Bridge Report SEPTENI HOLDINGS CO., LTD. (4293)

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1 Bridge Report SEPTENI HOLDINGS CO., LTD. (4293) Koki Sato, President Company Code No Exchange Industry President HQ Address Business Description Year-end URL SEPTENI HOLDINGS CO., LTD. JASDAQ Service Koki Sato Sumitomo Fudosan Shinjuku Grand Tower, 28F, Nishishinjuku, Shinjuku-ku, Tokyo Corporate management and control of group subsidiaries which conduct Internet advertising agency, sales promotion support, and contents distribution services. Yahoo is also a shareholder. September - Stock Information - Share Price Shares Outstanding Market Cap. ROE(actual) Trading Unit 65, ,826 shares billion 7.4% 1 shares DPS(Est.) Dividend Yield (Est.) EPS(Est.) PER(Est.) BPS(actual) PBR(actual) 1, % 4, x 47, x Stock price as of the close on May 18, Number of shares outstanding at the end of the most recent quarter excludes treasury shares. ROE and BPS are calculated by using actual amounts during or at the end of the previous term. - Consolidated Earnings Trends - (Unit: Million Yen) Fiscal Year Net Sales Operating Income Ordinary Income Net Income EPS Dividend (Y) September ,700 1,125 1, , September , September ,648 1,098 1, , , September , , , September 2012 Est. 41,000 1,475 1, , , Estimates are those of Investment Bridge Co., Ltd. We present this Bridge Report along with the first half of fiscal year September 2012 earnings results for SEPTENI HOLDINGS. 1. Company Overview 2. First Half of Fiscal Year September 2012 Earnings Results 3. Fiscal Year September 2012 Earnings Estimates 4. Conclusions 1

2 Key Points During the second quarter of FY9/12, sales of social games grew by a large margin along with strong growth in sales of Facebook and smartphone related services. Consequently second quarter sales, operating and ordinary income extended the record highs achieved during the first quarter to achieve a second consecutive quarter of record highs. During the first half of FY9/12, sales and ordinary income grew by 15.3% and 65.2% year-over-year to 20,514 and 931 million respectively. During the third quarter of FY9/12, SEPTENI expects to achieve sales and ordinary income are of 10,200 and 260 million respectively. Increases in personnel and anticipatory investments in advertising to expand social game sales is expected to contribute to reductions in both sales and profits compared with the second quarter, but compared with the same term in the previous year sales and ordinary income are expected to rise by 25.4% and 170.8%. Facebook related business, smartphone related advertisements, and social games are the central focus of the Midterm Business Plan (From FY9/11 to FY9/13) and are acting as growth drivers. During fiscal year September 2013, aggressive sales and operating income targets of 50.0 and 3.0 billion have been established, but the favorable near term business performance appears to be an indication of SEPTENI s ability to achieve these targets. 1. Company Overview The SEPTENI GROUP is comprised of 17 consolidated subsidiaries, which include the Internet advertising agency SEPTENI CO., LTD. and the mobile contents distribution company AXEL MARK INC. (3624) and others, and three equity accounting method held affiliates. SEPTENI will continue to fortify its Internet advertising agency service business, and also make aggressive investments in growth realms and convert in-house services into strong contributors of earnings. <Corporate History> SEPTENI was founded in October 1990 by Mamoru Nanamura (Current Chairman and Representative Director), who originally worked at Recruit Co., Ltd., as a human resources consulting services company called SUB & LIMINAL CO., LTD. It later expanded its business realm to include direct mail, catalog, and other outsourced mailing services. The main business currently of Internet marketing services was originated from a new business segment started by the current President Koki Sato. The company name was changed to SEPTENI CO., LTD. in March 2000, and the Internet advertising agency business was launched on a full scale in April of the same year. In August of 2001 SEPTENI went public on the JASDAQ market. In October 2006 SEPTENI adopted a holding company structure and changed its name to SEPTENI HOLDINGS CO., LTD. <Business Segment Descriptions (Business Segment Categories Changed in FY9/12)> SEPTENI s business is comprised of the Internet Marketing (Formed by the consolidation of the former Internet Advertising and part of the former Technology Business), Media Contents (Formed by the consolidation of the former Contents and part of the former Technology Business), and the other business (Formed by the consolidation of the former Direct Marketing and former Commerce Business), which is not included as a reported segment. Internet Marketing Business Comprehensive marketing support services that leverage the Internet are provided in this segment. In addition to Internet advertising sales and various web solutions, ad network and other marketing platforms and cloud type CRM services are provided as in-house services to a wide range of customers. 2

3 Advertising Sales Internet Marketing Advertising Agency Sales Ad Spot Purchases Internet Media Advertising Distribution, Display Client Companies Solution Provision Web Solutions Site creation, operation Creative SEO Social media Creation, operation etc Campaign Implementation, Operation, Effect Measurement Consumer, Users In-House Services Service Provision Cloud type CRM systems Ad platforms Effect measurement system Internet media Social research etc Information Transmission (Source: SEPTENI) Media Contents Business The planning and development of various forms of digital contents are implemented, including social games for smartphones and conventional feature phones provided to consumers using various social network systems and cellular telephone service carriers. Mobile media operations are also performed. (Source: SEPTENI) Social Game Lineup Kingdom Chronicle Legend of Grimoire Maiden Incarnation Ousama Game (King Game) Adventure Chronicle (Source: SEPTENI) (Major Business Groups) The SEPTENI group is comprised of the holding company SEPTENI HOLDINGS CO., LTD., 17 consolidated subsidiaries, and three equity accounting method held affiliates. 3

4 SEPTENI HOLDINGS CO., LTD. Internet Marketing Segment Tricorn Corporation CRM services SEPTENI CO., LTD. Internet advertising TRIGGER INC. Social research mume, Inc. Mobile advertising Media Contents Segment MANGO, Inc. SEM operation AXEL MARK, INC. Mobile contents Vasara, Inc. Internet advertising Cytech, Inc. Social application development HighScore, Inc. Social media, others Others GRP Co., Ltd. Television advertising SEPTENI DIRECTMARKETING CO., LTD. Direct mail EAGLE i Co., Ltd. Ad network ACRESS Mail order Septeni Asia Pacific Pte. Ltd. Internet advertising in the Asia Pacific region New Business Development SEPTENI CROSSGATE CO., LTD. Ad network SEPTENI VENTURES Co., Ltd. ASP CO., LTD. E-marketing solutions <Midterm Business Plan (From FY9/11 to FY9/13)> The SEPTENI group has created a Three Year Midterm Business Plan (From fiscal year September 2011 to September 2013) based on its corporate concept of Septeni Original. Amidst large changes in and development of the environment for Internet businesses and the subsequent evolution of both media and devices, SEPTENI is endeavoring to fortify its existing Internet Marketing Business, and capture new growth opportunities by making aggressive investments to expand the range of its various in-house services. The key areas for SEPTENI in the coming years are mobile, where it has achieved success through the concentration of its business resources, social media, where the share of the Internet traffic has risen rapidly, and platforms, where the creation of an effective business structure has led to solid earnings. Examples of the Company s near term endeavors include the fortification of its advertising services targeting the expanding smartphone market in the realm of mobile, and provision of one stop service capabilities including Facebook page creation, operations, and attracting guests in the realm of social network systems (SNS). In the realm of platforms, SEPTENI is cultivating ad network and other marketing platforms and cloud type CRM services. Furthermore SEPTENI is considering large M&A activities, sales of subsidiaries, and restructuring of businesses to bring about stable earnings and synergies between group companies as part of its efforts to better structure its group portfolio. In fiscal year September 2013, the final year of the Plan, SEPTENI seeks to achieve its targets for sales of 50.0 billion (Sales from existing and new businesses of 40.0 and 10.0 billion respectively) and operating income of 3.0 billion (Operating income from existing and new businesses of 2.0 and 1.0 billion respectively, for an operating margin of 6.0%). The achievement of these targets would effectively raise the gross income per employee from to million. 2. First Half of Fiscal Year September 2012 Earnings Results (1) Consolidated Earnings (Units: Million Yen) 1H FY9/11 Share 1H FY9/12 Share YY Change Initial Estimate Divergence Net Sales 17, % 20, % +15.3% 19, % Gross Income 3, % 4, % +28.3% - - SG&A 2, % 3, % +24.0% - - Operating Income % % +48.1% % Ordinary Income % % +65.2% % Net Income % % -8.0% % Figures include reference figures calculated by Investment Bridge Co., Ltd. Actual results may differ (applies to all tables in this report). 4

5 Record High Sales, Operating Income Achieved During First Half Sales during the first half of the fiscal year September 2012 rose by 15.3% year-over-year to billion. The large rise in sales of social games, which was launched on a full scale basis from the current term, to 913 million contributed to a 3.2 fold year-over-year increase in sales of the Media Contents Business segment. In addition strong demand for Facebook and smartphone related services contributed to a 7.9% year-over-year increase in the Internet Marketing Business segment sales. With regards to profits, the higher sales contributed to an improvement in marginal profitability and allowed operating income to rise by 48.1% year-over-year to 865 million. Improvement in income from minority shareholdings (A 9 million loss in the previous term to a 53 million profit in the current term) and income from valuation gains on marketable securities ( 19 million) allowed non-operating income to improve. The decline in net income is attributed to an extraordinary loss of 310 million arising from losses associated with the step-by-step acquisition of a subsidiary through a merger ( 154 million) and from impairment of goodwill of ACRESS ( 131 million). Sales, Operating Income by Segment (Units: Million Yen) 1H FY9/11 Share 1H FY9/12 Share YY Change Internet Marketing 15, % 16, % +7.9% Media Contents % 2, % % Others 1, % 1, % +1.8% Adjustments Total Sales 17,786-20, % Internet Marketing % % +14.6% Media Contents 9 1.4% % - Others % % -6.4% Adjustments Total Operating Income % (2) The Second Quarter (Jan.-Mar.) Consolidated Earnings (Units: Million Yen) 2Q FY9/11 Share 2Q FY9/12 Share YY Change Initial Est. as of 1Q Divergence Net Sales 8, % 10, % +20.7% 9, % Gross Income 1, % 2, % +35.1% - - SG&A 1, % 1, % +29.0% - - Operating Income % % +61.6% % Ordinary Income % % +75.9% % Net Income % % -14.9% % Sales, Ordinary Income Rise 20.7% and 75.9% Year-Over-Year Sales during the second quarter rose by 20.7% year-over-year to billion. Strong sales of social games boosted the Media Contents Business segment s sales by 3.2 time year-over-year. At the same time strong demand Facebook and smartphone related services allowed the Internet Marketing Business segment s sales to rise by 12.8% year-over-year. Subsequent to these performances, consolidated sales exceeded 10.0 billion on a quarterly basis for the first time. With regards to profits, aggressive hiring of personnel and advertising activities combined with anticipatory investments in new businesses (Caused profits to decline by 59 million) to raise selling, general and administrative expense by a large margin. However the higher sales and subsequent higher gross margins allowed this higher SG&A expense to be absorbed and contributed to a 61.6% year-over-year increase in operating income to 498 million, a new record high on a quarterly basis. The decline in net income is attributed to an extraordinary loss of 148 million including 130 million arising from impairment loss for goodwill of the Commerce Business. 5

6 12,000 10,000 8,000 6,000 4,000 2,000 0 Sales, Operating Income Trends ( mn) Sales Operating Income 9/11-1Q 2Q 3Q 4Q 9/12-1Q 2Q % 20.0% 19.0% 18.0% 17.0% Gross and Operating Margin Trends 9/11-1Q 2Q 3Q 4Q 9/12-1Q 2Q Gross Margin Operating margin 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Sales, Operating Income by Segment (Units: Million Yen) 2Q FY9/11 (Jan.-Mar.) Share 2Q FY9/12 (Jan.-Mar.) Share YY Change Internet Marketing 7, % 8, % +12.8% Media Contents % 1, % % Others % % +8.1% Adjustments Total Sales 8,953-10, % Internet Marketing % % +33.1% Media Contents % % % Others % % -1.9% Adjustments Total Operating Income % Internet Marketing Sales and operating income rose by 12.8% and 33.1% year-over-year to 8,735 and 399 million respectively. Advertising sales rose by successfully capturing large advertising projects and strong fiscal-year-end demand, in addition to brisk demand for Facebook related solutions and smartphone related advertising. With regards to profits, gross margin improved by 0.8% points year-over-year to 17.1%. While SG&A expenses rose by 13.3% year-over-year to billion on the back of higher personnel costs due to fortification of staffing, the higher sales and subsequent improvement in gross margins allowed these costs to be absorbed and allowed operating margin to improve by 0.7% points year-over-year to 4.6%. Facebook Related Business, A Strength of SEPTENI According to information released by Facebook, inc, the total number of active users on a monthly basis reached 901 million globally or roughly 13% of the world s population, and 169 million in the United States or roughly 55% of the population. Demand for advertising is rapidly growing along with the increase in users, and advertising income rose from US$764 million 6

7 in 2009 to US$1.868 billion in 2010, and expanded even further to US$3.154 billion in Against this backdrop, the market for Facebook related advertising is also expanding within Japan with the number of active monthly users rising to about 10 million or 8% of the population. SEPTENI launched its Facebook related Internet marketing support services at an early stage in July 2010 and became the pioneer in the provision of various Facebook related services. Currently the Company offers page creation, wall posting, edge ranking optimization, campaigns and other various services related to operations of Facebook (Operations for which the interface with customers is very important). Furthermore SEPTENI offers attracting guests services for posted advertising and has become a one-stop provider of comprehensive services relating to Facebook. One of SEPTENI s strength is its knowhow, which has been aggregated in the process of providing various Facebook related services as a pioneer during the past two years of this business operations. SEPTENI is also one of the few companies capable of providing one-stop service capabilities ranging from page creation to operations to attracting guests. SEPTENI boasts of business with over 100 companies including SAPPORO BREWERIES LTD. and JTB Corp., and has developed a unique in-house catalog gift service called BIRTHDAY CLAPPER (Social commerce) that allows users to send gifts to friends celebrating birthdays. Facebook provides its users with a wall which acts as an electronic bulletin board to which various comments can be posted. Edge ranking is a function that allows the use of an algorithm to optimize the matching of contents to Facebook users news feeds and postings shown on their walls. 1,100 Facebook Related Sales Trend (1Q FY9/11 = 100) /11-1Q 2Q 3Q 4Q 9/12-1Q 2Q (Source: SEPTENI) Smartphone Advertising Business Advertising for smartphone is growing strongly. The advertising effect measurement system called Smac, which allows advertising effect analysis to be performed and is based on PDCA(Plan, Do, Check, Act), has been received favorably by the market, and is expected to lead to absorb replacement demand for applications used for conventional cellular telephones as well as for new demand. 10,000 Smartphone Advertising Sales Trend (2Q FY9/10 = 100) 8,000 6,000 4,000 2, /10-2Q 3Q 4Q 9/11-1Q 2Q 3Q 4Q 9/12-1Q 2Q (Source: SEPTENI) 7

8 Fortification of Marketing Offices Demand for various cross border business, including from Japan to overseas markets and from overseas markets to Japan, is growing, and in order to respond to this growing demand SEPTENI established its first overseas subsidiary called Septeni Asia Pacific Pte. Ltd. in Singapore on March 19, This company will act as a base from which it will cultivate Internet marketing demand in the Southeast Asian region. Furthermore on April 2, 2012 SEPTENI opened its 10 th sales office in Yokohama City. In the future, the Company is expected to open sales offices as opportunities arise. Media Contents Sales and operating income rose by 3.2 times and just under 5 times year-over-year to 1,138 and 118 million respectively. Until the previous term official contents for conventional feature phones and electronic publications for smartphones had been the primary services offered in this segment, but beginning from the current term social games have become a mainstay. During the second quarter sales of social games rose by 1.6 times compared with the first quarter to 563 million (Fell slightly on a year-over-year basis). With regards to profits, SG&A expenses rose by 3.1 fold year-over-year to 367 million due to the fortification of staffing in the social games division, but the higher sales allowed these additional costs to be absorbed and gross margin improved by 2.8% points year-over-year to 42.7%. Currently six titles are provided and the total number of registered users of AXEL MARK has exceeded 1 million. Recently or Soon To Be Released Titles Providing Company AXEL MARK INC. Cytech, Inc. Platform mobage GREE Title Adventure Chronicle Legions of the sky War Maidens from Ruined Cuntries Launch Date March 2, 2012 Anticipated in Mid May 2012 April 13, 2012 Genre Card Battle Games Termination of Complete Gacha Service The Consumer Agency of the Japanese Government issued guidelines relating to the Act Against Unjustifiable Premiums and Misleading Representations and warnings of potential violations of this Act to the providers of the social game Complete Gacha on May 8, In response to these guidelines, the industry s largest players DeNA Co., Ltd. and GREE Inc., and other game service providers have indicated their intention of halting provision of Complete Gacha games. At the same time our Group companies AXEL MARK and Cytech have also decided to stop provision of this kind of games. The Consumer Agency of the Japanese Government adopted the approach of leaving the decision of whether or not to continue provision of this kind of games up to the respective game providing companies, and this issue has been settled with decision by the various companies to stop providing Complete Gacha service. And while there will inevitably be some impact to earnings from this issue, in exchange for the stoppage of this kind of games the industry has been able to avoid a worst case scenario of enforcement of stricter regulation of social games. The goal of Complete Gacha is to acquire special cards that can be used in the game by purchasing standard electronic cards. And although standard electronic cards only cost 300, many users of the game were so engrossed in their pursuit of these special cards that they wound up buying a extremely large amount of cards and the value of their spending reached very high levels with their tendency to boost gambling spirit. 8

9 3. Fiscal Year September 2012 Earnings Estimates In response to the rapid pace of changes in the business environment for the quickly expanding social media and smartphone related services markets, SEPTENI has chosen to announce earnings estimates for only the quarter immediately following its current term from this fiscal year. Therefore SEPTENI calls for sales and ordinary income to rise by large margins of 25.4% and 170.8% year-over-year to 10,200 and 260 million respectively during the third quarter (April to June), due in part to disappearance of the negative impact of the Great East Japan Earthquake during the previous term. However compared with the previous second quarter, sales and ordinary income are expected to fall by 5.6% and 50.4% respectively. While this decline in sales on a quarter-over-quarter basis is also attributable to seasonal factors (Yearend campaigns and acquisition of large projects at the yearend), the lower profits are also attributed to higher personnel costs arising from fortification of human resources through increased new hires (77 new employees joined the SEPTENI group in April, and aggressive hiring of new mid-career staff are expected to be taken on in the future), and expansion of advertising expense to grow sales of social games. 3Q (Apr.-Jun.) Consolidated Earnings (Units: Million Yen) 3Q FY9/11 (Apr.-Jun.) Share 2Q FY9/12 (Jan.-Mar.) Share 3Q FY9/12 (Apr.-Jun.) Est. Share YY Change Sales 8, % 10, % 10, % +25.4% Operating Income % % % % Ordinary Income % % % % Net Income % % % % 1-3Q Aggregated Consolidated Earnings (Units: Million Yen) 1-3Q FY9/11 Share 1-3Q FY9/12 Est. Share YY Change Sales 25, % 30, % +18.5% Operating Income % 1, % +72.7% Ordinary Income % 1, % +80.4% Net Income % % +16.4% 4. Conclusions Facebook related services and smartphone related advertising in the Internet Marketing Business, and social games in the Media Contents Business are acting as strong growth drivers for earnings. These areas have been specified in SEPTENI s Midterm Business Plan as areas upon which it will focus and are the basis for the aggressive sales and operating income targets established within the plan of 50.0 and 3.0 billion respectively in fiscal year September Furthermore the Company s businesses are recording strong growth near term and progressing steadily towards these targets. And while the stoppage of Complete Gacha games provision will inevitably impact earnings, the voluntary stoppage of this kind of games has averted a worst case scenario where stricter regulations would be introduced for social games. Therefore SEPTENI should also benefit from these types of responsible activities of the various social game service providers and the development of a healthy social game market over the longer term. This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the 9

10 contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration. Copyright(C) 2012 Investment Bridge Co., Ltd. All Rights Reserved. To view back numbers of Bridge Reports on SEPTENI HOLDINGS CO., LTD. (4293) and other companies and to see IR related seminars of Bridge Salon, please go to our website at the following url: 10