Cross Marketing : FY2024 2Q Analyst Report (Strategy Advisors)

Cross Marketing Group | 3675 (TSE Prime)

Company Report

March 1, 2024

Strategy Advisors, Inc. Takao Kanai

Significant Recovery in Digital Marketing in Q2 of FY6/2024. Returning to Growth in FY6/2025

In H1 FY6/2024 results (disclosed on February 13, 2012), sales declined 3.7% YoY and operating income fell 29.9% YoY, reflecting deteriorating profitability in Q1; but in Q2 alone, net sales were flat YoY and operating income rose 15.7% YoY, indicating a profit recovery. While Digital Marketing recovered strongly, Data Marketing was sluggish. The company lowered its full-year FY6/2024 forecast for sales from 30.0 billion to 26.0 billion and for operating profit from 3.0 billion to 1.9 billion.

The recovery in Digital Marketing was led by Media/Promotion, with Q2 sales in this business reaching ¥2.1 billion, up 35.7% YoY. Unit sales price rose 53% YoY. Sales promotion and advertising expenses of consumer goods manufacturers and telecommunication companies appear to be recovering.

In Data Marketing, while domestic research is strong, overseas demand, especially in developed countries, is declining significantly. In particular, demand from global companies in North America appears to have fallen sharply, partly as a reaction to strong demand through 2022. Although the market is expected to recover from the bottom of the cycle, a certain degree of uncertainty remains regarding the speed of recovery.

The company has pushed back by one year the timing of achieving the earnings targets in its medium-term management plan (30 billion in sales and 3 billion in OP) which had previously been set for FY6/2024. By integrating subsidiaries to establish core subsidiaries in each field, the company is now well-positioned to strengthen its digital marketing capabilities. If the overseas research business can recover, it will give momentum to earnings growth in FY6/2025.

Stock Price and Volume

(¥)			(thou shares)
900	Trading Volume (RHS)	Stock Price (LHS)	800
850			700
800			600
750			500
700			400
650			300
600			200
550			100
500			0

Source: Strategy Advisors

Key Indicators

	Stock Price (24/2/29)	568
	52-Week High (23/7/4)	861
	52-Week Low (23/12/12)	529
	Number of Shares Issued (mn)	19.3
	Market Capitalization ( bn)	11.0
	EV ( bn)	8.5
	Capital Adequacy Ratio (Actual, %)	44.6
	6/2024 PER (CoE, Multiple)	10.9
	6/2024 Q2 PBR (Actual, Multiple)	1.7
	6/2024 Dividend Yield (Yield, %)	2.3
	Source: Strategy Advisors

Japanese GAAP - Consolidated

FY End	Sales	YoY	OP	YoY	RP	YoY	NP	YoY	EPS	DPS
	(¥ mn)	(%)	(¥ mn)	(%)	(¥ mn)	(%)	(¥ mn)	(%)	()	()
Q1 6/2024	5,629	-7.8	-17	NM	-57	NM	-135	NM	-7.1	-
Q2 6/2024	6,885	-0.2	949	15.7	937	27.3	712	62.9	37.2	-
H1 6/2023	12,999	5.7	1,330	-22.2	1,271	-23.5	764	-31.2	38.6	6.0
H1 6/2024	12,514	-3.7	932	-29.9	880	-30.7	577	-24.6	30.1	6.5
FY6/2021	10,758	NA	1,007	NA	1,048	NA	540	NA	27.5	4.0
FY6/2022	24,899	NA	2,522	NA	2,498	NA	1,559	NA	79.1	9.6
FY6/2023	25,094	0.8	1,951	-22.6	1,880	-24.8	1,007	-35.4	51.0	12.0
FY6/2024 CoE (New)	26,000	3.6	1,900	-2.6	1,800	-4.2	1,000	-0.7	52.0	13.0
FY6/2024 CoE (Old)	30,000	19.5	3,000	53.8	2,900	54.3	1,800	78.7	90.1	13.0

Note: Due to a change in the fiscal year end, the fiscal year ended June 30, 2021 (a six-month period). So year- on-year comparisons for the fiscal years ended June 30, 2021 and June 30, 2022 are not available.

Source: Strategy Advisors - Based on Company Data.

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Cross Marketing Group | 3675 (TSE Prime)

Table of Contents
1. Recovery Begins in Q2 after a Sluggish Q1 in 1H FY6/2024	3
2.	Reorganization of Digital Marketing Subsidiaries	6
3.	Outlook for the Full Year Ending June 30, 2024 & The Full-Year Ending June 30, 2025	7
4. Stock Price Trends	9

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Cross Marketing Group | 3675 (TSE Prime)

Q2: Significant Recovery in

Digital Marketing. However,

Sluggish in Data Marketing

1. Recovery Begins in Q2 After a Sluggish Q1 in 1H FY6/2024

Cross Marketing Group (CMG) posted a 3.7% YoY decline in sales to 12.51 billion and a 29.9% YoY decline in operating profit to 930 million in 1H FY6/2024. However, a look at Q2 (3 months) shows that while sales declined 0.2% YoY, operating profit increased 15.7% YoY, indicating a turnaround. However, each business segment was mixed, with Digital Marketing, which focuses on media and promotions, posting a significant 23.3% YoY increase in Q2 sales; while Data Marketing, which focuses on online research, continued to decline sharply, falling 24.7% YoY.

Figure 1 . CMG's H1 Results Summary for FY6/2024

( mn)	Q2 6/2024	YoY	QoQ	H1 6/2024	YoY	FY6/2024
						CoE
						(New)	(Old)
Sales	6,885	-0.2%	22.3%	12,514	-3.7%	26,000	30,000
Digital Marketing	2,905	23.3%	31.9%	5,108	11.0%	11,000	12,000
Data Marketing	2,074	-24.7%	6.0%	4,030	-20.2%	8,500	11,000
Insight	1,906	6.8%	29.7%	3,376	0.8%	6,500	7,000
Operating Income	949	15.7%	returning	932	-29.9%	1,900	3,000
			to profit
Digital Marketing	294	60.7%	NM	295	1.7%	-	-
Data Marketing	742	-11.2%	163.1%	1,024	-28.2%	-	-
Insight	359	16.6%	252.0%	461	-21.6%	-	-
Adjustment	-446	NM	NM	-847	NM	-	-
Recurring Profit	937	27.3%	NM	880	-30.7%	1,800	2,900
Net Proft	712	62.9%	NM	577	-24.6%	1,000	1,800

Source: Strategy Advisors - Based on Company Data

Average Unit Price for Media Promotions in Q2 Increased 53% YoY

User Industry Promotional and Advertising Spending is Recovering

Within Digital Marketing, the Media/Promotion business has been the driver of earnings recovery. As shown in Figure 2, after falling in Q2 and Q3 of FY6/2023, unit sales in this business began to recover, rising 53% YoY in Q2, reflecting the contribution of TOKYO GETS (which conducts promotions using entertainment content), which became a consolidated subsidiary from FY6/2024 due to M&A activity. Sales of IT Solutions declined slightly in Q2, but this is estimated to have been due to the impact of taking orders while watching profitability amid limited engineer capacity and profits are estimated to have been firm. As a result, Q2 sales for Digital Marketing reached a record high of 2.91 billion.

Consumer goods manufacturers, the company's main users, were forced to raise product prices and take other action in response to rising raw material prices and labor shortages caused by inflation and the weak yen. In addition,

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Cross Marketing Group | 3675 (TSE Prime)

many of these companies temporarily curbed their advertising and sales promotion costs due to the uncertain future outlook. However, now that the external environment has calmed down and the price hikes and other measures have been put to rest, users appear to be increasing their sales promotion activities once again. Figure 3 shows the trends in sales promotion and advertising expenses for the three manufacturers of daily necessities and cosmetics, which discloses the breakdown of their SG&A expenses on a quarterly basis.

Figure 2: Unit Price of Media Promotions (YoY Change)

60%
50%
40%
30%
20%
10%
0%
-10%	Q1 6/2023	Q2 6/2023	Q3 6/2023	Q4 6/2023	Q1 6/2024	Q2 6/2024
-20%
-30%

Source: Strategy Advisors - Based on Company Data

Figure 3: Advertising and Sales Promotion Expenditures of Daily

Necessities and Cosmetics Manufacturers

(¥ bn)
100.0				25%
80.0				20%
			15%
60.0				10%
				5%
40.0				0%
20.0				-5%
			-10%
0.0				-15%
Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023
Kao	Unicharm	KOSE	Total YoY(RHS)	(CY)

Source: Strategy Advisors - Based on Company Data

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Cross Marketing Group | 3675 (TSE Prime)

Data Marketing is Tough in the USA and Other Developed Countries

Domestic Research Steady

On the other hand, the two segments responsible for research, Data Marketing and Insight, have seen robust domestic demand, whilst overseas demand has been severely challenging, resulting in segment sales and operating income stagnating. The decline in Data Marketing is particularly large, as mentioned above. The main reason is the sluggishness of overseas subsidiaries, with the decline seen particularly in developed countries such as the US. Insight is also expected to be sluggish in the U.K. and other developed countries. In the first half of the current fiscal year, total overseas sales of the two segments fell 39% YoY to 1.86 billion, and in Q2 alone, they were down 51% YoY.

On the other hand, total sales of the two domestic market segments were solid, growing 4% YoY in 1H and 9% YoY in Q2 alone. As with Digital Marketing, demand for research was affected by a slowdown in new product development by users from the second half of FY6/2023; but it has been resilient due to its relatively insensitive nature to economic fluctuations. Going forward, a gradual recovery in demand associated with new product development is expected.

Figure 4: Domestic and Overseas Sales Trends in the Research Business

(¥ mn)
5,000	80.0%
4,500	60.0%
4,000
3,500	40.0%
3,000	20.0%
2,500
0.0%
2,000
1,500	-20.0%
1,000	-40.0%
500
0	-60.0%

			Overseas Sales (LHS)				Domestic Sales (LHS)
			Overseas Sales YoY (RHS)				Domestic Sales YoY (RHS)

Note: Research business is the sum of Data Marketing and Insight

Source: Strategy Advisors - Based on Company Data

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Cross Marketing Group | 3675 (TSE Prime)

Figure 5: Net Sales and Operating Income by Segment, by Quarter

	6/2023				6/2024
	Q1	Q2	Q3	Q4	Q1	Q2
Sales
Digital Marketing	2,243	2,357	2,245	2,192	2,203	2,905
YoY	-3.1%	-14.4%	-17.1%	-5.0%	-1.8%.	23.3%
Media Promotion	1,460	1,540	1,440	1,390	1,500	2,090
YoY	-0.7%	-17.2%	-25.8	-13.1%	2.7%	35.7%
IT Solutions	780	820	810	800	710	810
YoY	-8.2	-6.8	3.8%	17.6%	-9.0	-1.2%.
Data Marketing	2,291	2,756	2,837	1,870	1,955	2,074
YoY	31.4%	13.5%	19.3%	3.1%	-14.7%	-24.7%
Insight	1,566	1,784	1,570	1,382	1,470	1,906
YoY	21.7%	0.6%	-7.0%	-18.7%	-6.1%	6.8%
Total Amount	6,101	6,897	6,652	5,444	5,628	6,885
YoY	14.1%	-0.8%	-1.9%.	-6.5%.	-7.8%	-0.2%
OP
Digital Marketing	107	183	156	26	0	294
YoY	NM	-49.2%,	-36.6	NM	NM	60.7%
Data Marketing	591	835	895	224	281	742
YoY	11.7%	-5.4%	8.0%	-3.0%	-52.5%	-11.2%
Insight	280	307	266	57	101	359
YoY	30.2%	-21.1%	-27.7%	-80.7%	-63.9%	16.6%
Adjustment	-468	-507	-472	-529	-401	-446
Total Amount	510	819	843	-222	-17	949
YoY	5.2%	-33.1	-17.5	NM	NM	15.7%

Source: Strategy Advisors - Based on Company Data

Progress in Cost Reduction The company has been working to reduce costs amid a difficult earnings environment in the first half of the year. Through reduction of outsourcing costs and conducting cost cutting, SG&A expenses were reduced by .9 billion YoY. The company's cost reductions amid cost pressures due to inflation are commendable.

Aiming for Synergies Such as Cross-Selling Through Reorganization of Subsidiaries

Excrie Established as the Core of Media/Promotion

2. Reorganization of Digital Marketing Subsidiaries

CMG started out in research and digital marketing expansion remains core to its growth strategy. It has grown its business by establishing its own subsidiaries and aggressively conducting M&A and it has taken time to integrate the new businesses into the group and create synergies. CMG is currently integrating subsidiaries and sales and promoting cross-selling. This has enabled the company to improve its management efficiency and at the same time to expand its scale and integrate its client lists, thereby creating a structure that will enable the company to win orders for large-scale projects.

In January 2024, Do House, which operates media such as Moratame and Tentame and D&M, which conducts online advertising and other promotional

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Cross Marketing Group | 3675 (TSE Prime)

M&A and Restructuring Will Continue

activities, merged to form Excrie. The company name Excrie is derived from "Experience Creation" and claims to be a "social and promotional partner that maximizes experience value". Excrie is not just an agency business but also intends to provide services that enhance the value of the user experience by leveraging the strengths of its own products within the group; including its own media such as Moratame, influencer marketing company REECH, and entertainment licensing company Tokyo Gets. The company intends to provide services that enhance the value of the user experience.

In January 2024, Fittio, which had been mainly engaged in the temporary engineer staffing function, will change its name to AlternaEX, aiming to comprehensively develop temporary staffing, placement and outsourcing services in the IT field. The company aims to develop a comprehensive range of services, including temporary staffing, placement and outsourcing in the IT field.

While the company plans to continue its M&A program and subsequent restructuring, the birth of Excrie in particular is a major step forward and it can be said that a structure is now in place to achieve growth in Digital Marketing by mobilizing a wide range of CMG resources.

Downward Revision of Full- Year Forecasts for FY6/2024 Mainly Due to Delay in Demand Recovery and Sluggish Overseas Research

Recovery Trend in Q2 to Continue in H2

3. Outlook for the Full Years Ending June 30, 2024 and June 30, 2025

The company's full-year forecasts for FY6/2024 were revised downward, from 30.0 billion to 26.0 billion for sales and from 3.0 billion to 1.9 billion for operating income. The main reasons for the downward revision are estimated to be the generally delayed recovery in Q1 compared to the initial forecast and the significant deterioration in earnings from overseas research. By segment, the sales forecast for Data Marketing was revised sharply downward from 11.0 billion yen at the beginning of the period to 8.5 billion yen, mainly due to sluggish sales overseas. The forecast is also down 13% YoY. The downward revision for Digital Marketing and Insight was smaller, with Digital Marketing sales forecast to increase 22% YoY. Regarding shareholder returns, despite the downward revision to the earnings forecast, the company did not change its plan to pay a dividend of 13, as forecast at the beginning of the fiscal year. The payout ratio will be 25% relative to the company's EPS forecast.

In the second half of FY6/2024, Digital Marketing will continue to recover. As earnings of user industries, such as consumer goods manufacturers and telecommunications companies, are recovering with sales promotion and advertising expenses are expected to increase. Sales of this division bottomed out in Q3 FY6/2023 and are expected to grow strongly YoY in Q3 FY6/2024. Even if it takes some time for overseas research, which has been sluggish recently, to fully recover, we do not expect a further downturn. Since Q2 and Q3 are the seasonal demand periods and Q4 is the non-demand period, Q3

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Cross Marketing Group | 3675 (TSE Prime)

Achievement of Mid-Term

Management Plan Goals

Pushed Back One-Year

Sales Achievement is in Sight. Expanding Digital Marketing Profits is the Key to Achieving Operating Income

trends will be the key to whether the company can achieve its new forecast or not.

The company has now announced that it will push back by one year the target of its medium-term management plan, which is set to end in FY6/2024, with the aim of achieving the plan in FY6/2025. The delay in the plan is due to factors that will worsen the business environment from the second half of 2022, including a lapse in demand for nest eggs after the COVID-19 disaster and the negative impact of inflation on demand industries, particularly consumer goods manufacturers. On the other hand, the company has made steady progress in M&A, mainly in Digital Marketing and in strengthening its structure through the above-mentioned subsidiary reorganization, etc. Details of the FY6/2025 forecast will be announced at the time of the FY6/2024 results announcement. At this briefing, it was explained that the company currently expects an 18% increase in Digital Marketing sales, a 6% increase in Data Marketing sales and an 8% increase in Insight sales compared to the FY6/2024 forecast.

Digital Marketing is expected to benefit from a recovery in demand and synergies from the launch of Excrie. In Data Marketing and Insight, there is a certain amount of uncertainty about the recovery of overseas markets; but the recovery trend is expected to continue, especially in Japan. Given these factors, the company is on track to achieve sales of 30 billion yen. On the other hand, the operating profit margin is expected to reach 10% in the medium-term management plan, but there will be certain hurdles to overcome. It should be possible to return to the operating profit levels of FY6/2022 and FY6/2023 when Data Marketing and Insight performed well. In addition, operating profit from Digital Marketing should reach a new record high.

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Cross Marketing Group | 3675 (TSE Prime)

Figure 6: Performance Trends

(Yen mn)

35,000	14.0%
30,000	12.0%
25,000	10.0%
20,000	8.0%
15,000	6.0%
10,000	4.0%
5,000	2.0%
0	0.0%

Sales (LHS)		OP (LHS)		OP Margin (RHS)

Note: Annualized for fiscal year ended June 30, 2021 due to a change in fiscal year end to a 6-month accounting period.

Source: Strategy Advisors- Based on Company Data

Stock Prices Recovered

Moderately After the Decline

Following the Q1 Earnings

Announcement

4. Stock Price Trends

The share price of the company has been slowly recovering after falling sharply after the announcement of Q1 results, moving back and forth. The Q2 earnings announcement was met with somewhat rough price action immediately after the announcement, perhaps due to the market's divided assessment of the results, accompanied by varied trading volumes. We assume that the situation was a mixture of positive factors such as earnings recovery from Q1 to Q2 and negative factors such as the downward revision of the full-year company forecast. However, the downward revision of the full- year forecast was probably factored in at the time of the Q1 results and as a result, the price did not move significantly.

If There is More Certainty in Earnings Recovery, There is a Strong Possibility that the Stock Price Will Also Turn to a Recovery Trend

While the stock market as a whole is booming, with the Nikkei Stock Average hitting an all-time high; especially for large-cap stocks, growth stocks are generally slow to rise. However, the market is expected to broaden its upward trend in the future and there are increasing expectations that the share prices of small and mid-cap growth stocks will rise for those companies that are performing well. While CMG has been able to secure solid earnings as a whole, its company specific factors such as sluggish overseas research have resulted in slow stock price movement so far. However, as the company's performance shows a clear recovery trend, the share price is likely to turn around.

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Cross Marketing Group | 3675 (TSE Prime)

The company's P/E ratio is 11.1x, second lowest after Macromill (3978 TSE Prime) and its P/B ratio is also second lowest after Macromill. If the company can achieve the targets of its medium-term management plan for FY6/2025, the PER will decline to 6-7x and the sense of undervaluation will become stronger.

Figure 7: Comparison of Stock Prices with Peer Companies

(Beginning of 2023 = 100)

250.0

200.0

150.0

100.0

50.0

0.0

		CMG		Intage HD		Macromill
		Members		Orchestra Holdings		Macbee Planet
		PLAID
Source: Strategy Advisors

Figure 8: Profitability: Comparison to Peers

	Code	FY	Sales	OP	OPM	ROE	ROIC	Net Worth
Company Name								Ratio
			( mn)	( mn)	(%)	(%)	(%)	(%)
CMG	3675	6/2023	25,094	1,950	7.8	17.1	24.2	41.9
Intage HD	4326	6/2023	61,387	3,785	6.2	11.4	18.1	69.3
Macromill	3978	6/2023	40,616	4,498	11.1	5.1	5.9	40.0
Members	2130	3/2023	17,662	1,441	8.2	16.5	30.7	56.3
Orchestra HD	6533	12/2023	10,377	1,350	13.0	8.9	8.9	43.1
Macbee Planet	7095	4/2023	19,589	2,162	11.0	29.0	72.8	46.2
PLAID	4165	9/2023	8,633	-881	-10.2	-63.5	-49.6	41.7

Source: Strategy Advisors - Based on Company Data

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