Hengge

Hi, I am Kazuhiro Ogura, the CEO of Henge. Thank you for watching our video today. Today, our director, Haruo Amano, will explain our full-year financial results for the fiscal year ending September 2023. Then, I will explain our full-year forecasts for the fiscal year ending September 2024 and our growth strategy.

Hi, I'm Haruo Amano. First, let me explain our 4-year financial results for FY 2023. This is the summary of our 4-year consolidated financial results. Net sales for FY 2023 were in line with the 4-year forecast. On the other hand, each profit exceeded the 4-year forecast. 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 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 Hangar 1 from exchange rate fluctuations. Personnel expenses increased mainly due to an increase in the number of employees and the revision of internal policy which is effective from July 2022. As for advertising expenses, we conducted a variety of events and seminars, including Henga Now, which targeted large companies, resellers, new customers, and existing customers. However, it decreased slightly year on year due to differences in the contents and approaches that have been applied from the previous year. For the other SG&A, it increased mainly due to enhanced recruitment activities and additional internal system usage fees to accommodate increased employees. The chart in the slide shows quarter-on-quarter fluctuation of operating expenses. Personnel expenses increased mainly due to an increase in the number of employees and the introduction of allowance for sales members in April 2023. As for advertising expenses, it increased during this quarter due to conducting advertising activities aggressively, such as sponsoring and participating in various events and seminars, and conducting out-of-home advertising. As for the other SG&A, it increased quarter on quarter mainly due to the energetic recruitment activities and an increase in transportation expenses along with increased offline 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 FY2023 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 40 at the end of FY2023. In particular, we have made steady progress in recruiting experienced IT sales members, which was the top priority for this fiscal year. Now, let's move on to the cash flow status. Operating cash flows increased significantly year-on-year due to an increase in the number of Henga 1's new contracts record. The rest of the categories are as shown in the slide. Cash and cash equivalents grew steadily year-on-year. Now, I will explain our business activities during this quarter. This is an overview of our business highlights. Let us touch on the business alliance with KickFlow Inc. Our group has been investing in B2B startup companies that have synergy with our group's business and have their own unique elements and technologies. This time as a new attempt, we have made additional investments in KickFlow Inc., a company that provides cloud workflow service KickFlow on the premise of a business alliance. Like our group's main service HengaOne, Kikro is a service for companies' IT administrators which we consider that there is a business synergy with us. By having both companies' strengths, we consider that we can further accelerate productivity of the companies in various industries. I will explain the other business topics in the next slides. In the fourth quarter, we carried out our advertising activities as shown in the slide. Following last year, we participated in Japan IT Week Nagoya which was held in July. We conducted out-of-home advertising such as posting advertisements featuring Ultraman as an image character at Haneda Airport in September 2023. In addition to these activities, we also carried out multi-layered advertising activities that contribute to our growth from the next fiscal year onwards. In August 2023, we announced that the part of license lineups for Hangar 1 will be revised from April 2024. We will continue to develop new features for Hangar 1 going forward and we will further promote cloud migration among companies. Next, I would like to explain our result of KPIs. This slide shows the progress of KPIs for Hangar 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. The conventional reasons for the cancellations are such as the IT system was unified into a different system due to the merger of companies or the crowd migration plan itself was reconsidered. From the first quarter of this fiscal year, in addition to those, there were some cancellations triggered by reviewing their internal IT services at the timing of contract renewal. As of now 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, we have steadily acquired contracts with relatively small companies due to strengthening relationships with resellers as a trend over the past few years. As a result, the number of new contracted companies have increased steadily since the previous quarter. However, the number of contracted users have shown a decrease compared to the previous quarter. There is a special factor in this point, and I will explain the details in the later slides. The quarterly trends in ARR and ARPU are shown in the slide. An increase in ARPU during this quarter is brought from several factors. Firstly, it is the contribution from newly acquired customers with the new license lineup since October 2021. Other factors are that the transition to the new license lineups for existing customers progressed well, and also there is a special factor. I will explain this point in detail in the next slide, as well as the reason for the decrease in the number of contracted users. In addition, the steady progress in the number of contracted companies and ARPU led to a significant increase in ARR for this quarter. Now, please let me give some supplementary explanation on the progress of the transition to the new license lineups for existing customers, which is one of the factors behind the increase in ARPU. We explained that approximately 80% of the transition to the new license lineups for existing customers have been completed as of the end of the previous quarter. And, as of the end of this quarter, the transition has been completed approximately for all customers. As I explained, while there is a steady increase in the number of contracted companies and ARR, the approval has grown compared to the past and the number of users has decreased from the previous quarter. This is due to change in the plan for a customer of educational institutions, which have been using our service from the past. By changing the previous plan to Henga One for Education, which was released after the contract was in place with the customer, the unit price applied and the users to be charged have changed. As a result, the number of users have decreased from approximately 90,000 to approximately 3,000, which have had an impact on Apple and the number of users. We believe that this is a very special case and our activities to acquire new customers are progressing well.

Next, turning to our full-year outlook for FY 2024. This slide shows our policy for FY 2024, that is to accelerate mid-term growth in Henga One ARR, continuously developing new features and services, providing them to customers, and building a more solid organization by enhancing our talent acquisition capability. As for Henga One business, we aim to sustain annual growth of more than 20% for ARR by increasing the number of contracted companies in ARPU. As for the marketing investments, we will carry out various advertising activities such as joint events with resellers in order to capture the demand for security that increases year by year. We will also hold various events to raise awareness of hengge. As for the personnel plan, we will actively recruit in each function and aim to exceed 50 headcounts increase in net. We will also aim to promote recruitment with a view to building an organization which enables to create higher value. In addition, following last year, we will keep considering various actions which will contribute to enhancing our talent acquisition capability. This slide shows our forecast for FY2024. In FY2024, we will aim for above 20% annual growth and we expect an increase in operating income and net income for FY2024. These charts show the transition of our sales by business over the last three years and forecasts for FY2024. This slide shows the actual advertising expenses and operating expenses excluding advertising expenses until FY2023 and the forecasts for FY2024. 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 contracts with the customers. Our growth strategy is to maximize this LTV. Maximizing LTV, that is, by seeking to maximize the total gross profit earned over the future, we would like to build a solid business model that can stably increase profits even if the investments for further business growth are increased. Currently, 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. In order to make this happen, we will actively engage in activities with expected high return on investment and aim to accumulate the ARR as much as possible. ARR can be broken into three factors, large n, small n in ARPU, which represents the number of contracted companies, average number of users per contracted company, and average revenue per user, respectively. A progress of three KPIs for Henga-1 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 Hengewan's ARR is steadily and stably increasing year on year. While ARR has been growing steadily, our challenge was that the ARR growth rate kept decreasing due to the denominator getting larger. COVID-19 pandemic has changed the ways of working, and we believe that there definitely will be a situation where cloud adoption will be expanded. In order to capture such an opportunity, we took a three-step tactic to create an inflection point for the ARR growth, which created an accelerated upward trend of the ARR. The fiscal year ending in September 2023 is the last year of these three steps for the first attempt, so I would like to review the overall situation and give my impression for this fiscal year and our challenges. The first step took place during FY 2021. We carried out marketing activities to raise awareness of Hengge among a wide range of people, including the company's decision makers, resellers, and more. We also announced new license lineups with new features. The second step took place during FY 2022. We promoted the new license lineups mainly for new customers. ARR growth was slightly under 20% mainly due to the shortage of members. However, we could increase the number of contracted companies and ARPU steadily by introducing new license lineups ahead of the initial plan, not only to new customers, but also to some of our existing customers. Then, last but not the least, we worked on the third step in FY 2023, which is to approach existing customers with these new features and new license lineups. As of the end of this fiscal year, the transition has been completed for approximately for all existing customers. In addition to strengthening relationships with resellers, we made significant increases in both the number of contracted companies and ARPU, which resulted our ARR growth exceeding 20%. As you can see from the increase in the number of contracted companies in the last few quarters, I can feel that the market is actually expanding. In order to capture such an opportunity, for FY 2023, we focused on recruiting experienced IT sales members to strengthen the organization for acquiring new customers and we have made steady progress on that. We would like to continuously build a more solid organization for acquiring new customers and increase the value that we can provide to our customers, deliver that value to our customers and gain their understanding. Through these activities, we will accelerate mid-term growth in Hengge 1's ARR by increasing the number of companies and ARPU. Hengge 1 has been enhancing its value by continuing to add powerful new features, especially since October 2021. Moreover, we released a new service called Tadrel in November 2022. We are also continuing to take on new initiatives, such as FileDLP, which is currently under development, and collaboration with KickFlow, which we entered into a business and capital alliance. In order to maximize the total amount of technology that we deliver to our customers, we will continue to add not only new features of Henge I, but also more essential features in the field of customer software as a service utilization. We will strongly support customers' productivity improvement led by software as a service utilization. By proceeding these steps, we will achieve mid-term ARR growth in the mid-20% average growth rate, Our aim is to achieve and exceed 10 billion JPY for Henga One's ARR. We would like to establish a sustainable growth model by continuing the business cycle to increase the acknowledgement of our brand and increasing the number of potential customers. And at the same time, we will also keep strengthening our sales force and the relationships with resellers, developing and releasing new features and creating additional values of Henga One. This concludes our explanation for the fiscal year 2023. Thank you for taking your time to watch our video.