FreakOut Holdings,inc. Q2 FY2025 earnings call

Overall Performance

• 2Q 2025 consolidated revenue missed internal budget by 5.8%, but EBITDA came in 1.3 billion yen above the 0.3 billion yen budget, driven almost entirely by the strong performance of the Japan segment.
• Exchange-related factors created a 0.27 billion yen foreign exchange loss due to rapid yen appreciation this quarter, after a 0.4 billion yen foreign exchange gain in the prior quarter. An additional 0.07 billion yen in TOB-related non-operating expenses was recognized.
• Consolidated selling, general and administrative (SG&A) expenses decreased by 0.22 billion yen quarter-over-quarter, driven by North American cost cuts (0.07 billion yen in communication and labor costs), FX-driven yen appreciation effects (0.05 billion yen), and influencer marketing segment SG&A cuts (0.04 billion yen).

Japan Business Highlights

• Core Japanese advertising businesses (Scarlet, GP) are expanding, newly consolidated Sumika (a service for real estate rental brokerage) is growing significantly, and turnaround efforts for IRIS are progressing well, with IRIS delivering 0.16 billion yen EBITDA this quarter.
• High-margin video/Connected TV advertising has been a strong growth driver, and GP continues to hit record revenue levels. Sumika is on track to become a meaningful contributor to group profits, with management confident in its long-term impact.
• Management expects a renegotiation of terms with a major Connected TV client will reduce annual gross profit by 0.6 billion to 0.7 billion yen, with negative impacts starting in 3Q, but frames this shift as a positive move toward a more long-term stable partnership.

North America Business Highlights

• Programmatic advertising sales continue to grow steadily, but direct sales recovery has been slower than expected, keeping gross margins and overall profits below target.
• Management is prioritizing cost containment amid uncertain North American macroeconomic conditions, focusing on resource adjustments rather than aggressive expansion to drive profit recovery.

Asia Business Highlights

• The segment has maintained steady positive profit levels through the off-peak advertising season around New Year and Lunar New Year, continuing the improvement trend that started in Q4 of the prior fiscal year.

Influencer Marketing (UUUM) Business Highlights

• Top-line revenue continues to decline, primarily in the marketing service segment, while other revenue streams (AdSense, merchandise) remain stable, so the segment remains profitable. The business is significantly behind original acquisition targets.
• Next fiscal year, the segment will implement office consolidation, delist to reduce listing-related costs, and restructure underperforming divisions to return to top-line growth and improve profitability.

For the 2Q 2025 fiscal period: 1. Japan Segment: 22.3 billion yen in revenue (27.4% YoY growth), 5.9 billion yen EBITDA (150% YoY growth, +1.8 billion yen YoY). Accounts for approximately 19.2% of total consolidated revenue. 2. North America Segment: 3.5 billion yen in revenue (12.4% YoY growth), small YoY EBITDA decrease. Accounts for approximately 30.1% of total consolidated revenue. In USD terms, revenue was 23.2 million USD (12.7% YoY growth) and EBITDA was -0.1 million USD. 3. Asia Segment: 1.61 billion yen in revenue, 0.07 billion yen EBITDA, which improved from 0.05 billion yen YoY. Accounts for approximately 13.9% of total consolidated revenue. 4. Influencer Marketing (UUUM) Segment: Revenue declined YoY, with continued negative YoY growth centered on marketing services sales. EBITDA remained profitable for the quarter, but revenue and EBITDA both missed internal budget targets. For the first half, EBITDA saw only a slight decrease YoY overall. Accounts for the remaining ~36.8% of total consolidated revenue. Total consolidated revenue for 2Q was 11.61 billion yen, 2.1% YoY growth, with total consolidated EBITDA of 0.43 billion yen, 15.5% YoY growth.

• Full-year 2025 guidance has been revised downward, driven by the expected 0.6-0.7 billion yen gross profit reduction from the Japan Connected TV client renegotiation, slower-than-expected North America recovery, and continued weak profitability at UUUM.
• 3Q 2025 EBITDA guidance is revised down from the prior 0.4-0.5 billion yen range to approximately 0.3 billion yen, with 3Q revenue expected to come in between 13.0 billion and 14.0 billion yen.
• Full-year 2025 North America segment EBITDA guidance is revised down from the original target of just over 0.6 billion yen to 0.3-0.4 billion yen, with full profit recovery now expected to occur in the next fiscal year rather than the current fiscal year.
• Management maintains confidence in the long-term growth prospects of both the North America and UUUM segments, with meaningful profit improvements planned for the next fiscal year.
• Asia full-year EBITDA guidance is maintained at around the mid-0.3 billion yen level.

• The slow recovery of direct advertising sales in North America has dragged on profits longer than expected, and the uncertain macroeconomic outlook for the region creates continued uncertainty for ad demand.
• A scheduled renegotiation of commercial terms with a major Connected TV client in Japan will create a 0.6-0.7 billion yen annual gross profit headwind starting in 3Q 2025.
• UUUM continues to miss revenue and profit targets, with top-line decline persisting, creating ongoing pressure on group profitability for the current fiscal year.
• Continued volatile foreign exchange movements make forecasting costs and profits difficult for the group's international segments.
• UUUM's current underperformance relative to original acquisition plans creates a need for drastic restructuring that will take time to implement and deliver results.

Q: What are the specific components of the full-year downward guidance revision? / A: The downward revision stems from three main sources: 0.6 to 0.7 billion yen in expected gross profit decline from the Japan Connected TV client renegotiation, a 0.2 to 0.3 billion yen EBITDA shortfall from slower North American recovery, and continued weaker-than-expected profitability at UUUM. All three factors are expected to hit results in the second half of the fiscal year, leading to the downward revision at this time.

Q: What areas has the company achieved cost reduction in so far? / A: The largest cost reductions have come from North America, where the company cut 0.07 billion yen in communication and labor expenses quarter-over-quarter. Additional cuts include 0.04 billion yen in SG&A at UUUM, and a 0.05 billion yen reduction from yen appreciation translating overseas costs lower. Next fiscal year, an additional 0.05 billion yen or more in quarterly cost cuts are expected from UUUM office consolidation and delisting.

Q: How is the IRIS turnaround progressing, and what is the outlook for the remainder of the year? / A: IRIS has made strong progress, hitting 0.16 billion yen EBITDA this quarter, a large improvement from prior periods. Going into 3Q, which is a traditional ad off-season, management is working to sustain improvements and avoid large EBITDA declines, to keep the turnaround on track through the full year.

Q: Why is North American recovery slower than expected, and what is the updated timeline? / A: Programmatic sales have continued to grow as expected, but direct sales client recovery has taken longer than the initially expected mid-to-late 3Q timeline. Full profit recovery is now expected next fiscal year; management remains confident in the long-term trajectory, but is prioritizing cost control in the near term.

Q: What is the strategy to restore top-line growth for UUUM? / A: After completing the delisting process next fiscal year, UUUM will implement deep cost cuts via office consolidation, and will restructure the underperforming marketing division to fix its top-line decline. Management plans to share more detailed strategic updates once the restructuring plan is finalized, and expects to return to growth and improved profitability in the next fiscal year.