Dentsu Inc. Announces Consolidated Financial Results for the First Quarter of Fiscal Year 2018 (IFRS)

The text of the Dentsu Inc. news release distributed on May 15 is as follows.

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May 15, 2018

Consolidated Financial Results for the First Quarter of 2018 (IFRS)

Dentsu Inc. (Head Office: Minato-ku, Tokyo; President and CEO: Toshihiro Yamamoto; Capital: ¥74,609.81 million; hereinafter "the Company") held a Board of Directors meeting today at the Dentsu Head Office Building in Shiodome, Tokyo, and finalized its consolidated financial results for the first quarter of fiscal 2018 (January 1, 2018 to March 31, 2018; hereinafter "the quarter").

Note: The Company adopted IFRS 15 "Revenue from Contracts with Customers" effective January 1, 2018. To facilitate comparison with prior-period results, pro forma information applying IFRS 15 is also used in this document for prior-period results, including the first quarter of fiscal 2017. For details on the pro forma information, please refer to the section "Details of Pro Forma Information Due to the Application of IFRS 15" in the document "Summary of Consolidated Financial Results for the First Quarter of Fiscal Year 2018" on our IR website.

[Key Points of the Earnings Announcement]

Consolidated performance for the quarter progressed largely in line with the full-year forecast announced in February 2018. Compared to the same period last year, revenue increased by 5.7%, gross profit increased by 6.1%, and adjusted operating profit decreased by ¥5.0 billion (a 13.3% decrease). Domestic operations saw gross profit increase by 1.9% driven by the digital segment, but adjusted operating profit decreased by ¥2.6 billion due to increased costs associated with advancing labor environment reforms. Overseas operations achieved a 9.8% increase in gross profit driven by acquisition effects and organic growth (2.2% increase), but adjusted operating profit decreased by ¥2.3 billion due to increased IT expenses and other costs aimed at building corporate foundations for a new growth phase.

There is no change to the consolidated performance outlook for fiscal 2018. Domestically, we are expanding our digital domain based on the integrated framework "People Driven Marketing," which consolidates and advances people-centric marketing methodologies. We are also introducing additional measures to complete the foundational work for labor environment reform, our most critical management challenge, in 2018. Overseas, we are executing investments for future growth, such as strengthening and expanding IT systems. Simultaneously, building on the record-high media transactions acquired in fiscal 2017 (US$5.2 billion after offsetting increases and decreases), we aim for organic growth exceeding the industry average.

[Current Quarter (FY2018 Q1 (Jan-Mar) Results)]
(△ indicates decrease)

※1: Adjusted operating profit is a profitability metric that measures the performance of recurring operations. It excludes non-recurring items such as amortization of intangible assets related to acquisitions, M&A-related costs, equity-based compensation expenses attributable to acquired companies, impairment charges, and gains/losses on the sale of fixed assets.
　

※2: Operating margin is calculated as "Adjusted Operating Profit ÷ Gross Profit."
　

※3: Adjusted net income attributable to owners of the parent is a measure of recurring profit attributable to owners of the parent, calculated by excluding from net income items related to operating profit, earn-out obligations, revaluation gains/losses on acquisition-related put options, and the related tax equivalents and non-controlling interest equivalents.
　

※4: The comparative results for the first quarter of fiscal year 2017 are pro forma, reflecting the application of IFRS 15.

 

＜Consolidated Performance Highlights for the Current Quarter＞

・Group Performance for the Quarter

Gross profit increased (+6.1% YoY), primarily driven by organic growth (+¥4.7 billion), acquisition effects (+¥7.4 billion), and foreign exchange impact (+¥0.7 billion). Adjusted operating profit decreased (-13.3% YoY).

・Gross Profit (¥226.6 billion, +6.1% YoY, +5.7% excluding currency effects)

Domestic Business: Slight increase driven by digital segment (¥102.3 billion, +1.9% YoY).
Overseas Business: Significant increase due to acquisition effects and organic growth (¥124.3 billion, +9.8% YoY, +9.0% excluding foreign exchange effects).

・Adjusted Operating Profit (¥32.7 billion, down 13.3% YoY, down 13.0% on a constant currency basis)

• Domestic Business: Decreased due to increased labor environment reform-related expenses (¥30.4 billion, -7.9% YoY).
Overseas Business: Profit decreased due to increased IT expenses and other costs aimed at strengthening the corporate foundation for a new growth phase (¥23 billion, -50.8% YoY, -49.7% on a constant currency basis).

・Operating Margin (14.4%, down 330 bps year-on-year, down 310 bps excluding foreign exchange effects)

The factors are largely the same as those for the adjusted operating profit above.

・Adjusted Net Income (attributable to owners of the parent) (¥17.9 billion, down 23.7% year-on-year)

The main factor for the decrease was the reduction in adjusted operating profit.
Basic adjusted net income per share was ¥63.76. The prior-year period figure was ¥82.73.
Note that net income attributable to owners of the parent under statutory accounting also decreased (¥10.7 billion, down 30.9% YoY).

(Details of Gross Profit)

・Gross profit growth rate: Consolidated 6.1%, Domestic operations 1.9%, Overseas operations 9.8%
・Organic gross profit growth rate: Consolidated 2.1%, Domestic operations 1.9%, Overseas operations 2.2%
・Overseas business ratio: 54.9% (same period last year: 53.0%)
・Digital segment composition ratio: Consolidated 43.7%, Domestic operations 23.0%, Overseas operations 60.8%
(Previous year: Consolidated 40.0%, Domestic Business 21.0%, Overseas Business 56.9%)

<Regional Performance>

(Domestic)
Starting this quarter, we will disclose "Domestic Business Sales by Business Segment" on a quarterly basis as a replacement for the "Monthly Non-Consolidated Sales" reported through December 2017.

Domestic Business Sales by Business Segment (IFRS Basis)
(Unit: million yen, △ indicates decrease)

※1: This figure includes both Internet (previously aggregated) and Internet advertising revenue (¥1,614 million) previously included under Mass Media, resulting in double counting.

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※2: Under IFRS, there is a difference in revenue recognition timing compared to Japanese GAAP. In the table above, to align with Dentsu Inc.'s non-consolidated results (Japanese GAAP) (see page 7 of this document), the difference from IFRS is adjusted under 'Consolidation Adjustments, etc.'

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※3: Includes adjustments for sales to overseas group companies and differences in accounting standards.

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※4: Figures that were double-counted between "Internet" and various mass media.

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※5: Figures calculated using the same method as "Interactive Media" in the standalone monthly disclosures implemented until December 2017.

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(Overseas)
Overseas Business: Gross Profit and Organic Growth Rate by Region

※For January-March 2017, the portion attributable to our subsidiary Merkle's EMEA operations was included in Americas. However, for January-March 2018, as it became possible to separate these figures, the relevant amount is now included in EMEA. Note that the organic growth rate for January-March 2017 was calculated after including this amount in EMEA.

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EMEA Performance: While major markets like Germany and France faced challenges, positive growth in the UK and strong growth in Russia and the Nordic countries drove overall growth.

Americas: The US, the world's largest advertising market, maintained its momentum, and Brazil, which had been a challenge, achieved double-digit organic growth. Overall, the acquisition of new business from the previous year and management changes proved effective.

APAC: High growth continued in India and Thailand, while China faced persistent challenges.

For details on the first quarter of fiscal year 2018 results, please visit http://www.dentsu.co.jp/ir/.

[Consolidated Performance Outlook for Fiscal Year 2018 (January 1, 2018 - December 31, 2018)]

There are no revisions to the consolidated earnings forecast announced on February 13, 2018. However, due to the adoption of IFRS 15 "Revenue from Contracts with Customers," the "Revenue" for FY2017 has been restated on a pro forma basis and is presented again in the table below.

*Changes due to the adoption of IFRS 15 "Revenue from Contracts with Customers".

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For details, please refer to the attached PDF.