AXXZIA Inc. Q2 FY2025 earnings call

Overall Interim Financial Results

• Total consolidated interim revenue: 6.28 billion yen, +15.7% year-over-year
• Operating profit: 110 million yen, -80.9% year-over-year; net interim profit: 62 million yen, -87.5% year-over-year
• Profit decline is primarily driven by weakened advertising efficiency in China EC and a higher proportion of higher cost-of-goods-sold M&D company sales, leading to a 28.2% cost of goods sold ratio (+9.8pp year-over-year) and 1.9% operating margin (-9.4pp year-over-year)
• Product updates: Renovated the 300,000 cumulative unit selling beauty drink as The Pure Drink, launched AXXZIA's first hair care product, Moisturizing Hair Milk, in December, and opened the 5th physical AXXZIA store in Japan at Shibuya Hikarie ShinQs
• Capital management: Executed treasury share acquisition and cancellation to improve capital efficiency, returning capital to shareholders

Short-to-Medium Term Strategic Priorities

• Responding to China's changing business environment: China remains the core main market, but the company is revising its strategy:
  • Product strategy: For cosmetics, focus on niche markets and develop functional products to match shifting consumer demand toward efficacy-focused products amid rising local brand competition; for inner care, develop mid-price point products and maintain a steady pipeline of new products to counter intensified low-price competition and declining high-price segment demand
  • Marketing strategy: Shift from reliance on top influencers to expand reach to mega-influencers (to build brand strength) and high-efficiency middle/micro-influencers; strengthen in-house live streaming sales to reduce platform payment fees; platform payment fees fell 3pp year-over-year as a share of revenue from this effort
• Accelerating Japanese business growth: Strengthen new customer acquisition via focused SNS marketing on priority products:
  • Core priority products include Essence Sheet, Mate For Eyes eye care, and the Comb Iron beauty appliance to expand into the beauty electronics category and open new customer segments
  • Plan to launch new Japan-exclusive products next fiscal year to expand reach to more customer groups

Long Term Strategic Priority: Shift to Global EC System

• Form a dedicated global EC team in H2 2025, which will oversee local EC teams in each region while local teams retain day-to-day operations
• The new structure will centralize management to deploy EC expertise built in China across all regions, while enabling local adaptation to regional characteristics, to drive sustainable, efficient global EC sales growth
• The global team will be formed using resources from the Japanese headquarters and the Shenzhen, China subsidiary, with rollout starting sequentially from the China local team

By region:

1. China: Total regional revenue was 4.3 billion yen, a 7.7% year-over-year decrease. China EC revenue specifically was 3.85 billion yen, a 6.1% year-over-year decrease, contributing 61.3% of total consolidated interim revenue.
2. Japan and third markets: Total regional revenue was 1.9 billion yen, a 165.8% year-over-year increase, with Japan revenue growing approximately 3x year-over-year. This segment contributed 31.1% of total consolidated interim revenue, up from 13.5% in the prior year period.

By brand:

1. AGTHEORY: Overall sales were in line with the prior year period. AG Drink underperformed on high price point inner care demand declines, while AGTHEORY cosmetics hit 340 million yen in interim sales, with 53.4% quarter-on-quarter growth (from 138 million yen in Q1 to 211 million yen in Q2). AGTHEORY overall accounts for a majority share of total revenue, with AG Drink making up 88.8% and cosmetics 11.2% of the brand's revenue, and the brand seeing a 3.2% year-over-year decline overall.
2. AXXZIA: The brand recorded an 8.6% year-over-year sales decline, though its Mate For Eyes eye care device reached 77 million yen in Q2 sales and remains a key focus product.
3. Nurturing segment (Venus Recipe/RevWell): This segment grew 12.8% year-over-year, and now accounts for 13.2% of total revenue, successfully diversifying the company's brand portfolio.

• Full-year 2025 July fiscal year guidance has been downward revised:
  • Revenue revised to 13.2 billion yen from the prior 15.4 billion yen, a 13.9% reduction
  • Operating profit revised to 207 million yen from the prior 941 million yen, a 734 million yen reduction
• Expected cost structure changes after revision:
  • Cost of goods sold ratio expected to rise 2.5pp to 28.0% (driven by slower growth of high gross margin China EC sales, leading to higher relative share of higher COGS M&D sales)
  • Advertising to sales ratio expected to rise 3.2pp to 25.7%
• H2 2025 advertising reallocation: Shift advertising budget originally allocated to China toward new product launches in China and priority products in Japan:
  • In China: Allocate advertising to four new inner care products launching in Q3 and Q4 to support strong launch momentum
  • In Japan: Increase advertising for Essence Sheet, Mate For Eyes, and Comb Iron beauty appliance
  The company expects advertising impact from this reallocation to mostly materialize starting in the next fiscal year.

• Weakened consumer sentiment and stagnant personal consumption in China's market has led to lower-than-expected China EC sales, with single-digit declines in the interim period, and this slowdown is expected to continue into H2
• Intensified competition in China: Local Chinese cosmetic brands are rising, inner care segment faces heightened low-price competition, and demand for high-priced inner care products, the company's core offering, has declined
• Advertising efficiency in China has deteriorated, pulling down overall operating profit margins, and cost cutting efforts to date are not sufficient to offset the profit decline from lower China EC revenue
• Rising live selling commission fees and declining traffic-driving ability of top influencers have increased marketing costs and reduced marketing effectiveness in China
• Interim sales and profit both missed internal budget targets due to China EC underperformance

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