Hengge

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

Hi, I'm Haruo Amano.

First, let me explain about our financial results for the second quarter for FY 2022. This is the summary of our consolidated financial results. In the second quarter, we performed steadily against the four-year forecast disclosed on November 12, 2021. Our quarterly trends for consolidated net sales is as shown on the slide. Sales for Henga One business is composed of recurring revenue, and it is growing steadily quarter on quarter. Year-on-year fluctuation for consolidated net sales is as shown on the slide. Sales for Henga 1 business is steadily growing. Sales of professional service and others business increased slightly due to a temporary increase in system integration sales that occurred in the quarter. Our quarterly trends for gross profit and gross profit margin are as shown on the slide. Year-on-year fluctuations for gross profit and gross profit margin are as shown on the slide. Gross profit margin remained high and consistent to the previous quarters. Our year-on-year fluctuation of operating expenses by nature is as shown on the slide. As for advertising expenses, while we held a large digital event hangar now, and the accompanying TV commercials in the second quarter FY 2021, we did not have such large events in the first half of current fiscal year. As previously explained, we are trying a multi-layered approach for advertising activities rather than holding one particular event. Thus, the advertising expenses have decreased significantly. The chart on the slide shows quarter-on-quarter fluctuation of operating expenses. During the second quarter, in accordance with our policy for FY 2022, we focused to invest on the activities which are expected to contribute for the further growth. As for the advertising expenses, in order to accommodate the demands from our customers for the new features, we've continued to hold events and advertisements. Also, we created content such as for TV commercials, which resulted to an increase in the expenses. As for the other SG&A, it increased quarter on quarter as we actively carried out recruitment activities during the quarter. For the personnel expenses, while we are actively engaged in recruitment activities, there was only slight increase due to the changes in the employees' joining and leaving ratio. I will explain about the details of employee transition in the later slides. This chart shows quarterly trends in the net sales and operating expenses. The number of employees and its breakdown by function as of the second quarter end is as shown in the pie chart. The transition in the number of employees is as shown in the bar chart. While our aim is to increase 50 headcounts for this fiscal year, the number of employees decreased in the first quarter, and we had an increase during the second quarter, but it only increased by 3 compared to the end of previous fiscal year. However, our recruitment activities have been progressing well in the third quarter, and this time, we have listed the results of April 2022 as well. As we have explained in the earnings call so far, members for Henga 1R and D employees are mainly hired from overseas. Fortunately, the immigration restrictions have gradually eased since March 2022, and our prospective employees from overseas have started to join our company from April. In addition to employees from overseas, although our company carry out the recruitment activities throughout the year, we could hire quite a number of people in April. This is due to April being a common timing for people to join and leave their companies in Japan. We will continue to actively engage in recruitment activities in order to achieve our plan to increase 50 headcounts. Regarding the retention plan mentioned briefly in the first quarter's earnings call, we are currently considering several plans and some of them will be conducted during the fiscal year. However, we do not think this will give a significant impact to our forecast. Besides these stories, the act on child care leave and family care leave has been revised in Japan and has been gradually reinforced since April 1, 2022. From this quarter, we started to disclose the number of members who was taking maternity, childcare, and family care leave. A large number of members in our company are taking maternity and childcare leave, and its rate for members taking leave for the period between April 2021 and March 2022 was at 100% for the employees who gave birth, and at 75% for the employees who were partners of people giving birth. As of March 2022, there were 11 members who took leave and some of them returned to work in April The figure as of April 2022 is shown in the slide Now, let's move on to the cash flow status. During first half of the year, there was upfront payment related to our cloud infrastructure. But there were no large payments of advertising expenses related with the events such as Henga Now which we had in the previous fiscal year. Therefore, operating cash flows in this quarter increased significantly year on year. Cash and cash equivalents grew steadily year on year. Now, I will explain our business activities in the second quarter.

This is an overview of our business highlights.

This quarter, we hosted an event, Hengi Meetup 2022, in a hybrid way, physically in Tokyo, Osaka, Nagoya, Fukuoka and online. Attendees were mainly IT managers of each company, and they could try all the features of Hengi One to feel how the actual access control works, or how sending emails to the wrong addresses can be prevented. This attempt was to create sales opportunities by making the potential users familiarize our service and have deeper image on how they can utilize our service. Additionally, Henga Connect was announced in March 2022 and was launched from April. This is Henga One's new feature, which was released following the three new features announced in August 2021. We are proud that we can provide more values to our customers through these features. This feature provides secure access to customers' on-premise systems through Henga One. Our basic policy stays the same, which is to help customers shift into the cloud-based working style. By having this feature, it will help customers who are hesitating to move on to the cloud, and ease us to propose Henga One as their solution. Henga Connect is available in Henga IDP Pro plan and Henga One Pro plan. By providing greater value, it enables us to promote higher plan to the customers, which links to our ARPU improvement strategy. Next, I would like to explain our result of KPIs. This slide shows the progress of KPIs for Henga 1 from the previous fiscal year. This slide shows the year-on-year fluctuation of KPIs for Henga 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. As we explained in the earnings call for the first quarter, we are still facing the shortage of sales power. Although we had improved the number of new contracted companies compared to the previous quarter, overall, number of new contracted companies during first half of the year was a gradual growth. The quarterly trends in ARPU and ARR are shown in the slide. ARR are exceeded 5 billion yen during this quarter. Increasing ARPU during the quarter is brought from several factors, such as contribution from newly acquired customers with new plan, or the number of existing customers who moved to the new plan were more than expected. As a result, ARR had grown steadily. We are continuously getting high interests about our new features and new plan from existing customers due to the recent higher security awareness. As of now, we expect around 10-20% of contracted customers at the end of FY 2021, which is 1,952 companies. We'll move to the new plan by the end of this fiscal year. Still, we anticipate that most of the existing customers will move to the new plan in the next fiscal year, so the transition of existing customers won't give significant impact to the ARR of this fiscal year. Next, turning to our 4-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 mid-term growth of the ARR of Henga One. As for the marketing investments, we will continue to carry out advertisements to raise our recognition of the new features. Also, we'll try a 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 will 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're aiming to hire people in each function, 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 this strategy will also contribute to the introduction of new plans for existing customers. These slideshows are a 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. Result up to second quarter 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 forecasts for FY 2022. As for the advertising expenses, we had aggressively progressed advertising activities in the first half of the fiscal year. In the last half of the fiscal year, we will be more aggressive in the advertising activities in order to acquire our future ARR. Therefore, advertising expenses will increase in the last half year of this fiscal year compared to the first half. I will explain about the details of advertising activities third quarter onwards in the next slide. As we released on our website from the third quarter, we have been proceeding our advertising activities as shown on this slide. Japan IT Week was held in Tokyo Big Site for three days from April 6, 2022. We have not only made an exhibition, but also occupied the advertising spaces within the escalator at the newest stations in order to attract visitors' attention. In addition, we have started streaming our new TV commercial featuring Ultraman, which is a very popular hero in Japan, in the World Business Satellite, one of the famous business news program in Japan. Like as in the previous advertising activities, we consider that the outcome will be appearing cumulatively, and these activities are for the acquisition of Henga-1's ARR for the next fiscal year onwards.

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 Hengge 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 software as a service is the most fair and sophisticated approach to liberate technologies. This is one of the reasons why we're providing software as a service, and we want to promote the use of cloud services among our customers as well. total amount of technology that we provide to the customer, and 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 other words, a total value arising from the current contract with 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. The 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 KPIs 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 the foundational sales from next year onwards. You can see Hengge 1's ARR is steadily and stably increasing year on year. While ARR has been growing steadily, our issue was that the 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 cloud adoption will be expanded. In order to capture such an opportunity, we are now taking a three-step tactics to create an inflection point for the ARR growth, which would create an accelerated upward trends of the ARR growth by having FY 2021's growth rate as a bottom. The first step has already taken place during FY 2021. We invested aggressively on marketing activities, which lead the acknowledgement on the strength of Hengge One and our company's brand value to the company's decision makers, partner companies, and more. We also announced three new features of Hengge One together with new license lineups. A second step, which is exactly what we are currently working on, is that we have been 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 FY2023. Through these three steps, our assumption is to create a growth cycle that will affect both Large N and ARPU, on and after FY 2022. Currently, we are getting high interests about new features and new plan from existing customers. Combined with other factors, we are having shortage of staff, but we will continue to focus on both marketing and recruiting investment to overcome the difficulties and succeed in the three-step tactics with a balanced manner. As our CFO explained, we're seeing the current situation that the third step is coming earlier, and the second step is starting slower, however, we are keeping our growth strategy as is. This is because we expect that most of the existing customers transition to the new plan will happen in the next fiscal year. We will achieve mid-term ARR growth in the mid 20% in average growth rate by proceeding these steps. Our aim is to achieve and exceed 10 billion yen for Henga One's ARR. We would like to establish a sustainable growth model by continuing the business cycle, by increasing the acknowledgement of our company's 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 Henga One. 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 ID as a service consisting of five main features and one option. We've added three new features in October 2021. In addition, we've launched the new feature, Henga Connect in April 2022. This is not the end of Henga One's evolution. We will continuously add more and more essential features that will help our customers' transformation led by cloud utilization and maximize the amount of technology that we liberate and provide to our customers in accordance with our corporate philosophy. Henga One is mainly composed of ID as a service, which brings higher and higher value to the customers as those customers get powered by more and more software as a service. We will continuously stimulate further expansion of cloud service adoption in Japan, and at the same time, collaborate more and more with other software as a service companies to form a platform, bringing further growth in the market. This concludes our explanation for the second quarter of fiscal year 2022. Thank you for taking your time to watch our video.