Performance trends of Sellable Net Advertising Co., Ltd. <9235>

1. Performance trends for the fiscal year ending July 2024

For the fiscal year ending July 2024, the revenue was 756 million yen (a decrease of 21.1% from the previous year), operating loss of 308 million yen (operating profit of 151 million yen in the same period of the previous year), ordinary loss of 315 million yen (ordinary profit of 166 million yen), and net loss attributable to parent company shareholders of 326 million yen (net income of 113 million yen in the same period). The revenue was 295 million yen below initial estimates, and the operating profit was 558 million yen below estimates. This decline was due to accelerating its growth strategy by starting to address issues like "fraudulent orders" and stepping up for business expansion including M&A upon listing, which were important measures to accelerate growth from the fiscal year ending July 2025.

The Japanese economy has been normalizing economic activities, with a mild recovery seen in personal consumption and an increase in inbound demand. In the EC industry to which the company belongs, while the size of the domestic and foreign EC markets is rapidly expanding, regulations such as the Act against Unjustifiable Premiums and Misleading Representations (Premiums and Misleading Representations Act), and the Law Concerning Assurance of Quality, Efficacy, and Safety of Pharmaceuticals and Medical Devices (Pharmaceutical and Medical Device Act) have become stricter regarding WEB marketing advertisements, demanding more cautious advertising expressions. In this business environment, the company focused on improving advertising efficiency by complying with regulations and conducting A/B testing repeatedly. Additionally, in February 2024, the company actively promoted the expansion of its service area by acquiring shares of Grupus and Orlinks Pharmaceutical, establishing two new subsidiaries: a growing cross-border EC company and a successful D2C industry M&A company.

As a result, in terms of sales, Orlinks Pharmaceutical began to grow, but due to measures against "fraudulent orders", advertising efficiency deteriorated, leading to a decline in revenue. On the profit side, the decrease in gross profit margin due to deteriorating advertising efficiency caused an increase in sales and administrative expenses through M&A and subsidiary establishment, resulting in an operating loss. Additionally, as a one-time expense, listing-related expenses were incurred when the company listed on the TSE Growth Market on October 23, 2023. Furthermore, considering the financial performance trends for the fiscal year ending July 2024 and beyond, the possibility of recovering deferred tax assets was conservatively evaluated. As a result, deferred tax assets were written down, adjustments for corporate taxes and others were made, leading to a widening of both ordinary and net losses compared to operating losses.

Temporary decrease in revenue for Digital Marketing Support

2. Performance trends by segment.

Segment performance includes sales of 674 million yen for D2C (online shopping) digital marketing support business (a decrease of 29.7% from the previous year), with a segment loss of 311 million yen (segment profit of 151 million yen in the previous period). Sales for D2C (online shopping) business were 82 million yen, with a segment profit of 2 million yen.

In the digital marketing support business for D2C (online shopping), from February 2024, in addition to the main products 'Sellable D2C Tools' and 'Strongest Sellable Media Platform', Grups started providing 'Operational Advertising' offered by the group, 'Cross-Border Support' provided by the sellable cross-border EC company, and 'M&A Brokerage Support' provided by the sellable D2C industry M&A company as part of the business. The measures against malicious 'fraudulent orders' trying to purchase products for resale or fraudulent purposes undertaken by the sellable online advertising company led to a decrease in revenue from performance-based advertising due to a low conversion rate, resulting in a decline in revenue as well as a deterioration in advertising effectiveness for some major clients, causing revenue to move sluggishly. Although the production service for landing pages has been improving the quality of the template mode, orders did not reach the expected level. Grups also assumed a significant increase in revenue in the fourth quarter and made upfront investments related to operational advertising for financial cases in the third quarter of expecting the revenue to grow, but due to changes in advertising operation algorithms, to avoid revenue deterioration, they switched from performance-based advertising to small-scale operations, resulting in revenue not reaching expectations. In addition, regarding the sellable cross-border EC company and the sellable D2C industry M&A company, they considered the third quarter as a preparation period and the fourth quarter as a full operation period, but due to the time required for launch, revenue recognition was postponed until the fiscal year ending July 2025. On the other hand, the D2C (online shopping) business launched through the M&A of Orlinks Pharmaceuticals focused on a social EC strategy that extensively used SNS without spending on advertising at the beginning, becoming popular with the sheet mask 'KogaO+', leading to steady growth in revenue and segment profit.

Expanding service areas while aiming for profitability.

3. Forecast for the fiscal year ending July 2025.

The company expects revenue of 1635 million yen (an increase of 116.2% from the previous year) for the fiscal year ending in July 2025, operating profit of 3 million yen (compared to an operating loss of 308 million yen in the same period of the previous year), ordinary profit of 7 million yen (compared to an ordinary loss of 315 million yen), and net income attributable to parent company shareholders of 4 million yen (compared to a net loss attributable to parent company shareholders of 326 million yen in the same period). Although the revenue was revised upwards by about 500 million yen compared to the initially announced plan, it was due to the inclusion of the revenue from the completed M&A of JCNT on August 22, 2024. As for operating profit, it was not revised as the increased revenue from JCNT was offset by M&A-related expenses.

To achieve the company's corporate philosophy, the company is expanding its service areas, having completed M&A of three companies, established two new subsidiary companies, launched four new businesses, invested in one company, and entered into a business alliance with another company in the fiscal year ending July 2024. Plans to continue strategic investments to increase client numbers, develop new products, and expand service areas, aiming to contribute to the full-year performance of the group of companies that joined in July 2024. In addition, the global communication business JCNT, acquired through M&A in August 2024, is expected to contribute to the full-year performance. The expansion of service areas in the fiscal year ending July 2025 includes collaborations with FM broadcasting CROSS FM in Fukuoka in October and Catchball, a subsidiary of Scroll Group which has distinctive deferred payment settlement, as well as the opening of a store page in China's 'Xiaohongshu (RED)' by a Japanese company for the first time in November, showing enthusiasm. Upfront investments, including the launch costs of newly acquired subsidiary companies and new M&A expenses, are expected, but aiming to steadily monetize group companies and achieve profitability for the full year.

In terms of segments, the digital marketing support business for D2C (online shopping) anticipates that revenue will increase significantly due to sellable online advertising companies and Grups, while expecting further growth from the sellable cross-border EC company and the sellable D2C industry M&A company as they complete measures against 'fraudulent orders'. On the profit side, the sellable online advertising companies and Grups are expected to reduce losses, while the sellable cross-border EC company and the sellable D2C industry M&A company are expected to turn profitable, foreseeing a significant decrease in losses for the overall business. Orlinks Pharmaceuticals is experiencing rapid growth and thus expects segment losses to build an organization in line with revenue growth; JCNT is expected to contribute to the overall performance as its revenue track record is strong, with slightly conservative adjustments made in the performance forecast.

(Author: FISCO guest analyst Nobumitsu Miyata)