SEPTENI HOLDINGS CO.,LTD. Q3 FY2025 earnings call

• Overall Consolidated Performance:

  • 3Q cumulative total revenue was 22.3 billion yen, up 6.7% year-over-year. Non-GAAP operating profit was 2.86 billion yen, up 27% year-over-year. Excluding one-time gains from prior year subsidiary share sale, continuing business quarter profit grew 21.4% year-over-year. For Q3 (Jul-Sep) alone, Non-GAAP operating profit grew 64.3% year-over-year, and parent-attributed quarter profit grew 138.4% year-over-year.
  • Revenue margin improved 1.1 percentage points year-over-year, and Non-GAAP operating margin improved 2 percentage points year-over-year. 70%+ of full-year guidance has been reached through 3Q, tracking on plan.

• Strategic Partnership Progress:

  • Cooperation with Dentsu Group: 3Q partnership revenue grew 22.9% year-over-year, with steady growth in new large client acquisition. Full-year partnership revenue is on track to hit an all-time high 7 years after the partnership launched.
  • Partnership with B-bit: Launched the "CRO Package" service that combines Septeni's ad operation strength and B-bit's customer insight/UX improvement expertise to provide end-to-end optimization from customer acquisition to conversion.
  • Joint venture with Cyber Record: Established a new JV to expand corporate version hometown tax donation support, combining Septeni's customer base and Cyber Record's EC/hometown tax operational knowhow and local government network.
  • Partnership with MYUUU: Launched generative AI training and workflow construction services using the Dify no-code AI development platform, with successfully delivered customized training for Pola Orbis Holdings leading to additional follow-up projects.

• Personnel Strategy:

  • Headcount is decreasing primarily at overseas locations, but supply-demand balance remains healthy due to improved operational efficiency. Mid-term hiring controls are in place for this fiscal year, adjusting hiring volume based on productivity and business performance. New graduate hiring will continue as planned.

1. Marketing & Communication Business: Achieved revenue growth driven by expansion of existing accounts and new client acquisition, despite negative impact from some clients starting from Q2. Non-GAAP operating profit grew 11.4% year-over-year, and Non-GAAP operating margin improved 1.8 percentage points year-over-year. This segment represents approximately 80.9% of total cumulative revenue. 2. Direct Business: Revenue reached 1.57 billion yen, up 19.5% year-over-year. Non-GAAP operating profit reached 360 million yen, up 56.7% year-over-year, driven primarily by growth in offline advertising projects. Non-GAAP operating margin has recovered to the 20% range after hitting a bottom in Q3 FY2024. This segment represents approximately 7.0% of total cumulative revenue. 3. Data & Solution Business: Revenue reached 750 million yen, down 10.5% year-over-year. Non-GAAP operating profit reached 110 million yen, down 16.3% (a 20 million yen decrease) year-over-year, due to the completion of large projects delivered in the prior year. This segment represents approximately 3.4% of total cumulative revenue.

• Full-year FY2025 (ending December 2025) guidance is maintained at: 30.3 billion yen total revenue, 4.0 billion yen Non-GAAP operating profit, 3.8 billion yen parent-attributed net profit. All three business segments are projected to deliver revenue and profit growth.
• Full-year dividend guidance is maintained at 18 yen per share, unchanged.
• All three segments are tracking in line with plan through 3Q, and management remains focused on achieving the full-year guidance with 1.5 months remaining in the fiscal year.
• For FY2026, management will continue to prioritize both top-line growth and further revenue margin improvement. Inorganic growth via M&A and business alliances will be actively pursued using reserved capital allocation capacity.

• The Data & Solution business has relatively small scale, so it faces temporary earnings volatility from the completion of large individual client projects.
• Marketing & Communication business is still absorbing negative revenue impact from reduced spending by a small number of large existing clients, which will not fully cycle out until Q2 FY2026. There is uncertainty on the speed of recovery from new client growth offsetting this impact.
• Generative AI has reduced demand for lower-complexity development work at offshore development centers, requiring ongoing headcount adjustment to align with current demand levels.

Q: Why has the revenue-to-sales ratio improvement accelerated in the last two quarters, and will this improvement continue into next fiscal year? / A: The key drivers are improved ad performance that allowed Septeni to renegotiate more favorable trading terms with clients, and a shift toward higher-margin business by combining core ad sales with high-margin solution offerings like the CRO Package from the B-bit partnership. These initiatives, which have been 1-2 years in preparation, have now built a solid foundation and are starting to deliver consistent results. Management sees no ceiling to further improvement, and expects the positive trend to continue next fiscal year.

Q: What is the background of headcount reduction at overseas locations, and what is the future direction of overseas business? / A: The headcount reduction was limited to Data & Solution's offshore development centers: generative AI has automated simpler development and maintenance work, so the adjustment was made to right-size costs for current demand levels. Overseas advertising business, centered on supporting foreign brands' Japan promotions (out-in), is already a competitive strength for Septeni and continues to grow steadily. Driven by recent favorable exchange rate trends, demand from Japanese brands for overseas promotions (in-out) is growing quickly. Management expects overseas business to enter an expansion phase, and will prioritize growing the in-out segment going forward.

Q: Is the -600 million yen net decline in existing client revenue for Marketing & Communication almost entirely from one large client, and can new client growth offset this impact by Q4/early next fiscal year? / A: The net decline combines small reductions from multiple clients and increases from other existing clients, but the vast majority of the negative impact is from the large client reduction disclosed in Q2, with no new large client reductions in Q3. The negative impact will fully cycle out one year after it started, so the balance will gradually turn positive starting next Q2. Competition for new client accounts has increased significantly, but Septeni's win rate has also improved compared to the last two years, and new client acquisition will continue to be aggressively expanded to offset the remaining impact.

Q: What is the outlook for Digital ad spending shift from traditional media in Japan, driven by generative AI? / A: The trend matches global patterns: Google and Meta continue to hold dominant, growing share, while vertical video platforms like TikTok and Japanese local platforms like TVer are growing share from a smaller base. In 2024, Japan's total ad market was ~7.6 trillion yen, with traditional 4-mass media growing ~1% and digital advertising growing ~9%, a trend that has held for several years and is expected to continue. Traditional media-focused industries including retail, food manufacturing, and energy are rapidly increasing their digital ad spending, which has driven higher client diversification and growth for Septeni. Digital ad spending is projected to grow to 55-65% of total Japanese ad spend by 2030, so the structural shift will continue.