We have documented the briefing session for the financial results in the fiscal year ended on December 31, 2019, held on February 17, 2020.
Miki Igarashi, President, CEO and Representative Director of Cross Marketing Group, Inc.

Briefing on earnings in the fiscal year ended on December 31, 2019

Miki Igarashi: Hello, everyone. My name is Miki Igarashi, and I am the representative director of Cross Marketing Group, Inc. Thank you for making the time for our briefing today. I would like to focus on five areas in my overall explanation of the results in the fiscal period ended in December 2019. First I will provide an overview of the consolidated financial results. Second, I will give a detailed explanation of the business segments, and third I will explain what we have worked on during the past five years. Fourth, I will lay out our forecasts for the next fiscal year, and finally I will discuss dividends.

The FY2019 Ending Executive Summary①

I will start by providing an overview of our consolidated earnings results, beginning with a summary of financial results in the fiscal year ended in December 2019. Overall, revenue in domestic businesses increased 11% over the previous year, with each business expanding steadily and contributing to growth. Please refer to the year-on-year change in revenue by segment for the key characteristics. Growth was also solid in the digital marketing segment, a new business area. Revenue rose 29.2% over the previous year in the IT solutions business, which is built around Cross Communications, achieving growth of about 30%. Revenue was up 6.1% over the previous year in the Domestic Research segment, which includes the key Cross Marketing and Medilead, Inc., which carries out medical research. Last year business, including the global economic environment, was extremely unstable, but in this fiscal year, the domestic business made major contributions to earnings and we have steady and solid growth.

The FY2019 Ending Executive Summary②

Now I want to discuss a major topic. The posting of revenue was delayed due to a major project in the Overseas Research business from the first to third quarters, but we were able to post 580 million yen in revenue in the fourth quarter so that ultimately, this segment made major contributions to earnings. We achieved our targets for operating profit and ordinary profit in fiscal 2019. As I will explain in more detail later, we did not reach the revenue forecast that we had disclosed, but we did achieve a good balance in 2019 by backing out of the areas we couldn’t improve and improving the areas we could, including strengthening our foundation, and making gains in areas that we were able to go after. This resulted in improved profits. Ultimately, we have achieved higher revenue for 16 straight years since we were founded. Although our operating environment still presents problems and issues, revenue increased 6.2% over the previous year to 18.5 billion yen.

FY2019 Full Year Consolidated Financial Results

I will now explain the figures in our financial results for the fiscal year ended in December 2019. As I said earlier, revenue rose 6.2% over the previous year to 18.5 billion yen. This was 92.9% of our earnings forecast. Last year we decided to revamp our foundation, so we pulled out of some offices, which resulted in heavy impairment losses. We then focused on controlling expenses, gross profit while steadily generating operating profit and ordinary profit. As a result, operating profit rose 32.9% over the previous year, nearly in line with our earnings forecast. Ordinary profit was also up 36.7% over the previous year, so we cleared the earnings forecasts that we previously disclosed for operating profit and ordinary profit. Net income was a 477 million yen loss due to 1,086 million yen for goodwill and fixed asset impairment losses.

FY2019 Change on Operating Profit(YoY)

A comparison of operating profit in the previous year shows discrepancies in operating profit that tell us how profit was generated and where funds were used. In the Research business, gross profit increased due to higher sales in Japan and overseas, resulting in a 491 million yen increase. In the IT solutions segment, operating profit rose 30% over the previous year. Partly due to the consolidation of a new company, gross profit rose by 205 million yen over the previous year. We even saw steady growth in new business and the digital marketing business, centered on D&M, and recorded a 41 million yen increase in operating profit here. Expenses were up 264 million yen due to an increase in personnel and higher personnel costs resulting from the consolidation of a new company. In addition, general administrative expenses increased, resulting in a 187 million yen increase in other expenses. Absorbing this, operating profit rose 312 million yen over the previous year to 1,267 million yen, reaching the forecast.

Business Status by Segment【 Research】

Moving on to conditions by business segment, we would like to discuss the Research business, our mainstay business. In the fourth quarter, performance was solid both in Japan and overseas. In particular, Cross Marketing, the main focus of the Research business, revenue rose 7.9% over the previous year, achieving relatively firm growth. Medilead’s revenue increased 33% year-on-year. The business is focusing on healthcare-related research, and growing steadily while benefiting from the market. In addition, as we noted earlier, we were able to post 580 million yen in revenue for a major overseas project in the fourth quarter, and so we achieved stronger growth than in the same quarter in the previous year.

Business Status by Segment【 IT solution】

The IT Solutions business consists primarily of Cross Communication and the development of smartphone applications, and runs temporary staffing and a BPO center. Revenue rose 29.2% over the previous year, in part due to ongoing extremely strong needs for the development of digital marketing in the market overall. Segment profit fell about 6.2%, partly due to goodwill from Supotant (now Fittio Inc.), which was consolidated last year, but we succeeded in increasing revenue significantly this fiscal year, including upfront investment. Orders were strong, including repeat orders from existing customers and new orders. Revenue from Supotant, a major issue last year, was about 500 million yen, but we began consolidating this business segment. Cross J Tech and Supotant were merged to more aggressively make it a clear growth driver, including the human resources market in the digital field, temporary staffing, and BPO. We started the business under the new brand “Fittio” from autumn 2019.

Business Status by Segment【 Others】

In the other business’s digital marketing field, in which D&M takes the lead, progress was made in acquiring customers and revenue rose 13.1% over the previous year, while segment profit increased 80.3%. Throughout the previous year, the panel affiliation and data marketing fields utilized the resources of the entire Group. New products for the data marketing field were developed from research to the advertising field, and added value has been increased. Growth in profit, more so than growth in revenue, has been able to steadily lock in segment profit. We actively acquired advertising projects, primarily through advertising agencies, in this fiscal year as well. We acquired over 150 new client companies, which is an approximately 40% increase. Aggressive business expansion has made this a field achieving steady growth.

Change of Rate on Revenue by Segment (2014→2019)

Now I will discuss changes in the percentage of revenue by business segment. These figures show how the business segments’ shares of revenue has changed in the five years from 2014 to 2019. The Cross Marketing Group overall was originally a company specializing in domestic research, but five years ago the Overseas Research business and IT Solutions business began expanding into new business fields in various ways. As a result, the Domestic Research business had a 75% share of overall revenue five years ago, at 6.1 billion yen, but five years later its share had dropped to 55% with revenue of 10.1 billion yen, which represents growth of 4 billion yen while its share of overall revenue declined. The share of revenue for the new business areas that were launched five years ago, including overseas IT solutions and data marketing, also rose from 25%, at 2.1 billion yen, to 45% and 8.4 billion yen. As the Group as a whole expands its scope, our business structure is changing even as we work to stabilize the foundation.

Focus Areas from 2015 to 2019

I will look back on developments through 2019, including these, and discuss the areas we will focus on in 2020 in greater detail now. By expanding the scope of our business into a wider range of fields, starting from the Research business, we have created room for growth in our business. As our main issue, in the Overseas Research business, we are actively opening offices by expanding the countries in which we deploy our portfolio in the Asian market, our focus in developing new offices overseas. In the Medilead area, we have expanded our service area with consulting services and data science, rather than just staying in the narrow field of healthcare research. We are enhancing the more advanced consultation and solution capacities while increasing these kinds of high added-value services. As a result, we can grow the profit we capture by more than revenue growth and offer services with high added-value, so we have expanded a wide range of services and enhanced our line of services. The human resource field is facing a serious shortage of human resources in the overall labor market. Due to this problem, active use of automation and the outsourcing of work and operations in outlying areas, as well as cities, has become a major trend. Even in the Web marketing field, the customer side is seeking help with operations, so we have to figure out how to get personnel for these operations, either by hiring them ourselves or contracting line operations externally with a BPO for the entire process. One of our assets is Cross J Tech, a company in the human resources field that provides engineering staff. Supotant also provides temporary staff and human resource referrals, among other services for EC site operations, but we changed the brand to Fitto to clarify its role as a company providing comprehensive digital human resources so that it can grow more aggressively. In Hakodate, we have a BPO office with 120 personnel. At the same time, we are eliminating constraints on personnel supplies in the metropolitan area by including processes further downstream and cutting costs. In the value chain in the IT field, by undertaking operations as well as the manufacturing process, we can actively move to the next development in the supply chain, and aggressively expand the scope of the solutions we provide to customers. D&M, which provides digital marketing, is not simply an agency for Web advertising, but has a network of about 10 million people representing panel assets for the Cross Marketing Group overall. By utilizing the resulting analytics and analysis for promotional products, we are actively expanding the data analytics business. This is being utilized to offer an ancillary service that determines how advertising conversion can be rationally increased, while selling advertising promotional products. We have made good progress in providing relatively high value-added advertising products and analytics services, making this an area in which the overall Group’s assets can be allocated to the advertising business. We will gradually grow the portfolios of new business areas other than research with initiatives such as these.

Contribution of Initiatives to Revenue since 2015

So how have these initiatives translated into actual numbers? The Domestic Research business was our main business, but this has been expanded into new business areas. In 2015, this business area brought in a total of 323 million yen. Five years later, in 2019, this had reached 3,748 million yen, and the average growth rate is 85%. In this fiscal year, revenue nearly reached 5 billion yen, showing that new businesses are steadily growing into new areas. Various measures are sustaining high revenue growth in the Group overall. Recently, the fields that have grown have become foundations and achieved steady growth, contributing to operating profit.

Digital transformation

“Digital transformation” is the keyword for the fiscal year ending in December 2020. The key question is which areas we will focus on while aggressively expanding. Our market includes the database business and data marketing fields—i.e., research. In the world as a whole, thus far the digital areas, including SI, have been separated from the offline and analog areas, but we will completely integrate these areas to carry out a digital transformation in the overall Group. While doing so, we will create the next growth opportunities and take several measures, including measures to lower cost of sales and raise the operating profit margin.

Focused Initiatives in FY2020 and Growth Image

Marketing solutions are the backbone of the services that we provide. In this sense, we are carrying out measures based on the theme of “marketing solutions x digital transformation” in this fiscal year. We will particularly focus on raising the added value of digital marketing in affiliation with the Research segment’s external tools. In addition to the previous digital marketing services, we are making inroads into customers’ operation lines while providing added value through digital tools such as the use and analysis of research data. Moreover, in the medical field, we will focus on “data analysis x AI x medical.” We are beginning initiatives that will enable us to derive a range of ideas from a vast amount of digital data by analyzing data derived from research and linking this to AI. We will also introduce more automation to the Internet research in our mainstay business. We have data from 10,000 surveys a year, as well as data from research projects. By using the assets in our server, we will digitize the overall process for research operations. For example, we are gradually building up an automation process by having planners and researchers more aggressively utilize systems to prepare the human resource surveys and reports. We think that this will be a fiscal year in which we introduce such systems, including reductions to internal cost of sales and a higher speed of action. In the human resources, BPO, and BPR fields, while a range of operations will be systematized and digitized, even as we face labor shortages, there are still areas in which humans are essential. We will create a foundation from which we can make comprehensive proposals, including acquiring more efficient operations, so that we can strengthen these fields.

Initiatives and Results of Each Segment

In the digital marketing field, we are strengthening data tie-ups with SaaS-type companies that provide a range of digital marketing services, rather than holding research data on their own. XICA Co., Ltd. and the Group have developed marketing mix model (MMM) tools through a business affiliation. This is used in managing advertising allocation, but we will also actively provide research data to XICA, the SaaS provider with the largest share in Japan. Through this affiliation, we will sell and collaborate through Cross Marketing and D&M, and more aggressively provide services.

Initiatives and Results of Each Segment

As I mentioned earlier, Fittio is our IT solutions business. Digital human resources must undertake operations to some extent in this digital transformation, and by actively expanding this specialized HR field, we will provide comprehensive proposals for the part that is automated and the part that is carried out by people.

Forecast for FY2020 executive summary

In the fiscal year ending in December 2020, we forecast 19,570 million yen in revenue, up 5.3% over the previous year. The Domestic Research business remains solid, and as we expect growth on many fronts, we forecast 6% growth over the previous year. The Overseas Research business posted goodwill impairment losses in the previous year, and revenue will decline due to closed offices, so we forecast a minor 3.3% decline in revenue. We expect the IT Solutions field to continue to achieve solid growth with an 8.2% increase over the previous year. In Other business, we expect ongoing favorable growth in the digital marketing field with a 35.1% increase in revenue over the previous year. We also forecast a 7.3% year-on-year increase in operating profit, to 1,360 million yen. The write-down of impaired assets will be entirely complete for overseas goodwill due to special factors, so we expect to be able to gradually post ordinary profit and net profit in the fiscal year ending in December 2020.

Shareholder Return and Dividend Amount

We will increase dividends in the fiscal year ending in December 2020 by 0.2 yen per share, with interim dividends of 3.1 yen per share and year-end dividends of 3.1 yen per share. We have decided to increase dividends because we have always set a dividend amount based on an approximately 15% consolidated dividend payout and return profits to shareholders with stable dividends and increase dividends in a stable manner. Although brief, that summarizes our results in the fiscal year ended in December 2019 and our initiatives.