We will use this transcript of the briefing on Cross Marketing Group’s earnings results for the fiscal year ended in December 2018, held on February 18, 2019.

Presented at Cross Marketing Group FY2018 Financial Results Briefing

【Code Number】3675

【Speaker】 Miki Igarashi Representative director and CEO,

FY2018 Financial Results Briefing

Miki Igarashi: Thank you for the introduction. My name is Miki Igarashi, and I am Cross Marketing Group’s representative director and CEO. Thank you very much for taking the time to come here today. I will explain Cross Marketing Group’s earnings results for the fiscal year ended in December 2018. So now let’s begin.



I will start by providing an overview of the consolidated earnings results for the fiscal year ended in December 2018, and then move on to discuss conditions in each business segment. Third, I will go over the Cross Marketing Group’s future direction, and then touch on our earnings forecasts for the fiscal year ending in December 2019. Finally, I will explain our shareholder returns and dividends.

If time allows, I will also explain the reference materials.

FY2018 Financial Results Executive Summary



First, I will summarize the consolidated earnings results for the fiscal year ended in December 2018, starting with the key points.

Overall, although we announced downward revisions in November 2018, earnings were solid after that point, and results recovered substantially in Q4.

Revenue in the mainstay domestic research business was 15% higher than the previous year through the fourth quarter, and drove earnings overall.

Domestic research was definitely robust, but when we look at the sectors within the business, we find that revenue in medical research increased by more than 30% over the previous year. Although we have various concerns, we believe that we were able to create significant growth this fiscal year for the medical field going forward.

As a result, we generally achieved the revenue and income forecasts that we announced on November 14, 2018.

Fluctuations in revenue by business segment and consolidating operating income



Next, I will discuss fluctuations over the past four years in the overall business.

In 2018, results were almost unchanged from the previous year in all businesses in Q2 and Q3, with the lack of new growth resulting in a slowdown. At the same time, however, we invested in growth markets in Q2 and Q3, including structural reforms for the company overall, and saw the fruit of these efforts in Q4.

FY2018 Q4 Financial Results (Oct. – Dec. 2018)



In Q4, revenue totaled ¥4,915 million, up 3.9% over the previous year. Operating income came in at ¥525 million, up 31.7%, while ordinary income rose 27.2% over the previous year, to ¥458 million. In Q4 on a non-consolidated basis we were able to raise income levels significantly compared to the same period in the previous year.

Looking at growth by segment, we find that in Q4 alone, revenue in domestic research rose 15.7% over the previous year. Revenue in the overseas research business was 81.7% of levels in Q4 FY2017, demonstrating that growth was extremely robust for the domestic research business.

In IT solutions, projects have recently expanded, and while the fiscal year generally ends in March for Japanese companies, revenue was down 7.3% over the previous year. Overall, the business is growing, but the domestic research business was the key driver in Q4.

Overview of FY2018 consolidated earnings results



In the full fiscal year, revenue totaled ¥17,492 million, up 4.4% over the previous year. Operating income was ¥955 million, an increase of 31.4%. Ordinary income rose 40.6% to ¥840 million, representing substantial growth over the previous year.

Difference in operating income in FY2018 for full year (compared to previous year)



This shows trends in operating income since the fiscal year ended in December 2017.

Gross profit decreased in the research business due to fluctuations in revenue and higher outsourcing costs. Obviously, not all of this could be posted in Q2 and Q3, so we see a reduction in gross profit in these areas in Q4. In addition, we secured major projects from end-clients, and gross profit decreased from their implementation.

Amortization of goodwill decreased due to special conditions last year. In addition, other expenses, including reductions in operating costs following the change in the Group’s overall framework, decreased by ¥203 million. As a result, operating income was ¥955 million.

Consolidated profit/loss statement for fiscal year ended in December 2018 (overview)



Here is an overview of the consolidated profit/loss statement for the fiscal year ended in December 2018.

The key points here are that revenue increased 4.4% over the previous year, as formerly noted. Of course, business portfolios for domestic research strengthened in a variety of ways and the overseas business portfolio weakened in some fiscal years. The domestic research business showed extremely strong growth in FY2018, including in Q4.

Growth in overseas business has declined since the previous year, with the domestic research business making up for this shortfall. In addition, growth was extremely strong in other businesses, including IT Solutions. These fluctuations taken together resulted in a 4.4% increase in revenue.

The gross profit margin ratio fell from 39.5% in 2017 to 36.8% in 2018. This was primarily due to low gross profit margins on the large-scale projects that we secured, as discussed when we announced the Q2 and Q3 earnings results, and our inability to grow sufficiently to compensate for the advance investments we made in Q2 and Q3, resulting in the 36.8% gross profit margin ratio.
SG&A expenses fell 7.1% over the previous year due to our efforts to reinforce our management system, including the elimination and consolidation of various Group businesses.

The main factor was personnel costs. Globally, we now have over 2,000 employees overall on a consolidated basis, and we are making progress in assigning them to their optimum positions, including changing management. We are making every effort to optimize personnel costs.

Goodwill amortization totaled ¥400 million last year, but reached ¥182 million in fiscal 2018, indicating that goodwill amortization has decreased.
Since UNCOVER TRUTH, an affiliated company that offers access analysis tools, issued new shares through a third-party allocation at market price, we recorded ¥165 million in variable profit on equity as extraordinary income.

Net income improved significantly to ¥507 million in fiscal 2018 from a net loss of ¥703 million, when impairment loss on goodwill was posted in the previous year.

Consolidated balance sheet for fiscal year ended in December 2018 (overview)



Next, we will look at the consolidated balance sheet.

In current assets, cash flows from operating activities marked a solid increase, resulting in about ¥600 million in cash and deposits.

The ratio of current assets to current liabilities shows that we have relatively stable capital reserves.

Shareholder equity was essentially unchanged over the previous year at 36.3%, but net assets increased ¥302 million.

Regarding the balance of goodwill, impairment losses at an overseas company, which have been the cause of impairment losses since 2018, have ended to some extent. However, in November 2018 we acquired Supotant, a temporary employment firm that specializes in EC operations, so despite reductions followed by increases, goodwill is essentially being maintained at about the same level.

Consolidated cash flow statement for fiscal 2018 (overview)



Next, we will look at the consolidated cash flow statement.

We are steadily posting income in cash flows from operating activities, and generated about ¥1,000 million from operating activities.

Cash flows from investing activities marked an outflow of ¥351 million in fiscal 2018 compared to a ¥1,300 outflow in the previous fiscal year, since most M&As were not particularly expensive.
In cash flows from financing activities we made progress in repaying long-term loans, but were also able to secure new loans for capital reserves. This resulted in a net ¥600 million increase in our cash position, ensuring sound fiscal health.

Revenue by business segment and comparison of segment income



Next, we will look at conditions by business segment. I will start by explaining the domestic and overseas research business.

The domestic research business has been a solid performer, with an increase in revenue from ¥9,075 million in 2017 to ¥9,551 million by the end of fiscal 2018. In contrast, revenue in overseas research was ¥4,983 million in 2017, but reached ¥4,742 million in 2018, falling just under 5%.
The IT Solutions business continues to show robust growth, with revenue rising 18.4% from ¥2,147 million in 2017 to ¥2,542 million in fiscal 2018.

In the Others business, new business, including Web promotions, recorded a 13% increase in revenue due to successful efforts cultivating new customers, and profits also doubled. As a result, in the Others business segment as a whole revenue increased 18.6% over the previous year and segment profit grew 96.1%, thanks to steady progress in generating profit.

Overall, we believe that, in the end, domestic research, IT Solutions, and Others were extremely solid last year. Revenue fell slightly in overseas research because, despite the large-scale M&A four years ago, this business is in the process of reorganizing its management.

At the same time, we have made significant progress in strengthening of management and introducing new systems, and the Group is currently striving together to return to a growth trajectory from the next fiscal year.

In addition, by growing new business last year, the portfolio for the IT Solutions and Others businesses grew to just under ¥3,100 million. We also saw substantial growth in the medical field within the Research business. In terms of cultivating new business, this means that about ¥4,000 million in new business had been generated as of 2018.

Given this, although there are discrepancies depending on the business sector, new business has been cultivated in the Group overall in a relatively sound manner.

Conditions by business segment: Research business



Next, we will look at the businesses in detail, starting with the Research business.

The Domestic Research business, which experienced sluggish growth in Q2 and Q3, recovered significantly in Q4 and recorded growth of about 15% over the previous year.

Moreover, Medilead, our subsidiary in the medical field, has been achieving steady growth. This business has built up its sales as it has strengthened its ability to adapt to global markets, including both domestic and foreign customers. Ultimately, this led to growth of more than 30%.

With 10 overseas offices, there are significant discrepancies by country. While performance undercut the previous year’s levels at some offices, even though revenue was down slightly overall, large-scale ongoing orders have been finalized for 2019 and we expect further growth as we overhaul the systems.

Conditions by business segment: IT Solutions business



Next, we will take a look at the IT Solutions business.

Here, orders were firm, particularly in the mainstay Cross Communication. Growth was especially strong for apps for financial institutions. Other than financial apps for securities companies, we developed apps for consumer finance and Internet banks, for example. In this respect, growth for transaction financial apps aimed at the financial sector was extremely strong.

The app business is now gradually moving away from PCs proactively, so the market is relatively solid. We offer apps for BtoB for financial institutions, and also have very good reliability, so we plan on gradually increasing the number of customers for this kind of transaction app.

In Q4 2018, although orders were down 7.1% over the previous year, they have reached a high for the year. And as the project gradually increases in size, the balance of orders is also growing.

We will post most of the future orders in Q1 2019. As there are so many business firms in Japan, we post orders in Q1.

Conditions by business segment: Others business



And now we’ll take a look at the Others business.

We are moving ahead with the Web promotion business through D&M. Compared to the same period in the previous year, revenue was up 18%, and we were able to secure segment profit due to this higher revenue.

In fact, the revenue structure has changed significantly. Between 2016 and 2017, search engine-linked ad products were very good sellers.

However, as you may know, the logic behind search engines such as Google and Yahoo! has changed, and as a result these schemes no longer function. Accordingly, from the second half of 2017 through 2018, we switched to affiliate advertising or advertising linked to databases.

While lowering this dependence rate, we have also identified new needs. As a result, we feel that revenue is also nearing the next growth trajectory.

Continuing to expand business while expanding business globally as the Marketing Solution Group



I would now like to give an overall view of the direction in which Cross Marketing Group is heading.

First, I will explain how our business format has changed by confirming our trajectory thus far.

Cross Marketing’s business on a non-consolidated level began in the online research field. In 2008, we listed on TSE Mothers, and became a listed company offering a single service. We diversified after surviving the shock of the Lehman Brothers’ bankruptcy.

After becoming a diversified marketing research company, the next step is marketing solutions, including globalization and database marketing. We are working to integrate the Group, including advertising products and SI.

At present, there are 29 Group companies, and we are actively working on building a business foundation in the BtoB market, including cultivating new business for marketing solutions overall.

Revenue has increased for 15 successive years since the Group’s founding, reaching ¥17,400 million in FY2018



This is a line graph showing growth from our founding in 2003 through 2018.

The Group achieved revenue of about ¥17,600 million in 2018, marking the 15th straight year of revenue gains for the Group, when businesses other than the Domestic Research business incorporate the Overseas Research business and including the expansion in ancillary businesses.

Domestic research business 1



I will now explain the initiatives and achievements of each of these businesses. I will start by discussing the areas that the Domestic Research business is working to strengthen.

Overall, the focus is on Internet advertising. Media activity has changed dramatically, as with the shift from the PCs to smartphones. There have also been various changes to overall trends, such as database marketing in different forms, including big data.

In the Group overall, customer marketing activities are gradually growing from conventional to digital marketing, and we are rushing to adapt.

With marketing research becoming increasingly digitized, we are seeing changes in various media. Recently, this has been in the form of text data and graphics data. Gradually we are seeing growth in video advertising as well, including YouTube. In this way, the effect of video advertising will require measures to keep with the changes in media.

Consumer behavior is also changing, and we are developing methods to gather research and data in various fields to adapt to these changes. In the previous fiscal year, we worked to strengthen a service that would enable us to acquire data on consumer behavior in Instagram while collaborating with Instagram service providers, including the Instagram monitor network.
There is also SNS, with Twitter as one example, where we have begun to provide infrastructure that can compile and analyze the research data from the data posted on about 50 other types of SNS. We are also working to strengthen our packages of services for companies shifting to digital marketing.

Domestic Research business 2



Recently, the trend from research to database marketing or digital marketing has significantly strengthened.

Conventional marketing research on consumer goods will be combined with Big Data and other data besides research, enabling us to more scientifically analyze consumer behavior.

In order to adapt, we use such BI tools as research data plus, CRM data held by customers, and purchasing data. This data can be stored in BI tools, and analyzed by services such as daily KPI analysis. This type of project is increasing rapidly, even in the research industry.

Our companies are taking up the challenge in fields that differ from the conventional research we have done thus far, including the SI field and the ability to provide this kind of SI solution, and are expanding into a wide range of fields, including content with SI businesses for consulting companies.

In this regard, we believe market needs will be extremely high going forward, and plan to aggressively build up expertise and expand the service lineup.

Domestic research business 3



Next, as previously mentioned, in digital marketing we have begun expanding Cross Trace services, including Internet-based analytical access tools, for which there is strong demand.

Our companies’ panels alone amount to about 1.8 million people, and when we include our affiliated panels, we have completed affiliations with Web media for about 5 million people.

By supporting optimal digital marketing through this attribute data, Web access log plus, and actual surveys, we are beginning to strengthen our sales to advertising agencies and end-clients’ digital divisions.

Domestic research business 4



As a result, the portfolio for our Domestic Research business has changed considerably.

Our end-client ratio currently exceeds 50% and is rapidly approaching 60%, with our end-clients increasing to about 1,500 companies. Compared to 2016, this is an increase of about 28%, which represents substantial growth.

Our goal is to form ties with our end-clients, and with the scope of our services expanding, we are currently working to actively cultivate relationships with them, including building a more robust client base, to enable us to better offer the Group’s various services. As noted earlier, in Research this would include digital marketing, Web promotions via CRM, and IT solutions through cross-communications.

In this way, we envision multi-faceted effects, and in the Domestic Research business we achieved growth in Q4, also leading to solid growth in the IT Solutions business and other ancillary businesses.

Domestic Research business 5



In the Domestic Research business, as explained earlier, we are seeing very strong growth in the medical field.

We are striving to hire personnel with even higher levels of specialized expertise, and to this end are hiring from consulting firms and think tanks rather than research companies. We are looking to strengthen not only research, but also place more emphasis on our consulting services to support our end-clients.

Our overseas clients—particularly those in Europe and America—are increasing, so we are more actively hiring staff, including employees who can speak English, to take advantage of this trend.

Overseas Research business1



Next, we have Global Research.

Last year revenue in the overseas research business decreased 5%, but we are actively boosting our investments and reinforcing infrastructure to expand the Overseas Research business. We are aggressively expanding with offices in areas in which we previously did not have a foothold.

As the US market drives global trends to a significant extent, we seek to open an office in New York, the epicenter of this market, and will strengthen our local marketing by reinforcing our response to European and US clients, without restricting ourselves to Japanese clients.

In the Asian region, we now have an office in the Philippines, where we were unable to expand laterally, and are making investments to develop this into a BPO center for English-language operations in the Philippines and the Asia region.

Global Research 2



In addition, by taking initiatives to achieve steady growth globally, we have opened an R&D center in India from this year.

As India is a rich source of employees who can speak English and have IT skills, we have set up an R&D center there, and as previously mentioned, English-language skills are extremely high in Manila, enabling us to lower costs and ensure capacity globally while building a BPO center.

Personnel expenses for English-speaking staff in developed countries have skyrocketed, making it difficult to hire suitable staff, so we are actively looking to hire such staff in India and the Philippines. We will proactively invest in India and the Philippines this year by expanding in line with conditions in each country to reduce costs and ensure staff capacity.

IT Solutions business 1



Next, we will look at the IT Solutions business.

This businesses is performing quite well, and we plan to steadily build up achievements and strengthen our value chain.

At this point, as noted earlier, we are gradually gaining recognition for high quality due to our achievements in financial app development and operation, thereby growing our share.

We believe we are number one, and although we can’t be sure since it is not open data, of the approximately 27 million accounts held by listed Internet-based securities companies, the apps we offer currently account for about 40%.

We are gradually gaining trust in the financial sector, and are steadily making progress in expanding into applications for members of credit card companies, consumer loans, and Internet banking, enabling us to build a system to ensure steady growth.

And in order to expand our business, we will not only provide apps, but will also handle the administration of our clients’ IT divisions by dispatching engineers through Cross J Tech.


IT Solutions business 2


As our clients also face various difficulties in hiring suitable personnel, we acquired Supotant to provide overall solution support by incorporating the administrative side as well while linking this to the basis for further development.

We have built this up through human resource dispatch to various business firms with referrals of specialized employees in Web and EC. In house, while this type of team has been reinforced with permanent employees, there are times in which the operation line cannot keep up with market growth.

To address this problem, we rapidly dispatch people who are well versed in a range of IT tools through temporary employment companies specializing in these fields. We are strengthening our expansion from just a few areas to a broad variety of areas, with the apps we have developed leading to operations, and these then leading to further development.

In addition, by forming business affiliations with CVC investments, we created a CVC business affiliate in April 2018. In the IT sector, we invest in companies in which we aim to form business affiliations.

This process also involved investment last year in Adinte, a company that provides Beacon in a bundle to companies—our clients—that offer apps.

Another of our achievements is the development of JAF apps linked to JAF stores, providing JAF users with special store discounts. Users install the app when installing AIBeacon, and we provide the one that is more user-friendly.

Beacon is attracting great attention as it connects the digital to the real, and we are steadily investing in this while also providing customer solutions.

IT Solutions business 3



With these initiatives and others, we expect growth to remain high in 2019 as well in the IT solutions field. We are working to expand services in various forms to achieve a forecast of about ¥3.3 billion in sales.

Promotion business 1



Next, the Promotion business. We are also expanding this business and moving ahead with affiliations in various forms, with the entire Group focusing on this business area for the next generation.

We are currently working on DMP, is a global trend in which the data management platforms of various companies are linked through data in a variety of ways.

In addition, including information leveling efforts, this kind of database marketing trend is a major development, and we are moving ahead with various affiliations in response.

Treasure Data was one example of this kind of effort in 2018. Acquired by an arm of Softbank Group, this was the first company we formed a data affiliation with as a Japanese research corporate group.

We have monitor data and also large-scale attribute data exceeding 2,000 items, so by offering this data to Treasure Data we are endeavoring to form data affiliations that users can freely use.

Promotion business 2



In 2018 we also formed an affiliation with Treasure Data, including efforts to gradually expand this type of data affiliation, and we also began affiliating with EverySense, a company that runs an information market that is essentially a trading venue where various kinds of Big Data can be bought and sold.

Adobe and LOGLY are other examples. These companies were listed in 2018, and affiliations with their DMP are also picking up speed. In these ways, we will gradually extend the scope of these kinds of DMP affiliations, allowing more customers to use the unique data that we possess.

Promotion Business (earnings from D&M company alone)

Including these results, we will continue with these initiatives in the database marketing sector to achieve medium- and long-term growth, including steadily expanding businesses while using the expertise and resources provided by our research business.



Key measures in fiscal 2019



From this point, I will discuss our key measures in fiscal 2019 and our image for future growth.

These are our key measures in fiscal 2019. This is essentially a summary of what we have covered thus far, and we plan to aggressively expand business in growth fields.

By strengthening ancillary business and new business, we are cultivating businesses that can sustain stronger growth, and one of these efforts will involve reinforcement of the digital marketing field. In this area, we will actively invest in the IT solutions business and the Web promotion business.

As we grow from this point, we will be able to make new developments in the IT field, and will proactively develop services with this goal in mind.

In the domestic and overseas research businesses, we will actively invest to strengthen earning power.

Global business overall has achieved approximately 2-3% growth in research, so although the market scope is substantial, this has become a stable growth market. We will thus work on automating this process, including creating conditions that facilitate the generation of profits, and will build human resource development programs that can support more advanced issues.

In overseas research, we will continue to aggressively invest in infrastructure of markets that have growth potential, including in Asia. We will also consolidate operations by establishing a global operation center and will invest in new technology in emerging markets, such as establishing an R&D center in India.

Accordingly, we hope to focus on growth while stably combining the aggressive expansion of business in growth areas with efforts to consistently strengthen earning power.

Expanding business by utilizing technology and pursuing stronger earning power and competitiveness in existing businesses are the key points of our overall investment.



As noted earlier, this is the digital marketing field. We will also utilize Big Data, digital marketing, and AI fields.

We will also work to develop the consultancy business by developing services in the upper layers of research, including the medical field. We will focus on RPA, including operation automation.

Through these initiatives, we will improve efficiency and aggressively invest in medical and other growth fields

Overview of earnings forecasts for fiscal year ending in December 2019



With this background, I will now explain our earnings forecasts for the fiscal year ending in December 2019.

We are aiming for ¥20 billion in consolidated revenue for the first time through ongoing expansion of operations. While continuing to build business with high added value and productivity, we aim to restore revenue levels to post ¥20 billion in sales and ¥1,250 million in operating income in fiscal 2019.

By business sector, we expect revenues in Domestic Research to increase 7% over the previous year to top ¥10 billion. In Overseas Research, we have made significant progress in building, reforming, and improving our financial structure in 2018, and predict a 15% increase to ¥5,456 million, including a boost to the next growth phase.

In IT Solutions, we expect growth to remain solid, with a 30.1% increase in revenues to ¥3,308 million.

In the Other business, we forecast a 55.1% increase in revenue to ¥1,017 million.

As a result, including the medical, IT solutions, and other sectors, the overall sales ratio will be maintained at 25%, and the entire Group will work to reliably bring next-generation new business areas to the growth stage.

Factors boosting revenue in fiscal year ending in December 2019



shows the factors behind the gains in revenue.

In the Research business, we aim to improve gross profit along with revenue growth by increasing gross profit by about ¥800 million. While we predict revenue growth in Overseas Research, we expect an approximately ¥500 million increase in gross profit. In the IT Solutions business, we forecast a roughly ¥500 million increase in gross profit through higher revenue.

In Other business, aggressive investment in SG&A expenses will increase personnel costs by ¥536 million. We plan to invest about ¥951 million in other costs, so we are not being conservative.

These forecasts will help us break out of the conservative conditions of the last three years to the next stage of growth by achieving about ¥20 billion in revenue and ¥1,250 million in operating income, while creating businesses for the next generation and making aggressive investments.

Shareholder returns and dividends for fiscal year ended in December 2018



Here we see shareholder returns and dividends.

Based on current performance trends, we will increase dividends by ¥0.5 in fiscal 2019, which will also allow us to continue returning profits to shareholders in a stable manner. Dividends to be paid at the end of fiscal 2018 will be ¥3.0, as planned. In 2019, we plan to increase full-year dividends to ¥6.0 per share.

As I have now spent about 45 minutes on my explanation, we will now move on to the question-and-answer session. We hope that you will use the reference materials to attain a better understanding of the company.