DMS INC. Q4 FY2025 earnings call

Core Business Overview

• The company has provided end-to-end support for building strong relationships between corporate/public clients and consumers since 1961, with direct mail services as its core business, complemented by logistics, sales promotion, and event services.
• Key competitive advantages include: one-stop integrated service, scale economies from handling over 300 million direct mail pieces annually, and certified management systems for quality and information security, which support its position primarily with large corporate clients.

Capital Cost and ROE Targets

• After engaging in dialogue with investors, management now recognizes an 8% cost of equity, down from the prior CAPM-based estimate. The 5-year average ROE is 8.5%, but current ROE stands at 5% amid a challenging operating environment.
• Management has set a target to restore ROE to 8%+ above the cost of equity to overcome long-term PBR below 1.0.

Strategic Business Portfolio Optimization

• Next-generation business creation: The company is developing new services in the data and AI field, aligned with growing client demand for big data utilization and AI analysis capabilities. It has already launched initial services including AI ad copy checking and customer data analysis, and entered a capital and business alliance with GROWTHVERSE to develop cloud AI marketing data systems to boost added value for existing core direct mail business, with M&A also under consideration.
• Building second and third core business pillars: Management aims to scale the logistics, sales promotion, and event segments into new core pillars through volume growth and efficiency gains, leveraging opportunities from expanding e-commerce, diversified local government resident services, and widespread labor shortages. The company recently won a contract to operate Higashikurume City's Family Attendant child-rearing support project, combining its BPO, logistics, and event capabilities for an integrated offering.
• Deepening core direct mail business: Amid growing demand for higher cost-effectiveness of direct mail (even with headwinds from postage rate increases) and declining effectiveness of online-only advertising, management is expanding use cases for direct mail through partnerships. A current collaboration with a big data company enables privacy-compliant direct mail outreach to new target customers, expanding the addressable market for the business.

Capital Allocation and Shareholder Returns

• Management updated its capital allocation policy to prioritize growth investment and shareholder returns more heavily than in prior periods. After holding 5 billion yen in working capital (equal to roughly 2 months of revenue), the remaining capital from existing 9.1 billion yen in cash plus operating cash flow will be split between growth investment and shareholder returns, with an increased allocation to both compared to the 2022-2024 March period.
• A new 8% target DOE (Dividend on Equity) was introduced as the core shareholder return metric, effective starting from the 2025 March full year end dividend. The company also completed a 421 million yen share repurchase in the 2025 March period, and will consider additional repurchases based on progress with growth investment.

Consolidated total revenue for the 2025 March full year was 27.555 billion yen, up 2.4% year-over-year. Operating profit was 1.19 billion yen, down 13.1% YoY, and net profit was 841 million yen, down 44.6% YoY, which beat the management's previously upward-revised full-year guidance. Performance by segment:

1. ダイレクトメール (Direct Mail) segment: Achieved both revenue and profit growth, driven by expanded transaction windows at existing clients, new order gains, and increased volume from mail order and financial sector advertisers. It is the company's core, highest contribution segment.
2. Logistics segment: Achieved both revenue and profit growth. Revenue grew on the back of sustained strong e-commerce outbound shipping demand, and profit grew due to efficiency gains from investments in modern logistics infrastructure.
3. Sales Promotion segment: Experienced both revenue and profit decline. Despite focused efforts on support services for corporate and local government clients, the segment saw a negative pullback from large COVID-19 related secretariat operation contracts in the prior year's April-June quarter.
4. Event segment: Experienced both revenue and profit decline. While the company focused on sales promotion and sports event operation/security services, there was a large negative pullback from COVID-19 vaccine inoculation site operation contracts in the prior year's April-June quarter.

• For the 2026 March full year, management guides consolidated revenue of 27.7 billion yen (small YoY increase), operating profit of 1.2 billion yen (small YoY increase), and net profit of 850 million yen. For the first half, management guides revenue of 12.5 billion yen, operating profit of 370 million yen, and net profit of 265 million yen, with first half profit expected to decline YoY.
• The guidance assumes sustained stable demand for direct mail from mid-sized and large clients amid a soft overall market, continued growing shipment volume in logistics driven by expanding e-commerce, new contract opportunities for sales promotion from local government child-rearing support and revised family registration law related work, and new order opportunities for events from large sporting events and manufacturer trade shows.
• Management expects higher selling, general and administrative expenses driven by increased personnel costs and IT infrastructure investments (PCs, cloud services) in the first half, but forecasts that revenue growth and margin improvements from increased orders and operational efficiency in the second half will offset the first half decline to deliver full-year slight revenue and profit growth.

• The overall direct mail market is in a softening trend, and postage rate increases present a headwind to segment profitability.
• The current 5% ROE is below the recognized 8% cost of equity, and the company has a long-standing issue of trading below book value (PBR < 1.0), which requires significant strategic and operational changes to resolve.
• Increasing personnel and IT infrastructure costs are expected to pressure near-term profitability.

Q: What is the reasoning behind the company's strengthened shareholder return policy?

A: Management implemented the new DOE-based policy and expanded share repurchases as part of its broader push to align management with capital cost and shareholder value expectations. The change follows direct dialogue with investors that revealed a gap between prior management capital cost assumptions and investor expectations, and the new policy is designed to help close the long-standing PBR below 1.0 gap by improving ROE through reduced equity on the balance sheet.

Q: What is the strategic priority and outlook for the company's growth investment?

A: The primary focus of growth investment is on expanding added value in existing businesses and developing new high-synergy growth areas. Key investment areas include automation and labor-saving infrastructure for existing operations to boost productivity, digital and IT transformation, and strategic investments including capital alliances and M&A in the high-potential data and AI sector, which complements the company's existing core marketing and direct mail capabilities.

Q: What is management's approach to financial leverage going forward?

A: The company will maintain a balanced approach to leverage that supports its updated capital allocation priorities. After holding required working capital for operations, management will deploy excess cash to both growth investment and shareholder returns, avoiding excessive leverage while making more effective use of the company's existing strong cash balance to improve ROE and deliver value to shareholders.