living outside of Japan unable to cross the border. Like as in the previous quarters, we believe that there will be no significant impact on other activities. However, we will keep our close attention to the situation. Currently, it is becoming harder to hire experienced sales representatives due to the intensified hiring market in the B2B SaaS sales field. We will continue to actively recruit in each function intensively for sales and customer success positions. Now, I will explain our business activities in the first quarter. This is an overview of our business highlights. This quarter, we hosted Henge Rocket Pitch. It is a new online event with more than 50 sessions, not limited to introducing Henge One for our new businesses, but also introducing solutions for IT system managers on their pain points. Each session was introduced in less than three minutes and was handy to watch. Our aim was to introduce our services and activities from various perspectives in order for our current and potential customers to get a deeper understanding of who we are and create opportunities to proceed for the next steps. As we explained in detail during Q3 FY 2021 earnings call, new features of HENRYONE were announced in August 2021. and were launched from October 2021. As previously explained, three wonderful new features for Hengge 1 have been added 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 Hengge 1 has been updated from October 2021. in the line with big version app. While we were mainly targeting to sell high-value-added suite plans, as a new attempt, we have also set up single-function plans that would be attractive for light users and allow us to approach a wider range of customers. Next, I would like to explain our results of KPIs. This slide shows the progress of each KPI for Hengge 1 from the previous quarter. This slide shows the year-on-year fluctuation of KPIs for Hengge 1. This slide shows the average monthly churn rate, and it is continuously very low. This slide shows the quarterly trends in the number of contracted companies and users. We had a gradual start of the year for the growth in the number of contracted companies.

We are currently having high interest from our customers and resellers, which resulted in higher number of contacts.

However, we are seeing lower number in new deal closing. which brought to the gradual increase and this is mainly coming from the longer hours which are required for the explanations and consultations for the existing customers in relation to the new plan. We believe that this is a positive sign that existing customers are highly interested in the new plan. And in order to capture that demand, we will continue to actively engage in recruitment activities to avoid any risks that may influence new customer acquisition, which may occur from shortage of people. The quarterly trends in ARPU and ARR are shown in the slide. ARPU is continuously on the NAPPA trend, The growth in ARR is a gradual start as well as to the number of contracted companies. Next, turning to our full year outlook for FY 2022. Please let me explain once again on our policy for FY 2022. Our policy for FY 2022 is an extension of FY 2021's policy. which is to keep aggressively invest on the marketing activities to capture the expanding business opportunities under the new normal and to help accelerating Hengge 1's mid-term ARR growth. As for the marketing investments, we will continue to carry out advertisements to raise our recognition of new features. Also, we'll try multi-layered approach to the market, such as attempting both physical events and online events, considering the situation of the post-pandemic, and not investing on one particular event. For the personnel plan, we'll continue to actively recruit in each function and aim to increase more than 50 headcounts in order to accelerate our growth going forward. Although we are aiming to hire people in each faction, our main target still remains with sales and customer success positions. This is to further promote our new plan, and until the team is up to speed, we will utilize the outsourcing resource for the support so that we won't be missing any business opportunities. This will be the top priority for us. We consider that the strategy will also contribute to the introduction of new plans for existing customers. This slide shows our forecast for FY 2022. There is no change in the forecast from what we have released on November 12, 2021. These charts show the transition of our sales by business over the last few years and the progress against the forecast for FY 2022. In the first quarter, it is overall on track. These charts show the transition of advertising expenses and operating expenses, excluding advertising expenses over the last few years, and the progress against the forecast for FY 2022. As for advertising expenses, in addition to the activities already in place, we will be further attempting a variety of marketing activities.

Finally, please let me explain our growth strategy. 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, and to change the world to be a better place. We've established Henge more than 25 years ago, and since then, we set our philosophy as liberation of technology, which we actually have demonstrated in various areas. From the experience we gained, we think that SaaS is the most fair and sophisticated approach to liberate technologies. This is one of the reasons why we're providing SaaS and why we want to promote the use of SaaS among our customers as well. 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 and this is expressed as LTV, lifetime value, which in another word, a total value arising from the current contract with the customers. Our growth strategy is to maximize this LTV. 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. The progress of those three factors for Hengewan is as shown on the slide. Including our main service, Hengewan, our group mainly operates a subscription model business. Barring any cancellations, the contracts secured this year will continue to generate sales and become foundational sales for next year onwards. You can see Hengewan's ARR is steadily and stably increasing year on year. While ARR has been growing steadily, our issue was that ARR growth rate kept decreasing due to the denominator getting higher. COVID-19 pandemic has changed the ways of working, including how a 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 now taking a three-step strategy to create an inflection point for the ARR growth, which would create an accelerated upward trend of ARR growth by having fiscal year 2021's growth rate at the bottom. The first step has already taken place during fiscal year 2021. We invested aggressively on marketing activities, which led the acknowledgement on the strength of Hengewan and brand value of Henge to the company's decision makers, partner companies, and more. We also announced three new features of Hengewan together with new license lineups. The second step, which is exactly what we are currently working on, is that we are approaching aggressively to the new customers with new features and new plan. And last but not the least, in the third step, our plan is to further approach our existing customers and introduce these new features during fiscal year 2023. Throughout these three steps, our assumption is to create a growth cycle that will affect both large N and ARPU on and after fiscal year 2022. Currently, our sales and customer success members are working on closing deals with new customers and, at the same time, gradually started making explanation and consultation to the existing customers. As mentioned earlier in this movie, thankfully, we have high interest in the new plan from the existing customers. The situation is more than expected and, therefore, we had to focus more on the existing customer during this quarter. Considering the current situation, we are seeing demands for the third step is coming earlier than what we've anticipated for. Combined with other factors, we are currently having shortage of staff. We will continue to focus on both marketing and recruiting investment to succeed in the three-step tactics with a balanced manner. We will achieve mid-term ARR growth in the mid-20% in Kager by proceeding these steps. Our aim is to achieve and exceed ¥10 billion for Henge One's ARR. We would like to establish a sustainable growth model by continuing the business cycle by increasing the acknowledgement of Henge brand and increasing the number of potential customers, and at the same time also keep strengthening the relationships with resellers, developing and releasing new features and creating additional values of Hengewan. 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. In October 2021, we've added 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' transformation led by SaaS utilization and maximize the amount of technology that we liberate and provide to our customers in accordance with our corporate philosophy. Hengewan is mainly composed of ideas which brings higher and higher value to the customers as those customers get powered by more and more sauces. We will continuously stimulate further expansion of cloud service adoption in Japan and at the same time collaborate more and more with other sauce companies to form a sauce platform bringing further growth in the market. This concludes our explanation of the first quarter of fiscal year 2022. Thank you for taking your time to watch our video.