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05/20CROOZ : FY03/22 Full Year Financial Results Presentation
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CROOZ : FY0322-2Q_CEO message

11/18/2021 | 02:32am EDT

Q2 FY03/22

Message from Koji Obuchi, President and CEO of CROOZ Group

(November 11, 2021)

I am Koji Obuchi, president and CEO of the CROOZ Group. Earlier today, on November 11, 2021, we announced our financial results for Q2 FY03/22. Now, I would like to share with you my thoughts and impressions to give you a better understanding of the current situation.

First of all, the financial results for this term seem to show a large decrease in sales- more than half year on year-but this is due to the impact of applying the Accounting Standard for Revenue Recognition, which all listed companies that use the Japanese accounting standards are required to adopt. As a result, we are disclosing sales net of purchase costs from FY03/22. This is a change in the method of reporting and has no impact on profit. In the past, I did not specifically mention transaction value because we referred to it as sales. However, it is safe to assume that transaction values disclosed from Q1 FY03/22 onward are equivalent to what we disclosed as sales until FY03/21, so please keep that in mind when making YoY comparisons1.

Turning to overall consolidated group results, 1H FY03/22 transaction value was JPY16,344mn (-7.4% YoY) and consolidated operating profit was JPY537mn (-53.8% YoY). Consolidated transaction value for Q2 FY03/22 was JPY8,002mn (-10.6% YoY), and consolidated operating profit was JPY106mn (-80.3% YoY).

The main reasons for the YoY decrease in consolidated operating profit were lower operating profit in the mainstay SHOPLIST business and development and advance promotion costs for new games at Studio Z.

Next, allow me to explain in detail the business results for each business segment.

First, let me go over the E-commerce business, which consists of the SHOPLIST business as well as e-commerce related businesses such as the undertaking of e- commerce developments and operations which were previously under the Other segment. I will still focus mainly on the SHOPLIST business, as the e-commerce related businesses are still small compared to it. The total transaction value of the SHOPLIST business in 1H FY03/22 was JPY11,608mn (-13.1% YoY), and operating profit was JPY400mn (-61.3% YoY). In Q2 FY03/22, transaction value was JPY5,469mn (-19.4% YoY), and operating profit was JPY34mn (-92.2% YoY). To be frank, these are not the results we were striving for. It has been over a year since I came back to the company in July 2020 as president to focus on rebuilding the SHOPLIST business by reforming the business and organization through the Critical Project Program2 and other measures. By reforming our business

structure, including streamlining logistics costs and advertising promotions, we achieved double-digit growth in sales for the first time in eight quarters in the previous fiscal year and generated operating income of nearly JPY2bn for the year, proving that things were steadily improving. On the other hand, some deep-rooted issues have accumulated over the years, and I feel that it will take some time to resolve them and achieve a full-scale comeback.

I will now talk about the transaction value. The main reasons for the 19.4% YoY decline in transaction value include: 1) the tapering of one-timeCOVID-19 demand, 2) fewer visitors from SEO, and 3) fewer visitors from advertisements, especially via apps, due to a lower purchase rate. As for the decline in the average price of shipments-one of the factors behind the decline in transaction value in Q1 FY03/22-there was an improvement to JPY5,691 (+0.4% YoY) in Q2 FY03/22. This was attributable to implementing appropriate price control measures such as eliminating inefficient sales through more accurate analysis of hot-selling products.

Next, I will explain the drop in the number of visitors. First of all, we have yet to fully recover from the impact of the program bug that occurred in the SEO project in Q1 FY03/22, which caused a decrease in the results we had accumulated to date. Overall, the number of visitors via advertisements is declining, and within that, the impact of the decline in the number of visitors from apps is significant. As a result of this decrease in the number of visitors via SEO and advertising, the transaction value also decreased compared with Q2 FY03/21.

As for the drop in the number of visitors from SEO, we have already fixed the bugs in the program and are on track to recover, but since SEO is evaluated and reflected by external search engines, it generally takes some time before we can see any results. As a result of this, the number of visitors via SEO had dropped to 68% compared to the peak, but it has now recovered to 84%. Initially, we had expected it to return to the previous level in October. However, since it is out of our realm of control, we cannot accurately predict when it will fully recover, but improvement is underway. In addition, to address the drop in the number of visitors via advertisements, we have been eliminating unnecessary advertising promotions since FY03/21 and had successfully streamlined our advertising investment. However, we have not been able to take on measures to boost traffic. Moreover, we are a bit behind in our merchandising measures such as improving the stock-out rate of products that users want to buy, which has resulted in a decline in the purchase rate. This in turn deteriorated the advertising efficiency, and the overall number of visitors via advertising declined. Also, the number of visitors via apps, which have a high purchase rate, is declining. This further is increasing the drop in the purchase rate. In response to this

decrease in the number of visitors from advertisements-particularly via apps-from Q2 FY03/22, as previously reported, we reviewed our existing promotion methods and implemented new measures such as YouTube advertisements, live YouTube streaming through influencer casting, and a point-back campaign only available to buyers via apps. As such, we have invested more aggressively in advertising, but we have yet to achieve the results we initially expected. We will continue to implement the PDCA cycle to put into practice more effective measures for advertising. From Q3 FY03/22, we will resume TV commercials to expand mass recognition and will continue to use YouTube and other social media advertisements, while also implementing campaign measures to increase the inflow of customers from apps. We will further boost our appeal to young people centered on the F1 demographic-which is a strong area for SHOPLIST-to continue attracting new young users, thereby driving visitors to our website not only from advertisements but via apps as well.

Now, I will talk about operating profit. Operating income for Q2 FY03/22 was down YoY to JPY34mn (-92.2% YoY). The main reason for this is a drop in transaction value. First of all, logistics-costs-to-transaction-value rose 0.5% YoY to 15.0% in Q2 FY03/22, owing to fixed costs such as warehouse rent accounting for a larger percentage of the total costs due to the large decrease in the transaction value. Neither our average shipping price nor our cost structure has deteriorated.

In addition, our promotion cost-to-transaction value increased by 1.2% from 10.3% in Q2 FY03/21 to 11.5% in Q2 FY03/22. And, due to a change in the accounting method for point reserves caused by the Accounting Standard for Revenue Recognition that was applied from FY03/22, what used to be recorded as SG&A expenses is now subtracted from sales. Excluding this change, our promotion cost-to-transaction value would have increased by 2.5%. This is partly due to the drop in transaction value, but also because we are actively investing in the aforementioned measures such as YouTube advertising and live streaming through influencer casting. From Q2 FY03/22, we will aggressively invest in measures to restore and further boost transaction value. While this means that the level of promotional expenses will remain high for the time being, we will identify and adopt more efficient advertising and promotional measures while implementing the PDCA cycle to avoid wasteful investments.

Next, our outsourcing costs-to-transaction value came to 2.7% in Q2, up 1.3% from 1.4% in Q2 FY03/21. This was in part attributable to the drop in transaction value, but also because some of our key projects continued to require major system upgrades and new development in Q2, such as for strengthening sales of outlet products. In line with this, our engineering outsourcing costs also increased. Our outsourcing costs-to-transaction value

may remain high from Q3 onward as we will need to newly develop and upgrade systems as we continue to address issues through respective critical projects. This is also, however, a temporary cost increase for future growth, and I expect development work to settle down from Q4 onward.

This concludes my explanation of Q2 results for the SHOPLIST business. As I have already mentioned, we must get transaction value once again trending toward growth, and this is our top priority. We have already been able to improve the decline in the average shipping price that occurred in Q1, but we have yet to recover from the drop in the number of visitors. As I previously stated, we have completed the analysis of the causes and the formulation of countermeasures, and we will recover the business from Q3 onward to put it back on track for growth.

Now I would like to talk about the Games business. We called this segment the Internet Content Business until FY03/21 but decided to rename the segment to better reflect the actual business. Q2 sales came to about JPY592mn (+6.6% YoY), with an operating loss of about JPY215mn (compared with an operating profit of JPY67mn in Q2 FY03/21). Development and advance promotion costs for the recently announced new game SHAMAN KING Funbari Chronicle were JPY290mn in Q2 FY03/22, resulting in a loss for the segment on a non-consolidated basis. Excluding the development and advance promotion costs for this title, the segment produced stable earnings and would have reported an operating profit.

Development is at its final stage and on track for release by the end of this year, but we expect to continue incurring development and promotion costs in Q3. As for the current status, pre-registration has started, and as of November 8, 2021, the number of registered users is over 280,000. And the number of followers of the official Twitter account has steadily increased, surpassing 170,000. We feel that this is promising, given the results of our competitors who showed strong first-month sales and had 100,000―200,000 Twitter followers at the time of game release. We will continue to disclose information such as the game's full release date via press release as necessary.

Next, I will talk about our Online Advertising and Media business. This is a combination of the Advertising Agency and Media businesses, which were separate reportable segments until FY03/21. We decided to combine and manage them as one business segment as both businesses were closely related in many areas.

Q2 transaction value came to about JPY931mn (-12.2% YoY), and operating profit increased significantly to JPY162mn (+43.7% YoY). This was attributed not only to Rank

King-which we have been disclosing results for-but also to the strong performance of other new media and advertising agency businesses, mainly in the financial sector. As the business has only been up and running for about three years, there may be some volatility in performance in the short term. The profit margin is high, however, and the business is expected to grow substantially going forward, so we will continue to focus on boosting results.

In the Investment business, Q2 sales came to about JPY347mn (+457.1% YoY), and operating profit was JPY167mn (compared with an operating loss of JPY30mn in Q2 FY03/21). The main reason for the profit in Q2 was the recording of a gain on the sale of some of our stock holdings. However, as I have explained in the past, it normally takes five to seven years to start seeing results in the Investment business. We may incur upfront costs, including impairment charges and management costs, but the Investment business is still in the early stages, just three years since inception, and there are no particular issues with its progress. Several of the investees are preparing to list on the stock market, and we hope that this will generate substantial profit within a few years. In addition, as disclosed today, based on our policy of focusing on the e-commerce domain as an e- commerce solutions company in the announcement of the full-year results for FY03/21, we have reviewed our strategy for the Investment business and decided to convert a portion of the fund equity managed by our consolidated subsidiary Sevenwoods Investment, Inc to cash. As a result, the company's stake in the fund will decrease and the fund will no longer be a consolidated subsidiary. This means that the Investment business will no longer be a reportable segment. Going forward, it will continue to be a net investment, and the profit and loss resulting from the investment will not affect the company's operating profit and loss. We will allocate the funds obtained from this project to the enhancement of our corporate value by investing in domains most likely to contribute to the growth of the group, including e-commerce.

This concludes my explanation of the results for each segment. In the SHOPLIST business, transaction value continues to decline and it will take some time to improve, but the decrease in the average shipping price has improved and some measures can be implemented to deal with the decline in the number of visitors. Furthermore, the Games business itself is performing well if we exclude the development cost for new games and advertising expenses, and the Online Advertising and Media business is generating profits and remains stable. Overall, on a consolidated group-wide basis, there is no cause for concern.

The SHOPLIST business is now in a position to generate stable profits, but as I have been saying, it is important to reinvest the profits to expand transaction value, and the

This is an excerpt of the original content. To continue reading it, access the original document here.


CROOZ Inc. published this content on 18 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 18 November 2021 07:31:01 UTC.

© Publicnow 2021
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Sales 2021 35 714 M 279 M 279 M
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Koji Obuchi President & Representative Director
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