Advance Create Co.,Ltd. FY2024 Q3 Earnings Report

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Executive Summary

Despite a double-digit decline in revenue, the Company narrowed its loss, indicating that it is in the process of restructuring its business structure. Revenue was ¥60.6B (¥78.4B in the same period of the previous year, YoY -22.7%), Operating Income was ¥-4.4B (¥-8.6B in the previous year), Ordinary Income was ¥-4.6B (¥-9.9B in the previous year), and Net Income was ¥-11.8B (Net Income attributable to owners of the parent was ¥-9.3B, compared with ¥-17.2B in the previous year). The primary causes of the revenue decline were downturns in the core insurance agency business and media-related businesses. However, Operating Income and Net Income improved from the previous year due to reductions in selling, general and administrative expenses and extraordinary losses. Meanwhile, net assets were ¥-49.2B, indicating that the capital deficit had expanded. Balancing earnings improvement with the restoration of financial soundness will therefore be a key challenge going forward.

Factors Affecting Business Performance

【Revenue】Revenue declined by double digits to ¥60.6B (down 22.7% YoY). By segment, the core insurance agency business (InsuranceAgent) generated ¥51.0B (-13.2%), accounting for 84.2% of the total and driving the Company-wide revenue shortfall. Among the media-related businesses, the Media Business (MediaAgency) generated ¥9.7B (-33.9%), while the Media Rep Business generated ¥5.3B (-32.1%), both recording substantial declines due to weak advertising market conditions. In contrast, the Reinsurance Business generated ¥10.3B (-9.4%), demonstrating relative resilience, while the ASP Business generated ¥3.1B (+2.5%), securing the only revenue increase.

【Profit and Loss】Operating Loss was ¥-4.4B (¥-8.6B in the previous year), and Ordinary Loss was ¥-4.6B (¥-9.9B in the previous year), meaning that the loss narrowed substantially despite the revenue decline. By segment, the Insurance Agency Business recorded a loss of ¥-6.9B (a 28.7% improvement YoY, but it remained the largest burden), while the Media Business (+¥1.9B), ASP Business (+¥1.2B), and Reinsurance Business (+¥0.8B) remained profitable and provided support. Extraordinary losses of ¥5.9B (including impairment losses of ¥2.2B) weighed down Net Income as a temporary factor, resulting in a divergence between Ordinary Loss of ¥-4.6B and consolidated Net Income of ¥-11.8B. There were no revenue-increasing factors; rather, the structure was one of improved earnings despite declining revenue. Accordingly, the results can be summarized as lower revenue but improved earnings (a narrowing loss).

Segment Analysis

Of the five segments, three businesses were profitable: MediaAgency (Operating Income of ¥1.9B, profit margin of 19.7%), ASPSegments (¥1.2B, profit margin of 40.3%), and Reinsurance (¥0.8B, profit margin of 8.2%). The loss-making segments were InsuranceAgent (¥-6.9B, profit margin of -13.5%) and Mediarepp (¥-0.4B, profit margin of -7.3%, with earnings deteriorating YoY). The deteriorating profitability of InsuranceAgent, which accounts for 84.2% of the revenue mix, was the largest drag on Company-wide earnings, while the high-margin ASP and MediaAgency businesses partially offset this impact.

Key Financial Indicators

【Profitability】The Operating Margin was -7.3% (equivalent to -11.0% in the previous year), while the Net Profit Margin was -19.5%; both remained negative but improved from the previous year. Although the gross profit margin remained high at 91.3%, the SG&A expense ratio was high at 96.0%, with the fixed-cost structure being the primary factor weighing on Operating Income.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥-39.0B, substantially below Net Income of ¥-11.8B, indicating continued challenges in converting earnings into cash. The deterioration in working capital, including a ¥6.6B increase in accounts receivable, was the primary cause of the cash outflow.【Investment Efficiency】ROE was calculated at 24.1%; however, because net assets were negative (¥-49.2B), this does not represent positive capital efficiency in the ordinary sense, and caution is required in interpreting the figure.【Financial Soundness】The Equity Ratio deteriorated to -64.6% (compared with -40.5% in the previous year), indicating an expanded capital deficit. The Company remains highly dependent on interest-bearing debt, particularly short-term borrowings of ¥46.4B. Cash and deposits increased to ¥53.4B, but a substantial portion was attributable to external financing, including the issuance of new shares amounting to ¥69.0B.

Cash Flow Analysis

Operating Cash Flow (OCF) was significantly negative at ¥-39.0B, substantially below Net Income of ¥-11.8B. The primary cause was the deterioration in working capital, including an increase in accounts receivable of ¥-6.6B. The fact that Operating Cash Flow subtotal before changes in working capital was ¥-47.4B also indicates a continuing cash outflow structure, even after temporary tax refunds and other adjustments. Investing Cash Flow was a relatively small ¥-1.4B, with capital expenditures remaining almost unchanged. Free Cash Flow was a substantial funding deficit of ¥-40.4B and was supplemented by Financing Cash Flow of +¥84.2B, mainly from the issuance of new shares and increases in short-term borrowings. As a result, cash and deposits increased to ¥53.4B. It should be noted that this funding structure did not result from autonomous cash generation and remains highly dependent on external financing.

Quality of Earnings

Recurring earnings are determined by the operating results of the core insurance agency business, media-related businesses, and reinsurance business. Of the ¥0.6B in non-operating income, foreign exchange gains and other items included strongly market-linked and temporary elements. Non-operating expenses totaled ¥3.4B, with commission expenses of ¥2.0B, interest expenses of ¥0.2B, and foreign exchange losses of ¥0.3B weighing on Ordinary Loss. Extraordinary losses of ¥5.9B (including impairment losses of ¥2.2B) were temporary factors and were the primary cause of the divergence between Ordinary Loss of ¥-4.6B and Net Income of ¥-11.8B. Given that earnings improved while OCF remained significantly negative, the fact that improvement in accrual-based earnings has not necessarily translated into cash generation is an important monitoring point in assessing the quality of earnings.

Earnings Forecast and Guidance

The Full-Year earnings forecast calls for Revenue of ¥94.5B (down 5.5% YoY), Operating Income of ¥2.0B, and Ordinary Income of ¥1.0B. Cumulative Q3 Revenue of ¥60.6B represented only 64.2% of the Full-Year forecast, below the standard progress level of approximately 75% assuming equal quarterly contributions. In terms of earnings, achieving profitability for the Full Year will require substantial profit generation in Q4, given the cumulative Operating Loss of ¥-4.4B. Although the earnings forecast was revised during the quarter, there was no revision to the dividend forecast.

Shareholder Returns

The annual dividend forecast is ¥35.00 (including the interim dividend of ¥17.5, which has already been paid; capital surplus is included as a source of dividends). Because consolidated Net Income for the current period was a loss of ¥-11.8B, the Payout Ratio has no meaningful interpretation on a calculated basis. Even based on the Full-Year forecast, the total dividend amount relative to Net Income of ¥7,000万円 represents a considerable burden based on the number of shares outstanding. It should be noted from the perspective of financial soundness that shareholder returns rely on capital surplus and external financing rather than retained earnings.

Risk Factors

1. Deteriorating profitability in the core business: InsuranceAgent, which accounts for 84.2% of the revenue mix, recorded an Operating Loss of ¥-6.9B. Although it improved from the previous year, it remains the largest factor weighing on Company-wide earnings.

2. Declining financial soundness: Net assets were ¥-49.2B (¥-32.3B in the previous year), indicating an expanded capital deficit, while the Equity Ratio deteriorated to -64.6%. The Company has a high degree of dependence on short-term funding, particularly short-term borrowings of ¥46.4B, necessitating monitoring of refinancing developments.

3. Cash outflows caused by deteriorating working capital: Accounts receivable increased by ¥6.6B, and OCF was significantly negative at ¥-39.0B, well below Net Loss. Liquidity management depends on financing activities such as the issuance of new shares and borrowings (+¥84.2B), meaning that changes in the external financing environment could affect cash management.

Industry Benchmark (For Reference; Company Research)

Industry Benchmark (insurance)

Profitability and Returns

Direct comparison is not possible because median data has not been prepared; however, both the Company’s Operating Margin and Net Profit Margin have remained in negative territory.

Growth and Capital Efficiency

Direct comparison is not possible because median data has not been prepared; however, the Company’s Revenue declined substantially from the previous year.

※Source: Company research

Key Points from the Earnings Results

1. Both Operating Income and Net Income losses narrowed despite the decline in revenue, supported by the restraint of SG&A expenses and a reduction in extraordinary losses. Whether the trend of earnings improvement will continue depends on the pace of profitability improvement in the core business.

2. Revenue progress against the Full-Year plan was only 64.2%, below the standard progress level. The earnings data indicates that achieving Full-Year profitability will require substantial improvement in Q4 earnings, which is an important structural consideration.

3. As indicated by the significant negative OCF and the increase in accounts receivable, a divergence has emerged between accrual-based earnings improvement and cash generation. Cash management depends on external financing such as the issuance of new shares and borrowings. The evolution of the financial structure, together with the continuation of the capital deficit, warrants close attention.

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not constitute a recommendation to invest in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own discretion and, where necessary, after consulting with a professional.

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