Bridge Report:（9698）CREO fiscal year ended March 2023

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

Company Information 

Stock Information 

*The share price is the closing price on May 12th 2023. The number of issued shares is obtained by subtracting the number of treasury shares from the number of shares issued as of the fiscal year ended March 2023.
* BPS and ROE are the results for the fiscal year ended March 2023. The figures are rounded off.
* DPS and EPS are the company's forecasts for the fiscal year ending March 2024.

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 fiscal year ended March 2023 and describes the earnings forecast for the term ending March 2024 for CREO Co., Ltd. 

Table of Contents 

Key Points
1. Company Overview
2. Fiscal Year ended March 2023 Earnings Results
3. Fiscal Year ending March 2024 Earnings Forecasts
4. Conclusions
<Reference: Regarding Corporate Governance>

Key Points 

• In the fiscal year ended March 2023, sales declined 0.6% year on year to 14,689 million yen, and operating income fell 14.7% year on year to 904 million yen, as both sales and profit declined year on year in the Solution Services business due to opportunity losses on projects with strategic orders along with the impact of higher costs.

   

• For its business plan for the fiscal year ending March 2024, the company forecasts a 2.1% year-on-year increase in sales to 15 billion yen and an 18.3% year-on-year increase in operating income to 1,070 million yen, with a recovery in the Solution Services business leading to higher sales and profit once the impact of opportunity losses on strategic orders and cost increases that affected the fiscal year ended March 2023 has subsided. The dividend is expected to be 40 yen/share, unchanged from the previous fiscal year.

   

• Key measures for future growth are (1) business expansion through HR tech collaboration with Amano Corporation, (2) shift of resources to businesses with high potential and profitability, (3) creation of cloud services, and (4) strengthening initiatives in new businesses. We would like to pay close attention to the results of this year's growth strategy, which will serve as a hint for the next medium-term management plan.

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 30.8% and 12.8% of shares of CREO, respectively. CREO is an equity-method affiliate of Amano Corporation. (All figures are from the Securities Report for the fiscal year ended March 2022)

[Three thoughts in the logo]

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)

[Company strength]

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

[Robust customer base]

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. 

Solutions Service Business (accounting for 30.7% of total sales in the fiscal year ended March 2023)

Contracted Development Business (accounting for 21.1% of total sales in the fiscal year ended March 2023)

(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) 

(From the financial results briefing material for the fiscal year ended March 2023)

1-3 Initiatives for sustainability and ESG 

【Human Capital and Sustainability Initiatives】
The company has identified six material issues based on the sustainability policies: "Contribute to the settlement of social issues through business activities," "Work toward sustainable harmony between the environment and the economy," and "Aim to develop a management foundation that can flexibly respond to change." In addition, the company has initiated efforts to achieve zero carbon emissions as part of its initiatives for the "Environment."

(From the financial results briefing material for the fiscal year ended March 2023)

【Sustainability data】

(From the company’s website)

【Efforts to Improve Corporate Governance】
The company was listed on the Standard Market on April 4, 2022. Amid the demand for tighter governance, the company is strengthening its governance to enhance its corporate value. Of all the principles required by the Corporate Governance Code, the sufficiency rate of our company at the moment is 95.1%, showing a significant improvement of 27.2 points from the level prior to the market change in April 2022.

2. Fiscal Year ended March 2023 Earnings Results 

2-1. Consolidated earnings results for the Fiscal Year ended 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 decreased 0.6% year on year, and operating income dropped 14.7% year on year.
Sales declined 0.6% year on year to 14,689 million yen, and operating income fell 14.7% to 904 million yen. The ICT services market, in which the corporate group operates business, continued to see strong demand from client companies amid changing workstyles in society. Despite this environment, the Solution Services business recorded lower sales and profit year on year due to lost opportunities in projects with strategic orders and higher costs. On the other hand, all other segments saw year-on-year increases in both sales and profit.
Gross profit margin was 22.1%, down 0.9 points from the previous term. SG&A expenses were largely unchanged from the previous term, and the ratio of SG&A to net sales rose 0.1 points year on year to 16.0%, while operating profit margin declined 1.0 point year on year to 6.2%. Other factors, including a decrease in subsidiary income, caused ordinary income to decline 17.7% year on year, which exceeded the rate of decline of operating income. Profit attributable to owners of parent declined 25.9% year on year due to an increase in total income taxes, despite a decrease in office relocation expenses and software valuation losses.

2-2. Trends in each segment 

Sales and operating income for each segment

* For two businesses other than the "System Operation and Services business" and the "Support Services business" operated by consolidated subsidiaries, no allocation of head office expenses, etc., is made 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 4,506 million yen (down 15.1% year on year), and operating income was 510 million yen (down 34.6% year on year). The high cost of projects with strategic orders resulted in the increase in development costs and lost opportunities for personnel as the projects concluded, and the cloud shift from a license format to a usage fee format accelerated in product services. As a result, sales declined 800 million yen year on year and operating income decreased 270 million yen year on year. Segment profit margin declined 3.4 points year on year.

Contracted Development Business 
◎The company mainly undertakes system development for major companies such as the Fujitsu Group and Amano Corporation. 
Sales were 3,093 million yen (up 22.8% year on year), and operating income was 567 million yen (up 21.6% year on year). Sales increased 574 million yen year on year and operating income rose 100 million yen year on year, mainly due to the healthy increase of projects for major clients. Profit increased due to improved personnel adjustments, and the company was also successful with major system integration projects due to specializing in areas in which it excelled. Segment profit margin declined 0.1 points year on year.

System Operations and Service Business 
◎The company mainly provides system development, maintenance, and operation services to major domestic portal site operators. 
Sales were 2,590 million yen (up 4.5% year on year), and operating income was 375 million yen (up 15.5% year on year). Sales increased 110 million yen year on year and operating income grew 50 million yen, mainly due to increased orders from major clients. In addition to the expansion of the major portal site business in Japan, higher unit prices also contributed to the increase. In addition, there were continued orders for medical services from the second half of the fiscal year ended March 2022. Segment profit margin rose 1.4 points year on year.

Support Services Business 
◎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 4,499 million yen (up 0.5% year on year), and operating income was 391 million yen (up 11.6% year on year). Sales increased 20 million yen year on year and operating income rose 40 million yen year on year, mainly due to an increase in orders received through cooperation among group companies. While the research service was scaled back, help desk and technical support services, which are the mainstay, remained strong. Segment profit margin rose 0.9 points year on year.

2-3. Variations in quarterly results

Transition of Consolidated Net Sales and Operating Income for the fourth Quarter (Jan-Mar)

In the fourth quarter of FY 3/23 (Jan-Mar), 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 March 2023 stood at 9,748 million yen, down 29 million yen from the end of the previous term. In the assets side, receivables, temporary account for software, investment securities, etc. increased, but cash & deposits, software in progress, etc. decreased. In the side of liabilities and net assets, other account payable, provision for loss from projects, retained earnings, etc. increased, however, not only trade account payable and income taxes payable decreased, but also the acquisition of treasury shares affected the performance. The liquidity of assets is high, as current assets account for 81.9% of total assets. Capital-to-asset ratio was as high as 70.8%.

Cash Flows

*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 profit before taxes and other adjustments, the augmentation of accounts receivable, contract assets, payments of income taxes, etc. Although, the cash outflow from investing activities decreased through the expenditure for acquiring intangible asset, etc., the surplus of free cash flow also shrank due to the above-mentioned shrank of the cash inflow from operating activities. 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 March 2023 was down 9.4% from the previous term.

2-5. Topics

(From the financial results briefing material for the fiscal year ended March 2023)

3. Fiscal Year ending March 2024 Earnings Forecasts 

3-1. Consolidated earnings forecasts for Fiscal Year ending March 2024 

*Unit: Million yen

Sales are expected to grow 2.1% and operating income is projected to rise 18.3% year on year.
For the fiscal year ending March 2024, the company is expecting a 2.1% year-on-year increase in sales to 15,000 million yen and an 18.3% year-on-year increase in operating income to 1,070 million yen.
Although the outlook for the global and domestic economies is becoming increasingly uncertain due to soaring raw material prices and global inflationary trends, the company will continue to promote the management of resources and capital through the use of ICT and adapt to cloud computing technologies, etc. in the ICT services market, in which the company operates business, specifically in the area of management of corporate resource and human capital management. The company expects to increase its investment in the expansion of its management base necessary for the digital society in the future. The company intends to build a new business model and provide services for the new normal.
Under these circumstances, a recovery in the Solution Services business is expected to contribute to higher sales and profit, once the impact of opportunity losses from strategic orders and cost increases, which affected the company in the fiscal year ended March 2023, has subsided. The contracted development business is also expected to continue its trend of higher sales and profits due to steady growth in projects for major clients. In addition, operating profit margin is expected to improve 0.9 points year on year to 7.1%, mainly due to an improvement in project profit margin.
The company plans to pay a dividend of 40 yen per share, like in the previous year. The company intends to maintain its dividend payout ratio target of 40%.

Sales and operating income for each segment of FY 3/24 (Company’s plan) 

3-2. Initiatives for business growth
The market environment for IT investment remains relatively favorable. The ERP market continues to see demand for renewal of old-fashioned ERPs, and there are signs of an increase in demand for cloud computing and ERP for data-driven management. In such an environment, the battle for hiring IT engineers is becoming more intense than ever, and the multiple subcontracting structure of system integrators may soon become unsustainable due to labor shortage, making it necessary to recruit and retain human resources that can survive in this era of rapid change.
The company will promote the following initiatives for growth in each of its business segments.

【Growing Businesses】
◎Solution Services Business

【Stable Businesses】
◎Contracted Development Business

◎System operation and services business

◎Support Service Business

3-3. Priority measures

◎ Growth Strategy
◆Expanding business through HR tech collaboration with Amano Corporation
◆Shifting resources to businesses with high potential and profitability
◆Creating cloud services
◆Strengthening initiatives for new businesses

◎ Sales Strategy
◆Securing an order receiving system by improving cooperation among group companies and external parties
◆Improving the quality of business negotiations by improving order risk management
◆Improving customer contact

◎ Organizational Strategy
◆Streamlining the organization by improving efficiency and controlling costs through organizational elimination and consolidation
◆Improving productivity and creativity by improving work comfort and job satisfaction and personnel training curriculum
◆Fostering engagement

3-4. Solution Map for Growing Businesses

(From the financial results briefing material for the fiscal year ended March 2023)

4. Conclusions 

The company's results for the fiscal year ended March 2023 showed declines in both sales and profit, with a 0.6% decrease in sales and a 14.7% drop in operating income year on year. Although sales and profit increased in businesses other than the Solution Services segment which was a growing business, it affected the results by recording lower sales and profit year on year due to higher development costs at project closures and lost personnel opportunities for projects with strategic orders. Although it was unfortunate that the Solution Services business experienced high-cost projects for the second consecutive fiscal year, the high-cost projects that impacted the results for the fiscal year ended March 2023 have already been concluded, and the company expects the Solution Services business to lead the recovery and expand earnings moving forward. For the fiscal year ending March 2024, the company forecasts a 4.7% increase in sales and a 40.1% increase in operating income year on year in the Solution Services business. Considering the cost increases and opportunity losses incurred from high-cost projects over the past two years, it seems that this plan is conservative. We will pay close attention to the performance of the Solution Services segment to see how sales and profitability will recover in the future, while ensuring thorough project management.
In addition, the company has decided not to prepare a new medium-term management plan. This is because the company will celebrate its 50th anniversary on March 22, 2024, and will take a year to solidify its foothold and announce a new medium-to-long-term management policy for the next stage of growth next year. The company's growth strategy for the current fiscal year to establish a firm foothold is: (1) expanding business through the HR Tech collaboration with Amano Corporation, (2) shifting resources to businesses with high potential and profitability, (3) creating cloud services, and (4) improving initiatives in new businesses. We will pay close attention to the progress on this year's growth strategy, which will serve as a guidepost for the next mid-term management plan.
Furthermore, the company plans to launch a new DX solution in the future. These include "Toramiru," a cloud solution for purchasing process management, and a corporate performance management service that supports data-driven management. The sales of these new DX solutions will be closely watched with high expectations.

<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>