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.