UUUM Co., Ltd. · not only with creators who are called “YouTuber” but also with creators who are active on all kinds of websites. There is also an event called YouTube FanFest

UUUM Co., Ltd. Q2 Financial Results Briefing for the Fiscal Year Ending May 2020

January 14, 2020

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Event Summary

[Company Name] UUUM Co., Ltd.

[Event Type] Earnings Announcement

[Event Name] Q2 Financial Results Briefing for the Fiscal Year Ending May 2020

[Fiscal Period] FY2019 Q2

[Date] January 14, 2020

[Number of Pages] 21

[Time] 16:00 – 16:33

(Total: 33 minutes, Presentation: 14 minutes, Q&A: 19 minutes)

[Venue] Nomura Securities Nihonbashi Head Office, 7F Hall, 1-9-1 Nihonbashi,

Chuo-ku, Tokyo 103-8011

[Venue Size] 414 m2

[Participants] 80

[Number of Speakers] 2

Kazuki Kamada President, CEO

Takashi Watanabe Director, CFO

[Analyst Names]* David Gibson Astris Advisory Japan KK

*Analysts that SCRIPTS Asia was able to identify from the audio who spoke during Q&A.



Presentation

Moderator: Now, we will start the financial results briefing of UUUM Co., Ltd. for the Q2 of the fiscal year ending May 2020.

We would like to thank all of you for taking time out of your busy schedule to participate in this event.

First of all, I would like to introduce the participants today. President, CEO, Mr. Kazuki Kamada; and Director, CFO, Takashi Watanabe. That is all for the attendees.

Let me confirm the materials we have distributed to you. Today, we distributed financial results briefing materials and financial results.

Next, I would like to explain today's progress by CEO Mr. Kamada. After that, we will have time for a question and answer session, and we would like to receive questions and opinions from our stakeholders.

Okay then, we would like to begin. CEO Mr. Kamada, please.

Kamada: I am Kamada from UUUM Co. Ltd., who was introduced to you just now. As usual, I would like to make a brief presentation this time, and afterwards, I would move on to the question and answer session.

We also prepared the same handouts for you, but we will omit the management philosophy provided at the very beginning because we have already shared it many times. There are four major topics, including financial statements and the rate of progress with respect to results, as well as the topics in this quarter, and it may be omitted for permitted time reasons; however, we have included the industry trends and UUUM long-term strategy, which we have explained each time, in the materials.



This is the Q2 figure from September to November last year. Sales started at JPY5.4 billion, or 118% compared to the previous year, and operating income was JPY350 million, or 89%. Net income amounted to JPY120 million, or 47%.

These highlights, which include Q1 and Q2, show a 125% increase in sales, starting with JPY10.9 billion, with 107% growth in operating income to JPY770 million and net income to JPY450 million.

The release of our extraordinary loss, which is attached to the materials we have distributed to you, is included in this Q2.



In terms of the mix of large net sales, the bottom line started with AdSense as usual, followed by a JPY1.4 billion tie-up, followed by a JPY740 million creator support, followed by a JPY220 million in-house support.

I thought there were probably some questions, so I made a statement in advance, but when you make a comparison with the last year’s situation, you would wonder if AdSense is falling. Rather than falling, you may use the phrase slowing, but you can see it as 106% if you look at the presentation of my financial results announcement last year, and regarding the same period from September to November, it’s a time when the unit price of AdSense is very likely to fall.

As you can see from the comparison with the previous year, especially in Q2 of the fiscal year ending May 2019, it was high since there were many companies that have significantly enforced the unit price of AdSense as I referred to at that time.

On the other hand, although it may be difficult to express the Q2 figures as achievement, since there were no exceptional [Inaudible] in particular, I think that profits increased in this way.



As described above, gross profit is JPY1.536 billion.

Selling, general and administrative expenses amounted to JPY1.185 billion. I assume that I will receive some questions about this later, so I would like to explain this first. A portion of personnel expenses, bonuses, is linked to gross profit and operating profit, so it has fallen because the allowance for bonuses has decreased compared to Q1. We partly have the asset light projects, which includes personnel expenses, and in view of this, it reduced by approximately JPY40 million compared to Q1 of the previous fiscal year. The breakdown shows that there is no decline in the number of employees.



The breakdown of gross profit and operating profit is just like this, so if you look at Q1 of June, July and August, starting from April in particular, you may think that September, October and November are down since such a period is not a peak season.

As I mentioned earlier, the number of employees has continued to increase. As I have communicated that our assets are people and they are the greatest, we have continued to carefully select our hires, but the number of hires continues to increase.



And the total number of plays per quarter is 10.9 billion times in a total of three months. To understand it easily, if you look at this based on the 9.532 billion times for the same period of the previous fiscal year, I believe that you can see that there has been a continuous increase.

Ranking of the number of subscribers. We refer to it in the material because it is easy for you to understand to what extent the number of subscribers is now linked to the sales figures, but I’m thinking about what to do recently.



Six of the top 10 channels are ours. However, as you can see, the seventh channel is a channel registered in Japan because of the reasons for the website we research, but in fact, it is being operated by foreigners, and it is a channel for foreigners. This is different from the official ranking in Japan, but according to the source we use, it takes the form such as this.

Unfortunately, there were some mistakes, but one of our creators for a channel where the number of subscribers is around 2.4 million has been omitted. To be exact, please assume that approximately 30 of the 100 channels belong to us now.

Considering the above, I would like to talk about the financial results for Q2 and the outlook for the business results.

We have set a single goal for the full year, and we have achieved 42% of our net sales of JPY26 billion. We achieved 45% with a gross profit margin of JPY3.1 billion with respect to JPY7 billion. Operating income and net income are currently at 55% and 52%, respectively. In this figure, you can consider that the extraordinary loss mentioned earlier is included.



In addition, the contents of the report can be graphed in this way. As I always mention, in terms of the content of AdSense, we often use the term of the unit price per play. However, since the unit price is simply calculated by dividing the execution amount by the number of plays at that time, it is not linked to seasonal factors sometimes, and it is linked to them sometimes, so there are some uncontrollable aspects.

We have been focusing on this tie-up, advertising since Q1. We have sales staff and they actually go to the client. For this part, the progress rate exceeded 50% in the half year, and the forecasts for March to May in the fiscal year end have also risen, even at this point, so I think that this part has produced enough results.



In addition, I would like to introduce some of the topics in the same Q2. First of all, one of them is Shibuya Parco which was renewed in November last year, and in fact, I have visited there. On the fourth floor of this building, where there are Nintendo’s shop and Pokémon’s shop, we decided to launch a cafe in collaboration with the event called U-FES. that we have now.

For the business period of the collaboration cafe is from November 22 last year to January 20 this month.



Second, which is also called U-FES., is a tour we are holding this time. You might have seen it before, but last year, we worked together with Lawson during an event where our creators gathered, and we launched Lawson’s popular menus as collaborated products with the creators.

Third, this was the second time, but we had a one-day Pro-Am tour with professional golfers and viewers in December of last year. We have a YouTube channel called UUUM GOLF, and involving viewers of the channel, we interacted with professional golfers in the event of the Pro-Am tour.

We received questions about why we would like to have a golf program on the YouTube channel before, but the golf channel we started with the recent desire to attract seniors now is viewed more than 10 million times per month, and of course the unit price of advertisements that come in is high and in good condition, so we have held this event again.



Next, in July of last year, we announced a capital and business alliance with Piece of Cake, Inc., and we decided to strengthen our activities to sell the goods of creators who are actually active on the platform called “note” on our e-commerce site.

We have also announced our initiatives at that time, and this is the first step in our efforts to grow together not only with creators who are called “YouTuber” but also with creators who are active on all kinds of websites.

There is also an event called YouTube FanFest in which YouTube hold every year in December, and the video that was played the most in each year is ranked in a ranking format. In FY2019, seven videos were ranked



among the top 10 creators. Aside from the genre of music, in the general creator category, we have announced that our creators accounted for 70% of the category.

We also announced this in December, and as I mentioned earlier, not only for YouTube, we have also formed a business alliance with Courage Co., Ltd. in the context of a wide variety of platforms in addition to YouTube. Courage has Hinata who is active in TikTok, and creators in other genres who may not have grown up under our environment. In cooperation with this kind of company, I hope that we can develop the business, focusing on supporting them to start YouTube, and sell items on our e-commerce, etc.



This is the last topic. Although I’ve made a presentation on this the other day, we will manage LINE livers held by LINE Corporation, and we will work with them. For reference, LINE livers who are active on the LINE LIVE are called LINE livers. In addition, some creators who might think that the LINE LIVE is more suitable than YouTube for them, they can work on their platform.

As I mentioned earlier, the most important thing I would like to convey to you is that we do not rely on YouTube. Rather, we would like to support creators in a wide range of platforms in the future.

From this point onward, it is about a long-term vision for the industry environment and for us. However, since this is what I explained last time, I would like to use this time for the question and answer session today, so I would like to skip this section.

That is all from me.



Question & Answer

Moderator: Thank you.

Now, we would like to take your questions from now. If you have any questions, please raise your hand, as the staff will bring you a microphone. When asking questions, please give us the company name and your name.

So, does anyone have any questions?

Naya: I am Naya from Ichiyoshi Research Institute. Thank you. I have about three questions.

First, in the area of tightening regulations in the YouTube content for children, how will your company’s performance be affected? Including the approximate timing where it starts to come out and where it converges, I think it is necessary to take measures for the future. Please tell us your thoughts on this.

The second is the expansion of television celebrities on YouTube. I think it is becoming more active now. What is the impact of this situation? To what extent can effects be seen now and what will they be like in the future. This is the second question.

Third, we did not have any specific explanations today, but there is a comparative figure between Japan and China on page 42. Do you have any plans to stop depending on advertising or increase the sales of non-advertising?

Please give us answers for the above three points.

Kamada: Thank you for your questions. I would like to answer those questions.

First, regarding the matter related to the suspension of personalized advertising for the Kids Channel. Since last September, Google has announced that it will be applied from January of this year. As you are probably aware of the fact that January 6 in the US time will be applied, and as I mentioned earlier, we were watching to see how much impact it would have on AdSense. However, at this point, it has been only about a week, so I think it is difficult to answer how much impact it will have.

However, regarding the question we received at that time, about 8% of the total number of channels would be relevant, and we have already completed the survey. From this January, it has been less than six months of this fiscal year, so at this point, we believe that there will be no significant impact on the performance.

However, it is difficult to tell you specifically. There were some channels that fell as we expected, and the number of plays fell in some channels, but the advertising unit price rose accordingly, and as a result there were channels that didn't fall. As I mentioned earlier, I would like to look at the progress and disclose information as necessary in a timely manner.

The second question, which I thought would be asked, is that many people have started YouTube in recent years. As I have been saying, the number of entertainers whom I recognize has begun to appear on YouTube, and the first effect is positive. Users who had previously been acquired through television will flow in the same way because they came to this YouTube. In this sense, I think that those who have not watched YouTube before will watch YouTube, so it is relatively positive.



If we have one more, I think that older entertainers are more likely to start it. I feel that in this Q2, and among the audience segments of the channel, the older audience segments have already begun to flow out from the older audience segments. However, this is sometimes transient, so I think we will continue to look at the progress.

Finally, I believe there was a reference on page 42 showing that the markets of influencers in Japan and China are different. Regarding whether money will be given to Japanese people every time, although there is a function of Super Chat in the current YouTube, I do not think it is appropriate as a content, so I do not think that a day when lots of money donated to our top creators will come at this point.

Nevertheless, in the context of our challenge in 2020, we believe that a business model that does not rely on billing or advertising will be a new source of earnings. I would like to take on several challenges this year, even regarding the growing goods that I mentioned earlier, or money donated to videos through purchases. I would also like to talk about it when it becomes possible to tell you appropriately. That is all from me.

Naya: Thank you.

Moderator: Thank you. Now, we would like to take next questions. Do you have any questions?

Sawada: I am Sawada from ACE Research Institute. Thank you for your explanation. I have two questions.

First, how do you see your company’s share on the YouTube, your UUUM creator’s share as a trend?

Second, you are strengthening the development of various platforms. Please tell me whether the know-how for developing these platforms is similar to the know-how that has been developed in YouTube, or unique know-how is required. I have these two questions.

Kamada: Thank you for your questions. I would also like to answer those questions.

The first question is on page 13. In response to your question on how do you see market share in the ranking, if you look at our materials chronologically, there were days probably with eight channels out of the top 10, or 34 out of 100 channels, so compared to that, I think that the market share is declining.

As I mentioned earlier, it may be difficult to see how much of the ranking in terms of the number of subscribers contributes to the number of plays. However, I believe that, as a whole, there is no doubt that, even if we adopt a somewhat weighted average, it is declining as a result of the entry of a variety of people into the market, rather than simply saying that it is very positive.

In this regard, while we want to maintain our share at a certain level, we also have the opposite thought on excessive market share as the industry. Therefore, I do not think it is negative, and this is the level I expect.

For the second question regarding whether this YouTube know-how will be applied to those platforms when we extend to various platforms not only in YouTube, but also Twitter, Instagram, TikTok, I would like to say that it will be roughly applied to them.

For example, the creator called Hajime Syacho is ranked among the top 10 for Twitter in terms of number of followers, and we believe that we have almost vertically started up those with a strong affinity between Twitter and YouTube.

In addition, for platforms that have been growing recently such as Instagram, TikTok, we have conversations with each platform holder. One of our greatest strengths is that we talk to all those platform holders face to face even though there may be companies doing business on a platform. I think that the company that has



such conversation is rare. By horizontally deploying the know-how we have gained from this creator, we are taking the initiative to vertically start up each platform.

Sawada: Thank you.

Moderator: Thank you. Now, we would like to take next questions. Do you have any questions?

Akachi: Thank you for your explanation. I am Akachi from Mitsubishi UFJ Morgan Stanley Securities. I have two questions.

First, you explained that AdSense revenues declined temporarily this time, but looking at the number of videos played, it is growing at double digits, and how do you see Q2 on a per-play basis?

Watanabe: Let me answer your first question. I would like to answer this question.

We would like to explain the relationship between AdSense’s sales and the number of plays once again to our stakeholders in detail.

It is often understood that the unit price per play has been decided, but, it has not been decided at all. In other words, when an advertisement is played back in terms of the YouTube mechanism, which is sometimes with or without advertisements, the number of advertisements is basically determined by the number of advertisements at that time. Therefore, the unit price is determined only by how many advertisements were placed in the quarter and how many times they were played back.

Conversely, even if the number of plays does not increase, if the number of advertisements increases significantly, AdSense’s sales will ultimately increase. In short, it is like the unit price has risen, and in fact, in some months, advertising placements greatly increase for example in March and December, so the sales of AdSense have soared to a large extent for the number of plays.

So, if this is the case, Q4 has become the strongest season in ad placement for AdSense. For us, it is March, April, and May, so Q4 is the strongest because the advertising period in March is included. In the past years, Q3 was comparatively a strong season since December is included.

However, regarding the number of plays, Q1 is the period in which the number of plays easily increases. This is because that the number of plays is largely affected by students and the number of plays per student tends to increase when there is a holiday season. Q1 corresponds to June, July, and August for us, and August is particularly strong due to the summer holiday that are exactly overlapping. Thus, the number of plays is increasing easily.

The hardest is Q2, which is September, October, and November, affected by the fact that there are any special holidays. Q3 and Q4 are the second strongest quarter following Q1. The Q3 and Q4 have winter vacation and spring vacation, respectively, and Q3 shows that students tend to stay home because of the seasonality and the number of plays easily increases.

In terms of the number of plays, Q1 is strong, followed by Q3 and Q4, and Q2 is weakest, in the form of the seasonality we are seeing.

The unit price is determined by the balance between the seasonality of ad placement and the seasonality of the number of plays, so the unit price varies depending on the balance between the sales of AdSense as I mentioned earlier.



As Kamada explained at the beginning, last year’s Q2 showed the tendency which was quite different from seasonality. Since there were many advertisements placed in Q2, many advertisements placed in YouTube, sales of AdSense drastically increased during Q1 and Q2 although the sales of AdSense usually do not increase that much from Q1. I would like you to take this as an irregular movement. That is all.

Akachi: Thank you. With regards to the seasonality of advertising, I think the unit price is not very relevant, but is it reasonable to assume that the timing of such an increase will be seen in Q4? Regarding the company's plans that have been left unchanged, do you have any expectation of AdSense in that respect?

Watanabe: Yes. Exactly. Q4 is the strongest quarter in terms of the seasonality. However, as Kamada said at the outset, we have not yet seen how the restrictions on content for children, which have been effective since January 6, will affect us. As no guidance has been factored into that matter, we are now in the process of assessing the situation.

Akachi: Thank you.

The second point is the personnel planning and cost perspective. Looking at the progress made up to Q2 so far, I think the advertising has been performing very well, but if you keep your company forecasts unchanged, I wonder if you have changed the cost plan with respect to proactive hiring and so on. I think it is good if you assume that AdSense will grow, but if AdSense is unlikely to grow, will you not be able to proceed with the recruitment of such personnel?

Watanabe: First, I would like to talk about the progress made in Q1 and Q2 so far. In Q1, the gross profit has exceeded the target. The sales were below the target, and although the sales in Q1 were below the target compared to the internal plan, the gross profit was upward, and although the sales in Q2 also behind the target, the gross profit landed at a line similar to the initial internal plan. That is, AdSense in Q1 and Q2 is underperforming in terms of sales.

However, we have been able to cover the costs by making a tie-up instead and by our services that were better than we expected, so we would like to use the costs as planned if we stay with the current situation.

Therefore, regarding the downside portion of AdSense, which you have just mentioned, the key point for this fiscal year is to somehow fill in the downside by doing our best in other businesses.

Akachi: Thank you.

Moderator: Thank you. Do you have any other questions?

We have allocated a large amount of time to the question and answer session, so we would like to ask your questions at this opportunity.

Gibson: I am David Gibson from Astris Advisory.

I think the figures for this announcement are up to the end of November. What are your views on recent developments, conditions in December, and trends? Could you tell us whether there is any change in the unit price?

Watanabe: Although we cannot discuss the details of the current calculations because they have not yet been completed, I think there are basically no major changes in December. However, the point is that we cannot really tell what will happen after January, either. From January onward, I think the key for Q3 onward is how the content restrictions for children will affect us.



Gibson: Thank you.

Moderator: Thank you. Do you have any questions? If you have any questions, please raise your hand. Would you like to add anything from the President?

There are no further questions, so we would like to finish the question and answer session. If you would like to exchange business cards, please come to the front later.

Now, we are closing the financial results briefing of UUUM Co., Ltd. Thank you very much for today.

[END]

______________

Document Notes

1. Portions of the document where the audio is unclear are marked as follows: [Inaudible]. 2. This document has been translated by SCRIPTS Asia.



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Documents

UUUM Co., Ltd. · not only with creators who are called “YouTuber” but also with creators who are active on all kinds of websites. There is also an event called YouTube FanFest