Bridge Report:（9698）CREO the second quarter of fiscal year ending March 2023

President and Representative Director  Junichi Kakizaki	CREO CO., LTD. (9698)

Company Information 

Stock Information 

*The share price is the closing price on November 7th 2022. The number of issued shares is obtained by subtracting the number of treasury shares from the number of shares issued as of the end of the latest quarter. 
* BPS and ROE are the results for the fiscal year ended March 2022. The figures are rounded off. 
* DPS and EPS are the company's forecasts for the fiscal year ending March 2023. 

Consolidated Earnings Trends 

*The forecasted values are from the Company. Unit: million yen, yen 
*Net income is the profit attributable to owners of parent. The same applies below.

This Bridge Report overviews the business performance for the second quarter of fiscal year ending March 2023 and describes the earnings forecast for the term ending March 2023 for CREO Co., Ltd. 

Table of Contents 

Key Points
1. Company Overview
2. The second quarter of Fiscal Year ending March 2023 Earnings Results
3. Fiscal Year ending March 2023 Earnings Forecasts
4. Conclusions
<Reference: Regarding Corporate Governance>

Key Points 

• In the fiscal year ended March 2022, sales increased 0.1% year on year to 7,173 million yen, due to the growth of businesses other than the Solutions Service Business. On the other hand, operating income declined 22.9% year on year to 366 million yen, as the performance of the strategic order receipt project in the Solutions Service Business fell below the forecast significantly. While the Solutions Service Business saw year-on-year declines in sales and profit, all of the other segments witnessed year-on-year increases in sales and profit.

   

• After the second quarter, the corporate forecast for the fiscal year ending March 2023 has not been revised, and it is projected that sales will grow 3.8% from the previous term to 15,350 million yen and operating income will rise 16.0% from the previous term to 1,230 million yen. Sales are expected to grow, as the demand for investment in systems is healthy because enterprises engage in workstyle reform, productivity improvement, etc. Profit is forecast to increase, as the company will finish the high-cost project of the Solutions Service Business and enhance marketing activities for increasing new customers. The dividend plan has not been revised, and they plan to pay a dividend of 40 yen/share, up 1 yen/share from the previous term.

   

• Since a high-cost project emerged in the Solutions Service Business, the sales and operating income in the first half of the term were 156 million yen and 53 million yen, respectively, smaller than the corporate forecast. Under such circumstances, the company thinks that it is possible to catch up by finishing the high-cost project in the Solutions Service Business early and resuming the normal allocation of resources. Their performance in the third quarter is noteworthy, to see how much they can get closer to the full-year forecast by catching up on the delay in the first half through their multifaceted measures, including the enhancement of PMO (project management support inside an organization) and quality improvement.

1. Company Overview 

CREO is a system integrator that offers a variety of solutions. The company offers business solutions, including “ZeeM Series,” a business package software used by over 2,000 enterprises (Enterprise Resource Planning (ERP) for human resources, accounting, asset management, etc.) and “BIZ PLATFORM,” for business process management (BPM), which contributes to the streamlining of business operation and cost reduction, develops systems for governmental offices, municipalities, public-interest corporations, and large companies, produces and operates web systems for leading portal site operators in Japan, provides loyal clients with call-center services, and so on. 

The corporate group is composed of CREO, and three consolidated subsidiaries: CoCoTo Co., Ltd., Brigh-E Co., Ltd. and Adams Communications Co., Ltd. Amano (6436) and Z Holdings Corporation (4689) holds 30.6% and 12.7% of shares of CREO, respectively. CREO is an equity-method affiliate of Amano Corporation. 

To create an “impression” The exclamation mark in the logo represents the stance of surpassing expectations and impressing clients. To continue “creation” The sphere is CREO itself, and represents the environment in which human resources, products, and services are born and grow. To cuddle up to “eternity” This logo denotes CREO, which is represented by the sphere, cuddling up to clients, society, and shareholders.

(From the company’s briefing material for individual investors)

(From the company’s briefing material for individual investors)

1-1. Business segments 

The company changed its organizational structure in April 2021 from a company system to a business department system. As a result, in the fiscal year ended March 2021, the Solution Service Company, West Japan Company, and Next Solution Company were restructured into Enterprise Digital Transformation Dept., Business Acceleration Dept., Business Strategy Dept., and Social System Dept. There are no changes to the four reporting segments, which are the disclosure segments. 

(From the company’s briefing material for individual investors)

(From the company’s briefing material for individual investors) 

1-2. Mid-term Management Plan (FY 3/21 to FY 3/23) 

*Unit: Million yen

1-3 Initiatives for sustainability and ESG 

Sustainability Data

2. The second quarter of Fiscal Year ending March 2023 Earnings Results 

2-1. Consolidated earnings results for the second quarter of Fiscal Year ending March 2023

*Unit: Million yen
* The figures include the figures calculated by Investment Bridge Co., Ltd. as reference values and may differ from the actual figures. The same applies below.

*Produced by Investment Bridge Co., Ltd. with reference to the material of the company.
*▲ represents a rise in expenses.

Sales increased 0.1%, while operating income dropped 22.9% year on year.
In the ICT service market, in which the Creo Group operates business, the demand from client companies and others remained strong due to the trend of workstyle reform. Sales grew 0.1% year on year to 7,173 million yen, and operating income dropped 22.9% year on year to 366 million yen. In the Solutions Service Business, sales and profit declined year on year, but all of the other segments saw year-on-year increases in sales and profit. Since the demand for investment in IT kept growing, the number of orders received was healthy, but operating income fell below the forecast considerably in the strategic order receipt project.
Gross profit margin declined 2.3 points year on year to 21.1%. While sales increased slightly, the company reduced SGA, and the ratio of SGA to sales decreased 0.8 points to 16.0%, but operating income margin dropped 1.5 points to 5.1%. Due to the decrease in revenues from subsidies, etc., ordinary income dropped 26.5% year on year, showing a higher decrease rate than operating income, while due to the decreases in expenses for office relocation, the loss from software evaluation, etc., profit attributable to owners of parent declined 14.0% year on year, showing a lower decrease rate than operating income.
Sales and operating income were 2.1% and 12.6%, respectively, smaller than the initial forecast for the first half of the term.

Situation of the high-cost project in the Solutions Service Business
In the Solutions Service Business, the company had a high-cost project in FY 3/2022 and another one in FY 3/2023. In the high-cost project in the previous term, the company undertook the collaborative development of packaged products to be sold by the client. On the other hand, in the high-cost project this term, the company redevelops the system so that a client can replace the old version of ZeeM, which is a core product of CREO. This project earns a revenue of several billions of yen. CREO has been making transactions for 20 years with the two client companies of the high-cost projects in the previous term and this term, so CREO undertook the projects for the loyal customers who are expected to make transactions with CREO in the long term. The company aims to finish the project that is affecting the performance this term by the end of this term, and its response will reach a peak in the third quarter. Currently, they are making company-wide efforts to deliver products to clients while taking multifaceted measures, including the enhancement of PMO (project management support inside an organization) and quality improvement.

2-2. Trends in each segment 

Sales and operating income for each segment

*Unit: Million yen
*In the two businesses other than the System Operation and Services Business and the Support Services Business operated by consolidated subsidiaries, the head office expenses are not allocated when calculating operating income.

*Produced by Investment Bridge Co., Ltd. with reference to the material of the company.

Solutions Service Business
◎It mainly offers solutions and services, including “ZeeM,” a solution for personnel affairs, salaries, and accounting.
Sales were 2,256 million yen, down 14.5% year on year, and operating income was 227 million yen, down 49.4% year on year. The number of orders was healthy, but the performance of the strategic order receipt project fell below the forecast significantly, so sales dropped 383 million yen year on year, and operating income declined 221 million yen year on year. The profit margin in this segment decreased 6.9 points year on year. Sales and operating income were 243 million yen and 182 million yen, respectively, smaller than the initial forecast for the first half of the term.

Contracted Development Business
◎The company mainly undertakes system development for major companies such as the Fujitsu Group and Amano Corporation. 
Sales were 1,379 million yen, up 19.9% year on year, and operating income was 241 million yen, up 31.8% year on year. Thanks to the increase of orders from major clients, etc., sales and operating income increased 228 million yen and 58 million yen, respectively, year on year. The profit margin in this segment rose 1.6 points year on year.
Sales and operating income were 59 million yen and 31 million yen, respectively, larger than the initial forecast for the first half of the term.

System Operations and Service Business
◎The company mainly provides system development, maintenance, and operation services to major domestic portal site operators. 
Sales were 1,299 million yen, up 10.6% year on year, and operating income was 182 million yen, up 28.0% year on year. Thanks to the healthy trend of projects for major clients, etc., sales and operating income rose 124 million yen and 39 million yen, respectively, year on year. The profit margin in this segment rose 1.9 points year on year.
Sales were 10 million yen smaller than the initial forecast for the first half of the term, while operating income was 22 million yen higher than the initial forecast.

◎The company mainly provides support and services centered on help desks and technical support and call center services for purposes, such as social research and market research. 
Sales were 2,237 million yen, up 1.8% year on year, and operating income was 183 million yen, up 18.8% year on year. Due to the rebound from the temporary decline in the number of orders in the same period of the previous year, sales grew 39 million yen year on year and operating income rose 28 million yen year on year. The profit margin in this segment increased 1.2 points year on year.
Sales were 212 million yen smaller than the initial forecast for the first half of the term, while operating income was 13 million yen higher than the initial forecast.

2-3. Variations in quarterly results 

In the second quarter of FY 3/23 (July-September), sales and profits declined YoY, but sales and operating income were higher level than in the past. 

2-4. Financial Position and Cash Flows

*Unit: Million yen 

*Produced by Investment Bridge Co., Ltd. with reference to the material of the company.

The total assets as of the end of September 2022 stood at 9,378 million yen, down 399 million yen from the end of the previous term. In the assets side, temporary account for software, investment securities, etc. increased, but cash & deposits, accounts receivable, etc. decreased. In the side of liabilities and net assets, provision for loss from projects, advances received, etc. increased, but the payment of dividends, the acquisition of treasury shares, etc. affected the performance. The liquidity of assets is high, as current assets account for 80.5% of total assets. Capital-to-asset ratio was as high as 70.8%.

*Unit: Million yen 

*Produced by Investment Bridge Co., Ltd. with reference to the material of the company.

In terms of cash flows, the cash inflow from operating activities shrank due to the drop in decreases in net income before taxes and other adjustments, accounts receivable, and contract assets, the augmentation of payments of income taxes, etc. In addition, the cash outflow from investing activities increased through the expenditure for acquiring investment securities, etc., and the surplus of free cash flow shrank. The cash outflow from financing activities expanded, due to the expenditure for acquiring treasury shares, the augmentation of dividend payments, etc. Consequently, the cash position as of the end of September 2023 was down 3.0% from the previous term.

2-5. Topics

◎Acquisition and retirement of treasury shares
After having discussions from the three viewpoints: (1) return to shareholders, (2) securing of funds for investment, and (3) maintenance of financial stability, which are our capital policies, we acquired and retired treasury shares.

<Results of acquisition of treasury shares>

<Results of retirement of treasury shares>

◎Capital and business alliance with Individual Systems Co., Ltd. in Vietnam
On May 10, 2022, CREO concluded a basic agreement with Individual Systems Co., Ltd. (hereinafter called “IVS”), a Japanese-affiliated software developer in Vietnam, for investing in IVS under the condition that they will obtain permits, approvals, etc. from the local authorities in Vietnam. Since the start of its business in 2002, IVS has trained engineers in Vietnam and engaged in offshore development for Japan, and developed a 300-employee organization, one of the largest among Japanese-affiliated IT enterprises. In addition, it occupied the largest share in the local SI market targeting Japanese enterprises in Vietnam, so it is growing rapidly. This capital and business alliance is aimed at offering systems and services while utilizing its cost advantage, by cooperating with a development company in Vietnam and establishing a development system to meet the requests from clients.
From now on, it is expected that (1) its production capacity will be improved by securing ICT personnel, (2) their in-house development function will be enhanced by establishing a laboratory and conducting global cooperation, and (3) the training of global personnel and the cultivation of markets will be accelerated.

◎Conclusion of a “basic agreement for industry-academia collaboration” with Shiga University
On May 23, 2022, CREO concluded a “basic agreement for industry-academia collaboration” with Shiga University for the purpose of developing personnel in the data science field and facilitating the collaboration between the industrial and academic sectors. The company will cooperate with Shiga University broadly in conducting collaborative research for solving issues in the business field by utilizing big data and open data, developing personnel in the data science field, accepting interns, and recruiting personnel, in order to compensate for the recent shortage of personnel versed in digital technologies and DX and acquiring personnel who can accelerate business in the data and AI fields. From now on, the company plans to implement measures for creating new value by mutually utilizing resources, including the development of personnel in the field of data science, utilization of big data, and collaborative research for solving issues in the business field.

3. Fiscal Year ending March 2023 Earnings Forecasts 

3-1. Consolidated earnings forecasts for Fiscal Year ending March 2023 

*Unit: Million yen 

Sales and operating income are projected to rise 3.8% and 16.0%, respectively, year on year.
After the second quarter, the corporate forecast for the fiscal year ending March 2023 has not been revised, and it is projected that sales will grow 3.8% from the previous term to 15,350 million yen and operating income will rise 16.0% from the previous term to 1,230 million yen.
Sales are expected to grow in all of the Solutions Service, Contracted Development, System Operation and Services, and Support Services Businesses, as the demand for investment in systems is healthy because enterprises engage in workstyle reform, productivity improvement, etc. Profit is forecast to increase, as the company will finish the high-cost project of the Solutions Service Business and enhance marketing activities for increasing new customers. In the other businesses: Contracted Development, System Operation and Services, and Support Services Businesses, too, profit is projected to rise. Operating income margin is expected to increase 0.8 points to 8.0%, due to the improvement in the profit margin of projects, etc.
The dividend plan has not been revised, and they plan to pay a dividend of 40 yen/share, up 1 yen/share from the previous term. The company aims to keep payout ratio at the target 40%.

In many business segments of the CREO Group, sales and profit tend to be larger in the second and fourth quarters. If the sales and profit in these quarters are not in line with the forecast, results may be significantly different from the consolidated earnings forecast. In the Solutions Service Business, projects tend to become larger, so there is a possibility that results will be significantly different from the forecast, if the receipt of orders or acceptance inspection is delayed or if a project becomes unprofitable. In the Contracted Development Business, acceptance inspection tends to be conducted in the fourth quarter due to the characteristics of the business, so there is a possibility that sales will be posted in the following term according to the progress of acceptance inspection. Furthermore, if leading IT vendors, which are their major clients, fail to receive orders from governmental offices, enterprises, etc., which are system users, as planned, they will not place orders with CREO, and business results may be considerably different from the forecast.

Sales and operating income for each segment of FY 3/23 (Company’s plan)

*Unit: Million yen
*Sales figures represent values prior to deletion of inter-segment sales or transfer amounts.

3-2 Key measures for the fiscal year ending March 2023 

◎ Large-scale project management
◆ Enhancement of the process for checking order receipt judgments and conditions
◆ Visualization and analysis of projects
◆ Supervision of projects, and enhancement of risk management

◎ Shift to highly profitable models
◆ Improvement in productivity through the standardization and sharing of the produces for introducing products
◆ Selection and concentration of commissioned development projects (in continuing and promising fields)
◆ Streamlining of system operation services
◆ Expansion of the scope of cooperative business with Amano

◎ Support for DX and the shift to cloud services
◆ Improvement of solution services of HR Tech
◆ Promotion of co-creation of cloud vendors and fortification of the DX base
◆ Creation of digital business

◎ Investment in human resources
◆ Enhancement of offshore development based on the collaboration with IVS this term
◆ Development of global personnel
◆ Training and reskilling of DX personnel
◆ To adapt to diverse workstyles

3-3 Growth strategies

[Expansion of the cloud services that connect information and services]  

(From the company’s briefing material for individual investors)

The company will redefine the products it offers in the Solutions Service Business as not only tools for the human resources, accounting, and information systems departments, but also as solutions for management, and proactively propose them to customers. 

(From the company’s briefing material for individual investors)

As a framework for promoting Enterprise DX for “Connecting,” they established a management base that connects management resources such as people, goods, and money, which brings continuity to digital innovation. 

Product/Service Lineup

(From the company’s briefing material for individual investors) 

3-4 Progress rate

[Consolidated results]

*Unit: Million yen 

[Profit of each segment] 

*Unit: Million yen

CREO conducts business administration with the aim of leveling off its performance throughout each term, but it is forecast that its performance will be better in the second half. The sales and operating income in the first half of the term were 156 million yen and 53 million yen smaller than the forecast, but they aim to catch up by normalizing resources while finishing the high-cost project in the Solutions Service Business early in the second half. In addition, they will meet the demand for their products and cloud services, including ZeeM, by cementing the cooperation with Amano and selling licenses mainly in the fourth quarter. Furthermore, they aim to increase sales further in the other segments, which are currently healthy.

4. Conclusions 

In the second quarter of the fiscal year ending March 2023, sales grew 0.1% and operating income dropped 22.9% year on year. In the ICT service market, in which the Creo Group operates business, the demand from client companies and others remained strong due to the trend of workstyle reform. Under these circumstances, sales and profit increased year on year in all segments other than the Solutions Service Business. In the Solutions Service Business, sales and profit declined year on year, due to the high-cost project. Consequently, the sales and operating income in the first half of the term were 156 million yen and 53 million yen smaller than the initial forecast. The company thinks that it is possible to catch up by finishing the high-cost project in the Solutions Service Business early and normalizing resources in the second half. The outcomes of ongoing multifaceted measures, including the enhancement of PMO (project management support inside an organization) and quality improvement, are noteworthy. The company aims to cement the cooperation with Amano to sell licenses mainly in the fourth quarter, meet the demand for their products and cloud services, including ZeeM, and increase sales in the other segments, which are performing well. Their business performance in the third quarter is noteworthy to see whether or not they can catch up on the delay in the first half and approach their full-year forecast with the above measures.
In addition, the company is actively carrying out investment for securing personnel and improving productivity, by accelerating the shift to cloud services (improvement of connectable cloud services), improving products and services targeted at the major customers of TimePro of Amano, and actively utilizing offshore resources (in Vietnam). In the mid/long term, we would like to keep an eye on when the outcomes of their strategic investment will become evident.

<Reference: Regarding Corporate Governance> 

◎Organization type, and the composition of directors and auditors

◎Corporate Governance Report: Updated on June 23, 2022

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)> 

<The main principles of disclosure>