Hengge

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

Hi, I'm Haruo Mano.

First, let me explain our financial results for the third quarter for FY 2022. This is the summary of our consolidated financial results. I will explain the details in the later slides. Our quarterly trends for consolidated net sales is as shown in the slide. Sales for Henga 1 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 in the slide. Sales for Henga 1 business is steadily growing. Our quarterly trends for gross profit and gross profit margin are as shown in the slide. Year-on-year fluctuations for gross profit and gross profit margin are as shown in 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 in the slide. As for advertising expenses, while we held a large digital event hangar now, and the accompanying TV commercials in FY 2021, we did not have such large events in this 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 had decreased. The chart in the slide shows quarter-on-quarter fluctuation of operating expenses. During the third quarter, in accordance with our policy for FY 2022, we've continued to focus on investing in the activities which are expected to contribute for the further growth. Advertising expenses are spent at the same level as the previous quarter as a result of conducting multi-layered activities, such as streaming TV commercials from April 2022 and participating in Japan IT Week, one of the large-scale events. As for the other SG&A, it increased quarter on quarter mainly due to an increase in recruitment costs as a result of energetic activities. and an increase in transportation expenses due to eased regulations regarding COVID-19. For the personnel expenses, it increased compared to the previous quarter as the number of employees increased in the third quarter as a result of recruitment activities. I will explain 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 end of the third quarter is as shown in the pie chart The transition in the number of employees is as shown in the bar chart In the third quarter, as we had a gradual lifting of the immigration restrictions from March 2022, some of our prospective employees from overseas mainly for R&D were able to join our company In addition, while the recruitment for both new graduates and mid-careers in the third quarter progressed well, we are still facing the shortage of members, especially for sales and customer success positions due to the changes in the employees' joining and leaving ratio in the first half of fiscal year. Now, I will explain our business activities in the third quarter. This is an overview of our business highlights. As I mentioned in the previous earnings call in the third quarter, we carried out our advertising activities as shown in the slide. From April 2022, we have started the marketing campaign featuring Ultraman, a very popular hero in Japan. and we progressed our activities in a multi-layered approach throughout the form advertisements on web, transportation, magazine and TV commercials. In addition, we participated in Japan IT Week which was held in Tokyo big site in April. We have not only made an exhibition, but also occupied the advertising spaces within the escalators at the newest stations in order to attract visitors' attention. We held various events and seminars for new and existing customers and Hangar 1 resellers. These were held to introduce solutions to various problems which the IT systems departments are facing, such as giving explanations on Hangar 1, challenges for crowd adoption, countermeasures against targeted attack, and free PPAP. This attempt was to create sales opportunities by making the potential users familiarize our service and have deeper understanding on how they can utilize our service. As I mentioned in the previous earnings call, Henga Connect was announced in March 2022 and was launched from April 2022. 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 onto the cloud and ease us to propose Henga One as their solution. By providing greater value, it enables us to promote higher plans to the customers, which links to our upper 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. It is continuously very low and the theoretical average contract period is over 30 years. This slide shows the quarterly trends in the number of contracted companies and users. Despite the situation where we are facing challenges to fulfill our sales power since the beginning of FY 2022, the number of new contracted companies have been recovering. We acquired a number of contracts with relatively small companies in this quarter as a result of strengthened relationships with resellers. For that reason, the number of contracted users have increased with the number shown in this slide. The quarterly trends in ARR and ARPU were shown in the slide. Following the second quarter, an increase in ARPU during the quarter is brought from several factors, such as contribution from newly acquired customers with the 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. As of now, we expect around 20% of contracted companies at the end of FY 2021 will 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 for this fiscal year.

Next, turning to our full-year outlook for FY 2022. This slide shows our policy for FY 2022.

This slide shows our forecast for FY 2022. There is no change in the forecast from what we have released on November 12th, 2021. As our CFO explained in the beginning of the financial results part, this is the summary of our consolidated financial results. Although the progress rates of each profit are over 100%, as I mentioned in the previous slide, there is no change in the forecast. Our business is steadily growing, however, there are some points which are different from the situation which we anticipated in the policy of FY 2022. I will explain it in the next slide. As for Henge I business, ARPU is on an increasing trend from the renewal of license lineups. Although our service has become more attractive by adding new features, we still have a challenge in fulfilling the sales force to acquire new customers for the current fiscal year. As a result, there are possibilities that our year-on-year growth rate of the ARR might be slightly under our policy, and our net sales might not reach our forecast slightly. As for the marketing investments, based on our policy, it may be impacted by another COVID-19 spread, but we will continue to invest aggressively on the marketing activities to help accelerate mid-term growth of the ARR for Henggawan. As a result, the advertising expenses will be in line with our forecast. As for the personnel plan, by having gradual lifting of immigration restrictions, mainly the number of R&D members have increased. However, due to the change in the employees joining and leaving ratio, the number of sales and customer success positions have not increased as we expected. As a result, the number of net increase in the headcounts for this fiscal year would be similar to that of last fiscal year and would not reach our policy for FY2022 which is to increase more than 50 headcounts in net. Going forward, we will be focusing on improving our brand value and employee retention by taking effective actions. such as raising the salary to the highest level among the B2B SARS industry. As I explained, if we look at the progress of the business, there are differences in the situation to what we have anticipated in the policy of FY 2022. However, we will be taking activities which will contribute to the future growth of the company for the rest of the fiscal year.

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 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 customers and total amount of liberated technology are the measure to prove our progress on our philosophy and this is expressed as LTV. LTV, or lifetime value, is 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 the 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 KPIs for Hengewan is as shown in 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 tactic to create an inflection point for the ARR growth, which would create an accelerated upward trend of the ARR. The first step has already taken place during FY 2021. We invested aggressively on marketing activities, which led to the acknowledgement of 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 HengaOne together with new license lineups. The 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 plans. 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 Arpuan and after FY 2022. As I mentioned earlier, while there's a possibility that the ARR growth rate may land slightly lower than our plan, we believe that it is important to continue this three-step tactic to create an inflection point for the ARR growth. Therefore, there is no change in our plan to take the three-step tactic. Also, as our CFO explained, we're currently seeing 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% CAGR by proceeding these steps. Our aim is to achieve and exceed 10 billion Japanese 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, we will also keep strengthening the relationships with resellers, developing and releasing new features and creating additional values of HengeOne. Since launching HengeOne 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. We will 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 services. We will continuously stimulate further expansion of cloud service adoption in Japan, and at the same time, collaborate more and more with other cloud companies to form a platform, bringing further growth in the market. This concludes our explanation for the third quarter of fiscal year 2022. Thank you for taking your time to watch our video.