From the 'MEDIA DO Report 2023'

MEDIA DO will continue to create corporate value by engaging with the market, with an emphasis on cost of capital and its share price, while taking appropriate risks and optimizing its portfolio.

Hiroshi Kanda Director, CSO and CFO

Overview of the Fiscal Year Ended February 28, 2023 (First Year of the Medium-Term Management Plan)

In the fiscal year ended February 28, 2023, MEDIA DO posted net sales of ¥101.6 billion, down 2.9% year on year; operating profit of ¥2.3 billion, down 14.9%; EBITDA of ¥3.8 billion, down 1.5%; and profit attributable to owners of parent of ¥1.0 billion, down 33.0%. The primary factor behind these declines was the change in sales channels for LINE Manga, a service operated by major business partner LINE Digital Frontier Corporation.*1 Other factors included the rebound from the benefits of large-scale campaigns conducted by distributors in the previous fiscal year, ongoing growth investments, and impairment losses following the transference of the shares of certain subsidiaries and the discontinuation of services as part of business portfolio reforms. However, it should be noted that these declines were something that we had expected at the beginning of the fiscal year. Despite these projected declines, we still implemented an upward revision to performance forecasts in the third quarter, and we were even able to achieve performance surpassing these revised forecasts. I therefore feel confident in saying that we made strong progress in the first year of the medium-term management plan.

MEDIA DO primarily develops its business in the eBook market. Although this market had previously benefited from the special demand associated with people increasingly staying at home during the COVID-19 pandemic, this demand for in-home entertainment has begun to dissipate together with the pandemic. Accordingly, the growth of this market appears to have returned to its normal level. During the height of the pandemic, MEDIA DO enjoyed growth rates of as high as 20% to 40%. Now that this trend has concluded, however, we found ourselves posting a net sales growth of 11.2% in the fiscal year ended February 28, 2023, when excluding the aforementioned extraordinary factors. It could thus be said that MEDIA DO has moved beyond a phase of rapid growth to enter into a phase of steady growth in line with the natural growth of the eBook market.

*1 For more information, please refer to the news release entitled “Notice regarding status of transactions with main business partner, and earnings forecasts for current fiscal year,” which was issued on April 14, 2022.

Distributors Conducting Large-Scale Campaigns (Billions of yen)

Distributors Conducting Large-Scale Campaigns (Billions of yen)

Consolidated Performance Forecast for the Fiscal Year Ending February 29, 2024

I regret having to inform you that, given these conditions, we are projecting that MEDIA DO will once again post decreases in sales and profit in the fiscal year ending February 29, 2024. The largest cause behind these decreases will be the lost revenues from the change in sales channels for LINE Manga in the eBook distribution business. To elaborate, in the fiscal year ended February 28, 2023, the amount of transactions associated with LINE Manga was ¥13.0 billion (the amount of transactions associated with LINE Manga in the fiscal year ended February 28, 2022, was ¥19.0 billion). In the fiscal year ending February 29, 2024, we will retain ¥1.5 billion of this amount through transactions based on exclusivity agreements with publishers, but the remaining ¥11.5 billion in revenue will be lost. Looking ahead, there are three main focuses we will emphasize in our efforts to compensate for this loss and to achieve recovery and growth in the eBook distribution business. These are the growth potential of the eBook market, the maintenance of MEDIA DO’s share therein, and the development of MANGA SAISON, an eBook distribution service we are operating jointly with Credit Saison Co., Ltd.

In terms of the growth potential of the eBook market, we cannot expect the market to continue to grow at the rate seen during the period of the special demand from people staying at home in response to the COVID-19 pandemic. Nevertheless, we do anticipate that the market will continue to grow at a stable pace given that the trend toward transitioning from paper books to eBooks has proven to be irreversible. In the past, the growth of the domestic eBook market has been driven by people picking up electronic comics instead of paper comics. In the future, however, we expect to see growth in the adoption of new forms of content, such as vertical scroll comics. It is also anticipated that a full-fledged transition to digital for non-graphic books and other more mainstream publications might be just beyond the horizon. Such growth in the eBook market would be closely linked to growth in MEDIA DO’s business. Based on this recognition, we began disclosing information on the monthly growth rate of MEDIA DO’s distribution volume, a management indicator we wanted to share with stakeholders, in April 2023. The more the eBook market grows, the more market participants will have to deal with a multitude of sales management, campaign management, and other processes, and the more complicated these processes will become. This should create additional demand from companies looking to entrust us with integrating management of such processes. We anticipate that this will enable us to recover the share we lost following the transference of processes associated with LINE Manga.

Moving on, I would like talk about MANGA SAISON, an eBook distribution service that was started through a capital and business alliance with Credit Saison. This service differentiates itself from others through its high rate of point returns. Specifically, MANGA SAISON users are able to accrue points equivalent to 50% of the amount of any purchase, a level that our competitors simply cannot mimic. Moreover, these points can be linked to the points Credit Saison provides with no expiration dates. We intend to continue working together with Credit Saison to determine the best types of services and promotions to be rolled out for holders of such points with no expiration dates as well as new cardholders based on its management plans and targets.

In addition to our eBook distribution business, we are also developing strategic investment businesses. Under the medium-term management plan, we aim to grow these businesses into a second pillar of earnings. All of these businesses, which are anticipated to grow going forward, are moving on from the investment phase to the earnings improvement phase. Of particular note are the FanTop business and the IP solutions business, which includes our vertical scroll comic operations. These businesses will be crucial to the accomplishment of the targets of the medium-term management plan. Accordingly, we intend to define key performance indicators (KPIs) and otherwise develop frameworks for disclosing our progress in these businesses. We expect that the fiscal year ending February 29, 2024, will be a low point for consolidated performance, and we remain committed to lowering losses and achieving profitability in strategic investment businesses so that we can resume growth in overall sales and profit.

Performance and Targets by Segment (Billion of yen)

Performance and Targets by Segment (Billion of yen)

Shareholder Returns Policy

Even as we continue to invest in future growth, we maintain our recognition of the fact that the return of profits to shareholders is an important management task. It is the basic policy of MEDIA DO to issue dividends based on a comprehensive assessment of management conditions such as the Company’s financial position and performance trends while also securing internal revenues. In accordance with this policy, a target of 30% or more has been set for the total return ratio.*2 In the fiscal year ended February 28, 2023, we chose to conduct share buybacks with an upper limit of ¥1.0 billion in light of the forecast for lower sales and profit as well as the need to communicate a clear message to shareholders regarding our commitment to business growth.

As for the fiscal year ending February 29, 2024, we intend to issue a year-end dividend of ¥22 per share, and we have already carried out another round of share buybacks, this time with an upper limit of ¥0.5 billion. There are two reasons for this hybrid approach toward shareholder returns combining share buybacks and dividends. The first reason is that we believe MEDIA DO’s shares are being undervalued. The post-merger integration process following the 2017 acquisition of Digital Publishing Initiatives Japan (DPIJ) greatly expanded the scope of our operations, granting us a prominent position in the industry, and we believe that MEDIA DO’s corporate value has been improving since then as a result. Regardless, MEDIA DO’s recent stock price has been lower than it was when the Company merged with DPIJ as well as lower than when it conducted share buybacks in April 2022. We therefore believe that we are being undervalued. The second reason behind this approach toward shareholder returns is that we anticipate that the eBook distribution business will resume steady growth in the fiscal year ending February 29, 2024, and that strategic investment businesses will see reductions in losses, with some even posting profitability. As such, we plan to resume dividend payments to send a message of our confidence in these outcomes. The dividend forecast of ¥22 per share was arrived at by calculating a total return ratio of 30% based on the projected level of ¥1.1 billion for profit attributable to owners of parent in the fiscal year ending February 29, 2024. Even when considering the internal revenues needing to be retained based on investment plans, this should still make for a total return ratio of 75.6% on February 29, 2024, given that we have completed the ¥0.5 billion worth of share buybacks as intended. This round of share buybacks was concluded on May 1, 2023, and all acquired shares were canceled on May 31 from the perspective of improving earnings per share.

Going forward, we will continue to examine the ideal amounts of dividends and share buybacks based on our share price and financial position, with the aim of communicating our intended message to shareholders and other stakeholders.

*2 Total return ratio = (Total amount of dividends + Total amount of share buybacks) ÷ Profit attributable to owners of parent

Shareholder Returns

Shareholder Returns

Business Initiatives and Financial Strategies for Growing Strategic Investment Businesses

Ongoing acquisitions are one way to grow a business. However, MEDIA DO is taking a new approach under the current medium-term management plan.

In the past, we have aggressively invested in acquisitions when we judged that their growth potential could be heightened by utilizing the sales capabilities and networks fostered through our core eBook distribution business. Through this approach, we succeeded in growing the scale of sales at Flier Inc., which was acquired in 2016, by multiple times after the reinvestment phase, though it had even achieved full-year profitability prior to that. We expect to be able to find more companies with potential to make positive contributions to MEDIA DO’s performance in the future. Our largest acquisition to date was DPIJ, which we purchased in 2017. The post-merger integration process with this company, which had a business scale larger than that of MEDIA DO at the time, was incredibly challenging. Nevertheless, we were able to succeed in integrating our management, organizations, and businesses, and the benefits were massive.

At the same time, there are a number of companies whose business we have gone on to withdraw from, and to sometimes even sell the companies themselves, after acquisition. In some cases, this was due to a decline in profitability following changes in the operating environment. However, the most common cause is a lack of the necessary teams or on-site capabilities to be successful in the post-merger integration process. Even if we prioritize acquisitions in which we can expect synergies by utilizing MEDIA DO’s sales capabilities and networks to acquire new customers and content, a company at which the necessary foundations are not in place will be heavily impacted by even the smallest change in the operating environment. This can lead to a situation in which too many issues emerge before we are able to successfully produce the intend synergies and we are thus unable to devote our energies to generating these synergies in light of the issues. This is why the first thing I did when I became a director in 2022 was to review our business portfolio. Using the benchmark of cost of capital of between 7% and 8%, I identified those businesses and subsidiaries in which return on invested capital (ROIC) was falling below the benchmark. It was then a matter of determining whether we should adjust business plans, change directions, or pull out. This is how I sought to rehabilitate our business portfolio. This process enabled us to concentrate our previously dispersed management assets on more promising investment areas. In future acquisitions as well, we will use the leeway in our management resources as an important criterion for judgment.

In October 2020, we announced plans to perform equity financing, and through this financing we were able to procure a total of ¥7.5 billion, comprised of ¥4.5 billion from the allocation of share warrants to securities companies and ¥3.0 billion acquired through the capital and business alliance with TOHAN CORPORATION. This financing was aimed at improving MEDIA DO’s financial health and securing funds for investments. On February 29, 2020, prior to the financing, MEDIA DO had an equity ratio of 17.0%. The 2017 acquisition of Digital Publishing Initiatives Japan along with various other investments had resulted in the Company holding goodwill and investment securities in an amount that exceeded net assets. As such, MEDIA DO was in a position in which a large impairment loss could present the risk of insolvency. Following the financing, the equity ratio rose to the current level of 32.8% seen in the fiscal year ended February 28, 2023, and net assets surpassed the total of goodwill and investment securities, making for a much safer financial position.

The funds acquired through the financing were primarily directed toward M&A activities. Among these acquisitions, there are some, such as NIHONBUNGEISHA Co., Ltd., and EVERYSTAR Co., Ltd., which are producing benefits surpassing our expectations by expanding our media mix through the ability to adapt their works into video mediums. However, there are also those new subsidiaries that are still in the phase in which they need us to invest. There are also cases like the capital and business alliance with Tohan, which has created benefits through synergies for starting up the FanTop business and expanding our digital library service but has yet to generate returns commensurate to the investment amount. I will therefore continue reviewing our business portfolio to facilitate post-merger integration with newly acquired subsidiaries and synergies with alliance partners in order to speed us toward our goal of return on equity (ROE) of more than 8%.

Consolidated Performance (Billions of yen)

Consolidated Performance (Billions of yen)

Sustainability Initiatives Supporting Strategies

Hiroshi Kanda Director, CSO and CFO

Up until now, I have been explaining the Group’s growth potential from the perspective of corporate and financial strategies. However, as the director in charge of corporate functions, I also recognize that I am charged with the mission of bolstering and strengthening the foundations and management resources that support the implementation of these strategies. In the fiscal year ended February 28, 2023, my goal in this regard was to identify a set of material issues for the MEDIA DO Group. Centered around the Sustainability Committee, which I chair, we sought out to identify the risks and opportunities faced throughout our businesses via close communication with the representatives of business divisions. We also examined various social issues and the desires of stakeholders to determine the factors that would be indispensable to the ongoing growth of the MEDIA DO Group over the medium to long term. These factors were assessed to gauge their impact on society. We even involved members of frontline organizations in this process. This process of analysis and evaluation, which included multiple discussions at meetings of the Executive Committee and the Board of Directors, lasted around a year. In the end, we succeeded in identifying 10 material issues, which were announced in May 2023.

The process of identifying these issues cast light on the need to bolster our efforts pertaining to human capital strategies and information and data security. With regard to human capital strategies, MEDIA DO has only been around for about a quarter of a century, and this relatively young age means that our people and our frameworks are our greatest management resources. At the moment, approximately 70% of our employee base is comprised of mid-career hires. We thus have a staff of various ages and genders with a diverse range of backgrounds and skill sets. Given the diversity of our staff, I hope to promote true diversity and inclusion at MEDIA DO. I believe we should go about this by analyzing and evaluating a number of factors, including how we seek to draw out the full potential of our diverse employees, the sufficiency of our training and retention measures, and whether we provide a workplace environment that has no shortcomings in comparison to our peers and is appealing to a wide range of individuals. The findings of these analyses and evaluations should then be used to mold our workplace based on our vision for MEDIA DO. Something similar could be said with regard to information and data security. Developing infrastructure for the safe and secure distribution of creative works will not only build greater trust for MEDIA DO, it will also help us exercise our corporate philosophy of delivering creative works to as many people as possible.

In this manner, our efforts to address the material issues we have identified will contribute to the strengthening of risk management, the acquisition of management resources, and the exercise of our philosophy. As we decide upon the KPIs to be used to gauge progress, we will work to make MEDIA DO an organization that will thrive over the next century while constantly generating corporate value and having a positive impact on society.

August 2023
Hiroshi Kanda
Director, CSO and CFO
Chairman, Sustainability Committee

MEDIA DO Report 2023
MEDIA DO Report 2023

- Reporting period : Fiscal year ended February 28, 2023 (Fiscal 2022)
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