DMS INC. Q3 FY2025 earnings call

Company Overview and Core Strengths

• Founded in 1961, DMS provides total support for relationship building between businesses/public institutions and consumers, with direct mail planning, production and shipping as its core business.
• The company has expanded into logistics (a new core growth pillar), sales promotion support, and event planning/management, offering a broad range of direct consumer communication services.
• DMS has three key competitive advantages: one-stop service for multiple client-required functions, scale advantages from handling over 300 million direct mail pieces annually, and a certified management system for quality and information security that delivers reliable, secure service. These strengths enable DMS to win large, high-value-added projects primarily from large corporate clients.

Aggregate Quarter Performance

• Total company revenue was 19.935 billion yen, up 1% year-over-year. Operating profit was 789 million yen, down 23.5% year-over-year. Net quarterly profit was 571 million yen, down 57% year-over-year.
• Revenue increased due to strong performance of the core direct mail business, while profit declined as a result of the pullback from COVID-19 related contracts that ran through the first quarter of the prior year.

Current Priority Initiatives

• Leverage the company's stable customer base to acquire new projects in currently unserved business segments.
• Pursue new customer acquisition across all business lines to build long-term recurring revenue.
• Execute on growth strategies to deliver concrete, measurable contributions to company performance.

1. Direct Mail Business: Delivered double-digit revenue and profit growth, driven by expanded business with existing clients and new order acquisition. Postage price hikes implemented in October did not impact volumes more than management's initial forecast, with particular strength among e-commerce and financial sector advertising clients. No absolute segment revenue was provided. 2. Logistics Business: Achieved double-digit revenue growth driven by strong e-commerce shipment volumes from existing clients. Segment profit turned positive, as higher revenue and process efficiency gains offset cost increases such as rising labor expenses. No absolute segment revenue was provided. 3. Sales Promotion Business: Despite successful new order acquisition for call center and back-office support services, the business recorded decreased revenue and profit. The pullback from large COVID-19 related contracts in the prior year's April-June quarter could not be offset by new business. No absolute segment revenue was provided. 4. Event Business: Revenue and profit both declined. Even with focused efforts on sales promotion, sports event operations and security services, the business could not offset the pullback from prior year COVID-19 vaccine inoculation site management contracts. No absolute segment revenue was provided. Revenue contribution percentages for individual segments were not disclosed in the transcript.

• Management upwardly revised the full-year FY2025 March term guidance on October 24, 2024, setting full-year revenue at 26.977 billion yen and full-year operating profit at 1.105 billion yen.
• As of the third quarter, the company has reached 74% of its full-year revenue target and 71% of its full-year operating profit target, meeting its progress expectations.
• Management expects to capture growing sales promotion demand from clients ahead of the new school year and new fiscal year, as well as rising consumer purchasing motivation, and will continue to drive order acquisition across all business lines to hit full-year targets.

• The post-COVID-19 pullback from large COVID-19 related government contracts that boosted prior year performance remains a headwind for the sales promotion and event business segments, leading to year-over-year profit declines for these segments.
• The October 2024 postage price increase creates downside risk for direct mail volume, though the impact so far has been lower than management's initial forecast.
• Rising labor and general operating costs create pressure on segment margins, particularly for the logistics business.

Q: Why did DMS report higher revenue but lower profit in the third quarter? / A: Revenue grew because the core direct mail business performed very well, with expanded access and new order growth from existing e-commerce and financial services clients. The logistics business also contributed to revenue growth through higher e-commerce shipment volumes. The profit decline is entirely driven by the pullback from large COVID-19 related contracts in the sales promotion and event business segments from the prior year's April-June quarter, which cannot be offset by new business yet.

Q: What is the outlook for the direct mail business following the smaller-than-expected impact of the October postage price hike? / A: Management believes clients value direct mail more for its proven effectiveness than they are deterred by higher postage costs. In the current high-inflation environment, it has become harder to drive sales with digital advertising alone, and direct mail is well-positioned as an effective tool to directly drive consumer action. DMS will continue to focus on improving operational efficiency and delivering high value-added proposals to improve clients' return on investment for direct mail campaigns.

Q: Is the logistics business returning to profitability driven by the new automated logistics equipment investment? / A: The new automated equipment installed at the logistics center enables automation and labor reduction for picking, packing, and sorting processes, and has already delivered faster work speeds and lower labor staffing needs. However, full operations only started in December, so the full profit contribution from this investment will come in future periods. The current profit improvement is driven by higher capacity utilization from increased shipment volumes, process workflow revisions, and improved efficiency from worker experience.