Cross Marketing : FY2023 Analyst Report (Shared Research)

Research Coverage Report by Shared Research Inc.	Coverage initiated on: 2022-11-29
Last update: 2023-09-12

3675

Cross Marketing Group

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an "owner's manual" to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [e-mail].

INDEX

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. Key financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5. Recent updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6. Trends and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.

Quarterly trends and results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13. . Business overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . Market and value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23. . Strengths and weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28. .

Historical results and financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30. . Income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37. . Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38. . Cash flow statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39. .

Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40. . News and topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43. .

Company profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45. .

Cross Marketing Group 3675

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp | Subscribe for FREE	2

Executive summary

Business overview

Cross Marketing Group Inc. (TSE Prime: 3675; hereafter "CMG") provides an extensive range of digital (DX) solutions to companies in the marketing sector. In FY06/23, CMG reported revenue of JPY25.1bn, operating profit of JPY2.0bn, and OPM of 7.8%. CMG's three business segments are Digital Marketing (36.0% of revenue, OPM of 5.2%), Data Marketing (38.9% of revenue, OPM of 26.1%), and Insight (25.1% of revenue, OPM of 14.4%). The company is not reliant upon any specific customer and maintains a client base that includes 6,700 companies and covers a wide range of industries.

In the Digital Marketing business, the company operates Moratame.net and other e-commerce sites, handles promotions utilizing panel data (described below), and provides IT solutions. These solutions span the development, operation, and maintenance of smartphone apps and online systems. In FY06/23, media and promotions accounted for 64% of Digital Marketing revenue, and IT solutions for 36%. At Moratame.net, the company procures product samples from manufacturers and provides them either for free or for a nominal fee to its roughly 2,000,000 members (as of end-January 2023), who then provide evaluations, comments, and other feedback to the manufacturers. In promotions and IT solutions, the company provides services ranging from business strategies for developing e-commerce sites and other applications to online advertising and other marketing activities to acquire customers, following up with customer relationship management (CRM).

In the Data Marketing business, the main service in online research, in which surveys are conducted via the internet using a panel network with a cumulative total of about 8,080,000 members (as of end-June 2023). A panel is a group of potential survey targets (registered panelists) with various attributes. Compared to conventional methods of conducting surveys and questionnaires door-to-door or via mail, online research can be conducted quickly at low cost. Clients can have online research done in as little as two days, starting at JPY90,000 for 100 responses to a set of 10 questions. CMG annually receives some 6,000 orders for online research. Order value can vary greatly from one order to the next, but averages roughly JPY1mn.

In the Insight business, as in Data Marketing, the company uses panels for research, using offline methods such as group interviews and in-venue or in-store surveys. For group interviews, it gathers about eight participants and interviews them in a roundtable discussion format. For in-venue surveys, it gathers participants at a venue, where, for example, they sample foods or beverages and respond to questionnaires. The number of offline survey projects, including group interviews and in-venue surveys, averages approximately 1,000 per year. The fee for a group interview session starts at JPY550,000 for a group of four or more. CMG has five interview rooms around Tokyo.

Although the company positions Data Marketing and Insight as separate segments, many client orders involve a combination of online research and group interviews. CMG does not have its own panels, but instead uses panelists registered with its equity-method affiliate Research Panel, Inc. (60% stake held by CARTA HOLDINGS Inc. [TSE Prime: 3688] and 40% by CMG) or with any of 27 other affiliated panel companies. CMG pays commissions for its use of the panels (to cover panelist recruitment).

CMG was established in April 2003 as an online research firm. Thereafter, it expanded its in-person research services, such as group interviews and in-venue surveys, and became a comprehensive research firm. Although a latecomer to the online research business, the company was able to expand its operations rapidly by using external panels instead of building its own panels, allowing it to focus on sales activity and data analysis. Since August 2011, it has expanded its business domain into the IT field through acquisitions, including a company that develops systems for mobile devices. As a result, CMG has grown from an online research firm to a company that provides its clients with total marketing support. As of end-June 2023, the CMG group comprised 32 consolidated subsidiaries and three equity-method affiliates.

The company began expanding overseas in February 2012 with the establishment of a marketing research firm in China. As of June 2023, it operates in 10 countries, including the US, the UK, China, India, and Singapore, and its research is used mainly by Western companies seeking to track the needs of Asian consumers. In FY06/23, overseas subsidiaries accounted for roughly 30% of Data Marketing revenue, 20% of Insight revenue, and 22% of the company's total revenue. The overseas research business endured a period of deteriorating profitability, but as a result of restructuring conducted from FY12/17 to FY12/19, has been back in the black since FY06/21.

In FY2022, the domestic marketing research market was worth JPY226.9bn (source: Japan Marketing Research Association's "Fact-Finding Survey of Management Operations"). Shared Research believes CMG to be third in terms of revenue scale, following Intage Holdings Inc. (TSE Prime: 4326) and Macromill, Inc. (TSE Prime: 3978). Established in March 1960, Intage Holdings has a long track record in nationwide consumer and retailer panel surveys that regularly collect information from

Cross Marketing Group 3675

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp | Subscribe for FREE	3

panelists. Established in January 2000, Macromill was a pioneer in the area of online research. Businesses other than marketing research, such as IT-related business, accounted for 36.0% of CMG's consolidated revenue in FY06/23, compared to 11.5% at Intage Holdings and 20.4% at Macromill.

CMG aims to be a marketing DX partner for its clients by providing total marketing support. For this reason, it believes its competitors to be closer in style to Dentsu Digital Inc. (unlisted), which is more steeped in the online domain when compared to other members of Dentsu Group Inc. (TSE Prime: 4324) than it is when compared to online advertising agencies or to marketing research firms such as Intage Holdings and Macromill. According to Fuji Chimera Research Institute, Inc., the domestic digital transformation (DX) market was worth JPY1.4tn in FY2020, and is expected to grow to JPY5.2tn in FY2030, for a 10-year CAGR of 14.2%.

Earnings trends

In FY06/23, the company reported revenue of JPY25.1bn (+0.8% YoY), operating profit of JPY2.0bn (-22.6% YoY), recurring profit of JPY1.9bn (-24.8% YoY), and net income attributable to owners of the parent of JPY1.0bn (-35.4% YoY). While revenue reached a record high, operating profit decreased due to an increase in SG&A expenses. By business segment, the Digital Marketing segment saw a decline in revenue due to cutbacks in advertising budgets by some clients. However, the Data Marketing performed strongly both domestically and internationally, driving overall revenue growth.

For FY06/24, the company forecasts revenue of JPY30.0bn (+19.5% YoY), operating profit of JPY3.0bn (+53.8% YoY), recurring profit of JPY2.9bn (+54.3% YoY), and net income attributable to owners of the parent of JPY1.8bn (+78.7% YoY). The company aims to achieve the medium-term management plan, DX Action 2024, which ends in FY6/24. It expects to increase revenue in all business segments and will work to create business restructuring synergies, recover order unit prices, and curb SG&A expenses.

The company targets market capitalization of JPY30.0bn, revenue of JPY30.0bn, and operating profit of JPY3.0bn in FY06/24, the final year of its DX Action 2024 medium-term management plan. Breaking down revenue, it expects Digital Marketing to generate JPY12.0bn (three-year CAGR of 20.8%), Data Marketing JPY8.0bn (7.2%), Insight JPY7.0bn (5.9%), and new businesses and M&A JPY3.0bn. CMG considers the period covered by the medium-term plan to be a growth period, and intends to accelerate growth by integrating CRM data from its group companies and establishing a structure for linking their systems together.

Strengths and weaknesses

Shared Research views the company's strengths as the following:

High growth rate and capital efficiency realized by transitioning from being a comprehensive research firm to being a marketing DX solutions firm

Rapid business development due to a corporate culture born from the company's vision ("Just go for it!") and policy (one aspect of which is "Getting past failure")

Use of its own e-commerce sites, Moratame.net and Tentame!, to obtain consumer evaluations through unconventional methods, complementing its capacity to provide clients with comprehensive marketing support as a marketing DX partner

However, we view the company's weaknesses as the following:

Lower operating profit growth and ROIC than at IT-driven marketing support firms, which CMG aims to be, since roughly half of its revenue still derives from low-growth marketing research-related operations

Lack of coordination in client information management to generate synergies among group companies, due in part to rapid business expansion through M&A and the establishment of new companies

Significant disparity between initial company forecasts and actual results due to the sensitivity of the marketing business to economic trends and the fact that the company is working to enhance its organizational structure in the midst of rapid business expansion

Cross Marketing Group 3675

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp | Subscribe for FREE	4

KeyIncome statement financiaFY12/15		l FY12/16d	ataFY12/17		FY12/18	FY12/19	FY12/20	FY06/21	FY06/22	FY06/23	FY06/24
(JPYmn)	Cons.		Cons.	Cons.		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue	14,859		15,969	16,758		17,492	18,580	15,985	10,758	24,899	25,094	30,000
YoY	82.5%		7.5%	4.9%		4.4%	6.2%	-14.0%	-	-	0.8%	19.5%
Gross profit	6,318		6,539	6,623		6,430	7,164	6,331	4,311	10,337	10,394
YoY	105.2%		3.5%	1.3%		-2.9%	11.4%	-11.6%	-	-	0.6%
Gross profit margin	42.5%		40.9%	39.5%		36.8%	38.6%	39.6%	40.1%	41.5%	41.4%
Operating profit	1,233		1,342	727		955	1,267	986	1,007	2,522	1,951	3,000
YoY	129.9%		8.9%	-45.9%		31.4%	32.7%	-22.2%	-	-	-22.6%	53.8%
Operating profit margin	8.3%		8.4%	4.3%		5.5%	6.8%	6.2%	9.4%	10.1%	7.8%	10.0%
Recurring profit	1,185		1,267	597		840	1,150	1,078	1,048	2,498	1,880	2,900
YoY	127.3%		6.9%	-52.9%		40.6%	36.9%	-6.2%	-	-	-24.8%	54.3%
Recurring profit margin	8.0%		7.9%	3.6%		4.8%	6.2%	6.7%	9.7%	10.0%	7.5%	9.7%
Net income	559		837	-703		507	-477	467	540	1,559	1,007	1,800
YoY	127.6%		49.8%	-184.0%		-172.1%	-194.2%	-197.8%	-	-	-35.4%	78.7%
Net margin	3.8%		5.2%	-4.2%		2.9%	-2.6%	2.9%	5.0%	6.3%	4.0%	6.0%
Per-share data (split- and reverse split-adjusted; JPY)
No. of shares outstanding at the end of FY(000	19,531		19,531	19,531		19,562	19,970	19,970	19,970	19,970	19,970
shares)
EPS	30.81		42.85	-36.00		25.92	-24.12	23.67	27.50	79.07	51.00	90.13
EPS (fully diluted)	-		-	-		-	-	-	27.42	78.29	50.57
Dividend per share	6.00		5.50	5.50		5.50	6.00	6.20	4.00	9.60	12.00	13.00
Book value per share	193.17		221.49	177.75		193.79	166.19	179.58	204.27	291.24	312.99
Balance sheet (JPYmn)
Cash and cash equivalents	2,384		2,160	2,047		2,606	2,714	5,218	5,174	5,542	6,478
Total current assets	6,423		6,557	6,459		7,130	7,780	9,327	9,556	10,715	11,292
Tangible fixed assets	462		457	391		365	315	248	297	293	278
Investments and other assets	802		1,000	972		1,236	1,219	1,299	1,245	1,146	1,276
Intangible assets	2,283		1,918	1,742		1,699	613	543	677	979	1,462
Total assets	9,970		9,932	9,564		10,429	9,927	11,416	11,775	13,133	14,308
Accounts payable	1,048		1,198	1,379		1,573	1,562	1,384	1,448	1,325	983
Short-term debt	1,120		885	801		897	1,332	1,646	1,198	1,147	1,339
Total current liabilities	4,090		3,697	3,704		4,298	4,773	4,995	5,051	5,036	5,147
Long-term debt	1,677		1,510	2,032		1,983	1,488	2,642	2,106	1,674	2,759
Total fixed liabilities	1,935		1,762	2,262		2,231	1,734	2,827	2,385	1,961	3,072
Total liabilities	6,025		5,459	5,966		6,529	6,507	7,823	7,436	6,998	8,220
Total net assets	3,945		4,474	3,598		3,900	3,420	3,594	4,339	6,136	6,089
Total interest-bearing debt	2,837		2,405	2,834		2,881	2,821	4,288	3,304	2,821	4,098
Cash flow statement (JPYmn)
Cash flows from operating activities	801		437	931		1,035	637	1,638	1,046	1,951	1,796
Cash flows from investing activities	-18		-220	-1,353		-351	-302	-366	292	-900	-902
Cash flows from financing activities	204		-127	302		-99	-222	1,272	-1,471	-777	27
Financial ratios
ROA (RP-based)	13.3%		12.7%	6.1%		8.4%	11.3%	10.1%	9.0%	20.1%	13.7%
ROE	17.2%		20.7%	-18.0%		14.0%	-13.4%	13.6%	14.3%	31.9%	17.1%
Equity ratio	37.8%		43.6%	36.3%		36.3%	33.4%	30.9%	34.0%	43.9%	42.0%

Source: Shared Research based on company data

Note: Figures may differ from company materials due to differences in rounding methods.

Note: FY06/21 was an irregular accounting period due to a change in the fiscal year-end.

Cross Marketing Group 3675

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp | Subscribe for FREE	5