■ Performance Trends of Koss Corp <6562>

2024 FY Performance Overview Consolidated performance for FY3/2024 of G-7 Holdings <7508> was 192,992 million yen in increased operating income of 9.1% over the previous year, and increased ordinary income of 7.4% to 7,318 million yen, and attributed to the parent company's net income of 5,175 million yen, an increase of 35.3% over the previous year. Sales were driven by the Business Supermarket Business and the Meat Business, and continued to set a new record high, exceeding the company's plan by 4.3%. However, in terms of profits, the automobile-related business was affected by a decrease in profits due to poor sales of winter tires due to a warm winter, and could not reach the company's plan, it turned to a profit increase for the second time due to the growth of other businesses centered on the Business Supermarket business. The sales cost ratio has increased by 0.8 points over the previous year due to changes in the sales composition ratio; however, the selling, general and administrative expense ratio decreased by 0.7 points due to the effect of increased earnings, and the operating margin decreased by 0.1 points to 3.6%. The main reasons for the increase/decrease of selling, general and administrative expenses were a decrease of 600 million yen in energy costs due to subsidies from rising electricity prices, and an increase of 1 billion yen in labor costs due to improvements in employee treatment and increased education costs. In addition to this, depreciation expenses increased by nearly 600 million yen due to rising construction material costs and rising costs of opening stores etc. The EBITDA margin has increased by 0.1 points from the previous year. Also, the reason for the large increase in the net income of the parent company's shareholders attributable to the current period is due to the elimination of 500 million yen in retirement benefits paid to executives that were recorded as special losses in the previous year, a decrease of 455 million yen in impairment losses, and a gain of 127 million yen on the sale of investment securities in FY3/2024. Changes in the ratio of revenues - while the revenue composition ratio increased by 0.8 points from the previous year, the selling, general and administrative expense ratio decreased by 0.7 points due to the effect of increased earnings, and the operating margin decreased by 0.1 points to 3.6%. The main factors affecting selling, general and administrative expenses were a drop of 600 million yen in energy costs due to subsidies from rising electricity rates and an increase of 1 billion yen in labor costs due to increases in treatment and education expenses for employees. Depreciation expenses also rose by just under 600 million yen due to increased costs of construction materials and opening new stores. The EBITDA (earnings before interest, taxes, depreciation, and amortization) margin rose 0.1 points from the previous year. Lastly, the reason for the increase in the net income of the parent company's shareholders attributable to the current period was due to the elimination of the 500 million yen for executive retirement bonuses paid in the previous period, the reduction of impairment losses by 455 million yen, and the realization of gains on investment securities of 127 million yen in FY3/2024.

For the consolidated performance for the fiscal year ending March 2024, sales revenue reached 80.12 billion yen (up 24.1% from the previous year), gross profit was 61.38 billion yen (up 19.4%), operating profit was 15.38 billion yen (down 37.4%), pre-tax profit was 12.77 billion yen (down 44.0%), net profit was 10.35 billion yen (down 51.0%), and net profit attributable to the parent company's owners was 10.31 billion yen (down 51.2%). Although profit after operating profit decreased, the main reasons were due to the reversal of fair value gains on the acquisition of U.S.-based Zelto's subsidiary in the previous year, as well as growth investments in personnel costs, outsourcing expenses (1 billion yen), advertising and promotion expenses (0.1 billion yen), among others. Adjusted operating profit after the Zelto's one-time losses reduced profit (0.55 billion yen) and obligation waiver gain to the former shareholders (0.11 billion yen) decreased by 22% from approximately 1.11 billion yen in the previous year to 0.87 billion yen.

In terms of sales, the video area performance in the supply-side business and the performance improvement in the performance area in the demand-side business contributed to the expansion. According to Dentsu Group <4324>'s announcement of the detailed analysis of "2023 Japan's advertising expenses Internet advertising media expenses," internet advertising media expenses increased by 8.3% year-on-year to 2 trillion 687 billion yen due to the growth of video advertising and digital sales promotions. The sales growth rate of the same business in the fiscal year ending March 2024 exceeded the previous year by 9.9%, demonstrating high growth potential. Additionally, the expansion of enterprise customer base in the marketing SaaS business contributed to the increase in revenue.

* Source: Dentsu '2023 Japan's Advertising Expenses'

Looking at the business segments, the sales revenue of the main advertising platform business reached 4.306 billion yen (up 9.9% from the previous year), with a segment profit of 2.244 billion yen (up 3.7%). The main reasons for the favorable performance include the expansion of video area performance in the supply-side business. The marketing SaaS business achieved a significant increase in revenue and profit, mainly due to the increase in orders for sales support and management systems such as SFA/CRM, as well as a significant increase in CHAT orders. The company has been focusing on developing its enterprise customer base in this business, effectively meeting individual needs such as cooperative development with customer companies' own systems, thereby enhancing customer satisfaction. Furthermore, strengthening ties with major advertising agencies and initiatives such as recommending their own products to customer companies led to an increase in sales revenue. CATS, an advertising effectiveness measurement tool, is a service operated by CATS, Inc., a subsidiary of the company that was acquired in 2022. Changes in billing methods and an increase in development projects also contributed to its performance. Despite intense competition in their product range, the company views responsive strategies to customer needs and superior cost performance as one of the sources of competitiveness.

In comparison with the revised full-year performance forecast made during the fiscal year ending March 2024, the advertising platform business achieved sales revenue (100.2% achievement rate) and segment profit (102.0%) as planned. However, the marketing SaaS business fell short of the planned sales revenue (93.2%) and segment profit (53.9%), while the overseas business did not reach the planned sales revenue (89.2%) and segment profit (67.1%). The company attributes this to two main reasons. The first reason is the impact of the North American advertising market recession, with Google and other major players lowering ad prices, affecting the domestic advertising market as well. Although the situation improved slightly in the latter half, it fell below expectations throughout the period. The second reason is the timing mismatch in orders from enterprise customers in the marketing SaaS business. As a result, the achievement rate for the revised full-year plan for overall sales revenue and each stage of profit fell short of expectations.

2. Summary of performance for the first quarter of the fiscal year ending in March 2025

The company announced its earnings reports for the first quarter of the fiscal year ending in March 2025 on August 13, 2024. Sales revenue was 22.65 billion yen (+26.2% year-on-year), gross profit was 17.4 billion yen (+26.5% year-on-year), operating profit was 8.15 billion yen (+633.7% year-on-year), pre-tax profit was 7.48 billion yen (compared to 80 million yen in the same period last year), quarterly profit was 670 million yen (+6 million yen), and quarterly profit attributable to the parent company was 672 million yen (+4 million yen). Operating profit also significantly increased year-on-year, but this includes one-time gains related to the earnout of Zelto's M&A. Excluding this, the normal basis operating profit was 170 million yen (+53.2% year-on-year), showing steady progress in both sales and profit. In terms of segments, the main advertising platform business saw smooth progress in the supply-side business from the previous period. In the marketing saas business, delivery of large projects in the fiscal year ending in March 2024 has been completed, reaching the stage of monthly revenue acquisition, in addition to advancing customer development in enterprise areas such as commissioned development projects, SFA/CRM, and the CHAT sector. Management of Zelto's overseas business has progressed, promoting business integration with the company. Generally, revenue in the advertising platform business tends to expand in the second half, but the situation indicates that the fiscal year ending in March 2025 continues the favorable performance from the first quarter, raising expectations for performance in the second quarter and beyond.

3. Segment Performance for the first quarter of the fiscal year ending in March 2025

(1) Advertising Platform Business

In the first quarter of the fiscal year ending in March 2025, sales revenue for the advertising platform business was 11.79 billion yen (+24.4% year-on-year), with segment profit of 5.81 billion yen (+26.4% year-on-year), achieving increased revenue and profit. In the business for the supply-side, the company proactively expanded into the previously untapped video sector from the fiscal year ending in March 2024, leading to an expansion of business performance. By advancing strategies to increase advertising unit prices for both new and existing media, the company raised the revenue per company and expanded sales revenue through the growth of enterprise transactions. Using 'company unit' as a managerial KPI to refer to revenue per company, with the increase in enterprise projects, the revenue per company improved from around 1,500 thousand yen to 2,000 thousand yen when compared to the first quarter of fiscal year 2024. The company also manages the number of trading partners as a KPI, and while there is not a significant difference with around 200 companies compared to the previous year, the increase in revenue per company is shown to contribute to revenue growth. The company plans to continue promoting the development and expansion of products that are expected to increase customer unit prices, contributing to revenue growth. With the improvement in advertising unit prices and the increase in enterprise transactions, gross profit also expanded. In the first quarter of the fiscal year ending in March 2025, the gross profit for the quarter alone secured 0.99 billion yen, a 25.3% year-on-year increase, with the growth rate improving by 24.0 points compared to the year-on-year growth rate.

The background behind the company's strong track record in acquiring customers in the enterprise area lies in its competitiveness in products and cost performance. To gain market share, it is necessary to outperform the services provided by the customer company's existing contracted suppliers and the company analyzes the products and services of competing companies for each business segment of the customer company, proposing its own enhanced features to the customer in areas where it lacks competitiveness. By accurately capturing the needs of customer companies and providing services with equal or greater functions than competing companies at a lower cost, the company has successfully replaced services.

(Writer: FISCO analyst Tomoichi Murase)