Hengge

Hi, I am Kazuhiro Ogura, the CEO of Hengge. Thank you for watching our video today. Today, our director, Haruo Amano, will explain our financial results for the first quarter of fiscal year 2023 and progress of full year forecasts, and then I will explain our growth strategy and give my impression for this quarter.

Hi, I'm Haruo Amano. First, let me explain financial results for the first quarter of FY2023. This is the summary of our four-year consolidated financial results. In the first quarter, overall result is on track against the four-year forecast, which was disclosed on November 11, 2022. Our quarterly trends for consolidated net sales is as shown in the slide. Sales for Henga One business is composed of recurring revenue, and it is continuously on an increasing trend quarter on quarter. Year-on-year fluctuation for consolidated net sales is as shown in the slide. Sales for Henga One business shows a steady progress year-on-year. 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. While the gross profit margin decreased slightly mainly due to an increase in R&D members and an increase in infrastructure costs for Hangar 1 from exchange rate fluctuations, it still remains high. Our year-on-year fluctuation of operating expenses by nature is as shown in the slide. Cost of sales increased mainly due to an increase in R&D members and an increase in infrastructure costs for Henga 1 from exchange rate fluctuations. Arsenal expenses increased year-on-year mainly due to an increase in the number of employees and the revision of internal policy in July 2022. As for advertising expenses, it increased as a result of conducting wide-ranging activities such as holding Henga Now. For the other SG&A, it increased mainly due to enhanced recruitment activities, additional internal system usage fees to accommodate increased employees, and an increase in transportation expenses. The chart in the slide shows quarter-on-quarter fluctuation of operating expenses. As previously mentioned, cost of sales mainly increased due to an increase in infrastructure costs for Henga 1 from exchange rate fluctuations. As for advertising expenses, while we conducted advertising activities aggressively, it decreased quarter-on-quarter due to differences in the contents and approaches that have been applied. For the other SG&A, while reactively engaged in recruitment activities, it decreased quarter on quarter mainly due to a temporary decrease in recruitment expenses through a revision of several activities. 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 first quarter of FY 2023 is as shown in the pie chart. The transition in the number of employees is as shown in the bar chart. We aim to increase more than 45 headcounts in net for this fiscal year, and we had a net increase of 11 for this quarter. In order to strengthen the organization for acquiring new customers more, we are focusing on increasing the number of experienced IT sales members. We will keep considering various actions which will contribute to our talent acquisition enhancement. Now, I will explain our business activities during this quarter. This is an overview of our business highlights. As mentioned earlier, the main advertising activities for this quarter was Henga Now, which was held on site in October 2022 for the first time in three years. The previous Henga Now was held online with nearly 10,000 participants in February 2021. This time, it was aimed for nurturing new customers and promoting usage of new features and a new service for existing customers. Not only by introducing various initiatives of Henga One and our company, but also by setting up several workshops in person, we could have opportunities to deepen communications within the IT administrators and between participants and our sales representatives. Please let me explain the difference between this time's Henga Now and the previous one. The previous Henga Now aimed at a wide range of customers to capture the demands for remote work and cloud services, which were rapidly growing in interest during the COVID-19 pandemic, and to refresh our potential customer list significantly. This time's Henga Now was mainly aimed at promoting the use of new features and a new service for existing customers. In order to interact more closely with participants, it was an event with hundreds of people. Regarding the details of our marketing activities, please refer to the Q&A for Q1 to FY23. In November 2022, we released a new service title to meet the growing demand for the solutions of targeted email attacks. It enables companies to improve their employees' security awareness by email training, which is self-implementing, continuous and practical, and establishment of reporting flow. 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. Compared to the past, since the amount of cancellations have slightly increased, the average monthly churn rate rose slightly in this quarter. The main reasons for cancellations so far were that the IT system was unified into a different system due to the merger of companies or the crowd migration plan itself was reconsidered. In addition to that, from October 2022, there were some cancellations triggered by reviewing IT services used in our customers at the timing of contract renewal for existing customers. While we will continue to pay close attention to the trend, it is continuously very low and the theoretical average contract period is approximately 30 years. This slide shows the quarterly trends in the number of contracted companies and users. Although we are still facing challenges to fulfill our sales force, the number of new contracted companies has been increasing. We acquired a number of contracts with relatively small companies as a result of strengthened relationships with resellers and there were slightly more cancellations than before. For that reason, the number of contracted users has increased with the number shown in this slide. The quarterly trends in ARR and ARPU are shown in the slide. An increase in ARPU during the quarter is brought from several factors. Firstly, it is a contribution from newly acquired customers with the new license lineup since October 2021. Another factor is that approximately 40% of existing customers out of circa 2000 have moved to the new license lineups at the end of December 2022. As a result, ARR had grown steadily. We had some cancellations, but overall transition to new license lineups for existing customers, who have to renew their contracts in this quarter, progressed well. We plan to complete the migration of all applicable customers to the new license lineups by the end of this fiscal year. Next, turning to our 4-year outlook for FY2023. This slide shows our policy for FY2023, which is to accelerate mid-term growth in Henga One ARR by continuously carry out active marketing activities and build a more solid organization by enhancing our talent acquisition capability. As for Henga One business, we aim to achieve sustained annual growth of more than 20% for the ARR by increasing the number of contracted companies and ARPU. As for the marketing investments, we will hold interactive events which are focused on the specific target such as large companies, resellers, existing customers, and so on. Carrying out a wide variety of advertisements such as web, print advertisements, ad-form advertising, TV commercials, and so on to raise recognition of our company and our services will be continued. As for the personnel plan, we will actively recruit in each function and aim to increase more than 45 headcounts. In order to strengthen the organization for acquiring new customers more, we will focus on increasing the number of experienced IT sales members. We will keep considering various actions which will contribute to our talent acquisition enhancement. These slideshows are a forecast for FY2023. There is no change from the four-year forecast, which was disclosed on November 11, 2022. These charts show the transition of our sales by business over the last three years and the progress of the first quarter against the forecast for FY2023. Results of the first 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 of the first quarter against the forecasts for FY2023.

Finally, please let me explain our growth strategy.