Trend Micro Incorporated (OTC:TMICY), a global leader in cybersecurity solutions, held an earnings call where Mahendra Negi, the company's COO, discussed the fourth-quarter performance and future strategies. Despite a 5% increase in net sales, the company faced a 45% decrease in operating income, resulting in a ¥2 billion net loss, primarily due to higher expenses, including restructuring costs and the impact of variable expenses. The company is transitioning into a platform-based cybersecurity company, with a focus on the Zero Trust concept and the Vision One platform. Trend Micro aims to become a $1.9 million company by the end of 2023, shifting towards a subscription-based business model catering to enterprise customers. The company announced shareholder return plans, including a special dividend and a share buyback program.
Key Takeaways
- Trend Micro saw a 5% increase in net sales but a significant decrease in operating income and a net loss due to increased expenses.
- The company is undergoing a transformation to a platform-based, subscription-focused business model.
- Subscription sales, particularly for the Vision One platform, experienced double-digit growth.
- Plans for shareholder returns include a special dividend and a share buyback.
- The company's revenue now consists of 62% from subscriptions, with the aim to grow this further.
- A new service, Attack Surface Risk Management, has generated over $100 million in revenue.
- Despite weaknesses in the consumer and small business sectors, Trend Micro has consistent revenue growth and is committed to a recurring revenue model.
Company Outlook
- Trend Micro plans to prioritize larger enterprise accounts and continue innovating with AI and cloud security capabilities.
- The company's transformation is expected to result in a more robust business model.
- There are plans to transact through Azure and GCP, following success with AWS marketplace.
- The company aims to achieve 29-31% operating margins in the long term.
Bearish Highlights
- The company reported a ¥2 billion net loss due to higher expenses including restructuring costs.
- The smaller enterprise segment, especially in Japan, has declined, affecting overall performance.
- The renewal of perpetual licenses has become less profitable, now representing 27% of total revenue.
Bullish Highlights
- Trend Micro experienced a 19% YoY growth in subscription annual recurring revenue (ARR) at $784 million.
- The company has received several awards and performed well in industry analyst reports in Q4.
- Plans to enhance cybersecurity platforms and deploy new technologies like generative AI are underway.
Misses
- Operating income decreased by 45%, leading to a net loss this quarter.
- The decline in the smaller enterprise segment and perpetual license renewals have impacted profitability.
Q&A highlights
- The impact of employee turnover will be clearer by the end of March.
- Subscription revenues can increase even if the number of accounts remains flat.
- The company does not provide quarterly guidance but expects a healthy performance in Q1.
- A focus on economic security is creating opportunities in Japan.
- A 70% payout ratio is targeted, but exceptional circumstances may affect dividend payments.
- Headcount reduction is seen as a way to increase motivation among remaining employees.
InvestingPro Insights
Trend Micro Incorporated (TMICY) has demonstrated resilience and strategic growth despite recent market fluctuations. Notably, the company holds more cash than debt on its balance sheet, which is a strong indicator of financial health and could provide a cushion against the operational headwinds it currently faces. This aligns with the company's transition to a platform-based cybersecurity company and its focus on subscription-based models.
InvestingPro Data highlights that Trend Micro has a market capitalization of $6.52 billion, with a high P/E ratio of 70.31, which has increased to 84.95 over the last twelve months as of Q3 2023. This suggests that investors may expect high growth rates in the future to justify the current earnings multiple. Moreover, the company's revenue growth of 15.07% over the same period indicates a solid expansion trajectory, which is critical for a company aiming to become a $1.9 million entity by the end of 2023.
An InvestingPro Tip worth mentioning is the company's significant shareholder yield, which is a testament to its commitment to returning value to its shareholders. This is particularly relevant as Trend Micro has announced plans for a special dividend and a share buyback program, emphasizing its confidence in the company's financial stability and future prospects.
For readers interested in deeper analysis and more InvestingPro Tips, there are additional insights available on Trend Micro, including its prominent position in the Software industry and its track record of maintaining dividend payments for 21 consecutive years. To access these insights, visit https://www.investing.com/pro/TMICF and take advantage of the exclusive offer using coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Trend Micro Inc (Tok (TMICF) Q4 2023:
Mahendra Negi: [Foreign Language] [Interpreted] And I would like to explain the fourth quarter performance and this is the overview. 5% increase in net sales and expenses was up 10% and operating income was minus 45% and then ¥2 billion net loss. This is probably not in line with your expectation but I would like to [attention] to the bottom. In the fourth quarter, what's really characteristic is that -- [Off Topic]. Let's start with the summary page and I'll repeat. At the top, we have net sales, as I said, and if you could pay attention to the pre-GAAP, post-GAAP versus pre-GAAP, the difference was about ¥20 billion or more. And as you know, variable expense is related to pre-GAAP. So, in the fourth quarter, we explained the same thing last year. So, there is more variable cost in the fourth quarter compressing the operating income. And pre-GAAP-based operating income is shown at the bottom, which is ¥23.2 billion, in that positive territory. And the restructuring related cost also was incurred. And on the next slide, yes, on this slide, starting from the top, can you please go back one? Thank you. At the top, ¥1 billion cost was incurred in relation to the operating income. This is restructuring related, obsolete hardware. We are trying to save the expenses costs. In order to do so, we have changed the hardware lineup, and due to that, we had extraordinary losses or expenses. And bottom of the slide, restructuring costs. Another item is shown here. This includes retirement expenses. Some of the employees left the company, so this is the related cost. And the reason we're doing this is because, as you'll hear from Eva Chen's presentation, platform sales, our sales and support organization, the systems have changed, and we are trying to increase the efficiency internally. And all of these expenses are posted in the fourth quarter. And I will talk about the forecast later, but starting from 1st of January, we can start fresh. So, most of these expenses were accounted for in the fourth quarter. Without that, we would have been profitable. Next slide, please. On the left-hand side, the revenue, this is a yen-denominated, 100% achievement. On the right-hand side, as I have explained, there are extraordinary expenses that were posted, and only 94% achievement. And as you can see in the parenthesis in the top right, actually, the achievement is 97% if you exclude these restructuring costs. But we are under by 3%. In terms of revenue in the fourth quarter, consumer sales in Japan and also overseas on-premise sales were lower than expected. So, this explains the 3% underachievement. Next slide, please. As I have explained before, this is pre-GAAP versus total costs. You can see the trend. In the third quarter, pre-GAAP, post-GAAP were mostly in line. But in the fourth quarter, we have ¥58 billion, and the costs have also gone up. The red line indicates, excluding the restructuring cost, pre-GAAP operating profit margin was 29%, which is the same as last year. Next slide, please. Consumer and on-premise sales were worse than expected, but the subscription is showing a double-digit growth, a 90% growth, especially Vision One platform sales is showing a sustaining high growth. Next slide. Cash flow status has not really changed around ¥10 billion. We may be in the loss, but in terms of operating income, but there is no change in cash flow. Next slide. This slide shows costs. Compared to the prior year, it's higher but as you can see in the red part of this bar, a ¥2.6 billion of weak yen impact is accounted for and other expenses have gone up somewhat. So, cost trend without the impact of FX will be shown in the later slide. This is a summary of highlights. First of all, we had the highest revenue ever, and also double-digit growth in Subscription ARR, and we have also implemented cost-saving measures. Not just one-off measures, but in order to grow revenue for the future, we are building the ground so that we can maintain the cost level into the next year. This is the full year total, 100% net sales achievement, but operating income is only 94%, but it's actually 97% without the restructuring cost. Net income is much lower, but this is due to the restructuring costs. Also, in the third quarter, there was a lot of tax burden and the extraordinary dividend was paid and in addition to that, there was some extra tax in the third quarter. As you can see in green, we have a special dividend. It's usually ¥56, but we are adding ¥682, so per share, we are paying ¥738. And of course, this is subject to approval at the AGM on the 28th of March. Next slide. Weaker yen impact, how big is that and where is it? Maybe this is difficult to see from analyst perspective, so we are showing some of the key cost items at constant currency rate. And as you can see, COGS, this is a hardware-related inventory write-off included, and cloud-related costs, a second one from the bottom. Last year, we built regional data center, and this year, we believe that we can keep it flat. And other than that, third one from the top, this is the biggest one, salary and benefit, headcount cost. In ’23, this was 5%, and this is lower than the growth of the revenue. But in this coming fiscal year, we will keep it flat, so we will try to control this. Next slide. And this is this year’s forecast. In terms of revenue, low single digit growth in Japan and in the Americas, a slightly higher end of the single digit growth, and in Europe and Asia, 10% or more double digit. In terms of profit, we will attempt to maintain the cost level, same as the prior year, which should contribute to the improvement of profitability. Next slide, please. And this is the forecast. 9% increase on intermediate basis in net sales, ¥271 billion, so 6% growth without the FX impact. And the operating income is a 62% up, this is because this time around, the situation is different. And another topic is shareholder return. In the third quarter, I have already explained this, but in the end the accounts, the books have been closed, and we can disclose specific numbers now, dividends ¥101 billion, so, ¥738 per share. As I have explained, this includes ¥56 of a regular and ¥682 of one-time dividend. Other than that, ¥40 billion share buyback will be implemented. Starting from the 26th of the month until the end of November, we will be buying back our shares. Dividend for this fiscal year, well, as you can see at the bottom of the slide, usually we are aiming at the 70% payout ratio, and we will maintain the 70% target. And as I have explained before, net income will not be retained. Basically, the total amount will be returned to the shareholders as a basic policy. Well, the slide is basically the same as before, and this is incorporated as a reference. And during Q&A, I'd be happy to provide some additional explanation. And in terms of the shareholder return, this is going to be my last slide. The shareholder return is achieving a level that they never did before. And with that, I would like to conclude my remarks. Thank you.
Eva Chen: This is Eva. I'd like to discuss about Trend Micro after the [inaudible]. Trend Micro has been in the business for more than 30 years. We've been always innovating for customer cybersecurity problems based on their infrastructure change, customer behavior change, and the threat landscape change. With those innovation engine, Trend Micro at the end of 2023 will grow into a US $1.9 million company with more than 7,000 people worldwide. But I must say, in the past three years, Trend Micro has gone through a major transformation that has never happened before. This major transformation comes from, at first, we were looking at the ransomware or the threat landscape change. At that time, we realized that ransomware has changed all the security defense landscape a lot. Because customer and cybersecurity company will always look at the cybersecurity in the line items, means that we design security based on the endpoint security, the network security, or the email security, vulnerability management, it’s all based on the line items like this. But ransomware, an attacker, they don't see the infrastructure like this. They see the customer's environment as a map. They enter through an email and then travel through the network, attacks on a certain endpoint and then elevate the right into the administrator account. And then finally, they ransom the whole company's operation. And even they go through that the supply chain and to ransom other customer's environment. So this change will force us to make sure we need to innovate and change our customer and to do [inaudible] we move to a Zero Trust concept, which means you need to constantly monitor and evaluate the risk of the overall environment, provide the visibility and make sure you put in your best risk management to reduce the risk being attacked and also reduce the cost when you getting being affected by this cyber threats. That's why in this environment, Trend Micro starting three years ago, start to move into a platform. Vision One platform is a platform for customer to have a full visibility and monitoring system for their risk management, Attack Surface Risk Management. So this platform will enable our customer to be able to monitor, modernize their cyber security platform and able to design their cybersecurity based on risk. What is the risk? And that is how they can achieve the Zero Trust cybersecurity management. I must admit that during this transformation, even we ourselves didn't expect it. This is not just a technology or product innovation or transformation. It was an overall company operation and organization transformation, a need to transform our product license technology into a platform technology company and also our go-to-market need to transform from selling user based license to a platform consumption concept price model. And also our marketing and our sales commission need to be [inaudible] and how we service the organization structure also need to be transformed. So Trend Micro, after we do all this transformation, our revenue composition will change into mainly subscription business model and mainly focus on first wave of focusing on enterprise customer. Now Trend Micro's business still have about less than 40% of the [inaudible] of the business, that is on the smaller business and on [inaudible], that is brown gray business. But 60% more is focusing on enterprise and platform based security. This type of subscription will create a totally different revenue and cost model. So I must say, in the past when we move to the enterprise model and subscription-based model, it changed how we win and our [inaudible] look like a lot because Enterprise business model has two very important characteristics. One, the customer's transaction size is bigger. Second, the customer's payment tend to be more not like the long duration instead more [participate] at the end of the quarter and because it’s [inaudible] when it close at the end of the quarter or close at the beginning of the quarter, the percent of recognized revenue will have a huge difference. If you have 100, it’s the same $100 but if you close at the end of the quarter then you probably recognize only $10 but if it's beginning of the quarter then you’ll recognize $30. That's three times difference. However the cost, no matter it’s the salary or the commission we pay or the hardware cost we pay, does not get deferred. It's still recognized in the same quarter and that's why during this transformation you might find Trend Micro whenever we do quarter-to-quarter, year-on-year growth report you will find our post-GAAP revenue and our post-GAAP profit margin change fluctuation a lot. But actually I think after the transformation our business will become much more robust. And let me explain why and how. Trend Micro after this transformation, how our financial and how our operation look like. First, now our revenue are composed by perpetual license and subscription business and as you can see 62% of our overall company's revenue at the end of 2023 are subscription business and our perpetual license business are composed as 33%. This transformation mainly happened in what we call value business which is the Enterprise, big enterprise customer’s environment and that part of the revenue we can see or the blue line first one is when we sell the new perpetual license, the revenue has been declining and now it composed of 19% of the revenue. The revenue come from the perpetual license but renewal which is like 30% of the renewal business. It was the most profitable business but the problem of that renewal perpetual license, 30% renewal revenue is very hard to expand in the same customer base. That revenue has come down to, now it’s 27% of the total revenue and what is growing is before when we were doing all this platform transformation our first year's subscription business are growing. However, that business is most costly because there's cloud cost, there is acquisition cost, and there is subscription-based revenue recognition, make the initial cost look really high. So when you see this blue line come down and red line coming up that's where you see, look like Trend Micro’s profit margin gets squeezed. But the good news is when this subscription goes to the second year, then we starting to see the renewal subscription and also the expansion capability of the subscription revenue and that is that green line. In 2023, that green line now become the highest percentage of the total revenue for the Enterprise business, that is 32% of the revenue of the Enterprise business. And that's where the new scalability of Trend Micro's business start to appear. Although this new subscription and expansion business we actually formally launched it on July 1st, 2023. So six months, but we've seen the great momentum and based on those numbers, we can see our long-term customer value increase more than three times for our big enterprise and even for smaller enterprise it increased six times. Every average customer will spend more money with Trend Micro. And our new business, we call it the Attack Surface Risk Management which is the overall visibility of customer’s risk management. This service we just launched and during this time, we see within six months, already more than US $100 million credits that the way we count these credits is almost like one credit equal to one US dollar and that revenue has grown more grown over US $100. So this momentum growth shows that Trend Micro's platform way of selling increase per customer revenue as well as the expansion capability where we can expand into new business much faster. The volume business is another story, there's 40% of them and we have been is flat but I believe in 2024 what we see is we can use the AI to improve the profitability because the support costs can be reduced and also we see that AI might bring a new wave of PC shipment because now the AI chips can be embedded into the PC and people can use the so-called local AI to generate much more sufficient productivity. So we see the possible business momentum come from this AI for our 40% of the volume business. So these are what we see the transformation of Trend Micro's business and revenue and cost structure. So talking about organization actually Trend Micro, our operation before was, I kind of call it the franchise model where our global organization produced the same product, the same product selling to different region and then different region were based on their operation to select different type of product that is best for them. For instance, in Japan, they sell the most endpoint security product while in US they sell most, the cloud, Cloud One, the cloud security product. That is a different organization structure. And the organization structure, it looks like there's global with R&D, product management, product management marketing, and then finance. That's the global operation. And then each region they have different organization for their sales, tech support, marketing, channel management or a different organization. That was the original Trend Micro's organization look like. But once we move to a platform then we need to actually integrate all of this organization into a customer centric organization. What type of customer are you? Are you a big enterprise customer, small enterprise customer? And at what stage are you in adopting Trend Micro's platform? And what is the best opportunity to up-sell and expand our business within this customer? So organization need to transform into the products, the tech support, the sales, the marketing are all into what we call a web organization. Look like a circle of web organization. This is the major transformation that we've done and you see our restructuring of the organization is not just a headcount reduction. It's an actual customer environment. I mean our customer service and our customer centric organization restructuring. We believe with this new web organization, Trend Micro's scalability and innovation for customers can even more enhance. So personally I feel I'm very proud of Trend Micro able to do this type of transformation organization without major disruption to the business because most of the time this type of organization restructuring, everybody will be saying, oh this is my reporting line, this is my territory. And then there will be a lot of inner fighting. But in Trend Micro that doesn't happen. We were able to do it very structurally and very smoothly. And I think that was based on Trend Micro's global culture, Trend Micro's corporate culture. Everybody is emphasizing on empathy for customers and we will gain our wisdom and analysis from the data, real data. And finally everyone need to be free to make their own decision and take their accountability, we were able to achieve this type of reorganization. So at the end I would like to say, Trend Micro, we always believe in one basic strategy, that is Hedgehog Strategy from Good to Great, the book of Good to Great. A company need to integrate what they are best at, what they're passionate about, and what is their growth innovation, those growth engine is. We believe Trend Micro after the transformation we still have the same passion of solving customer’s cybersecurity problem, we still have the same strength in our defense, threat expertise, and we transformed our growth engine from global and local operation to a platform growth strategy. So with that, Trend Micro after transformation, we are the same Trend Micro Hedgehog but with much more robust business model. This picture is what we did, the AI contest in Fukuoka last year. And that event shows how passionate Trend Micro people implementing AI to power our transformation. So thank you very much and please come with Trend Micro into 2024, the new transforming -- transformed Trend Micro.
Kevin Shimzer: Hi, everyone. My name is Kevin Shimzer and I'm the Chief Operating Officer for Trend Micro. I'm here to provide some additional insights on our Q4 and our 2023 fiscal year financial performance. If you managed to join us during our December 1st Investor Conference, we laid out this corporate strategy which talked about moving more and more towards a recurring revenue stream, increasing our operating margins by driving our hybrid platform across that Enterprise customer base better predicting our revenue growth and ultimately increasing our shareholder value. From a 2023 financial highlights perspective, Mahendra already went through these numbers, and I thought what I would do is highlight a little bit more around our Q4 performance overall. We executed on a lot of good things in terms of driving our platform into our installed base accounts which is what we had laid out as a strategy. However we did see weakness in three different areas. Number one was around our Consumer business. We did see that our Consumer business declined for the quarter. The second was in our -- globally within our small business, small enterprise business in particular, we saw that decline by 7% for the quarter. And then finally in the Enterprise space, we saw some weakness in the Americas, an area that we have identified as an area that is one that we will be restructuring and refocusing and retooling for 2024. We really saw our perpetual-based business fall off faster than what it had been. Overall, we continue to show that we know how to grow revenue and if you look at this overall track record back to 2013 of revenue growth, this is actually a 8% compounded annual growth rate. So we continue to increase our overall share of wallet. From a driving subscription sales standpoint, this recurring revenue -- our recurring revenue across both our Consumer and our Enterprise business now represents 65% of our total revenue. This is a 12% compounded annual growth rate. So we're very serious about moving to more and more of a recurring revenue model. Let's double click on each one of the businesses. The first up is Enterprise. We're really taking a data-driven approach. We have this 28,000 enterprise customers and we're going to be fixated on getting our hybrid platform adopted within those customers as broad and deep as possible. We're going to prioritize high potential larger enterprise within our customer base and we're going to drive growth in both the top and the bottom line in doing so. We have the most comprehensive hybrid cybersecurity platform on the planet and we recently were awarded with a couple of new certifications which we think are going to help us in a certain set of markets number. Number one was FedRAMP, help us with us Fed, State Government, suppliers to the US Federal Government; ISMAP in Japan; and then C5 in Europe. All those will allow us to better embrace and serve our customers in those markets. Innovation as it never stops and we continue. Lots of AI with our built-in Companion capability, lots of Cloud and Container Security capability, more stuff with AWS, lots of innovation and that will continue. Industry analysts awarded us with some new things in the quarter. Gartner (NYSE:IT) published their Endpoint Magic Quadrant and we showed up in that Leaders Quadrant again for over a decade. Our Gartner Peer Insight’s, customer specific choice nominations and we ended up with a large basket of awards in Q4. And then, finally, Canalys which really recognizes our leadership in the channel ecosystem and how we how we work with our channel partners and giving us that top spot in the Champions quadrant. If you look at our business from a segment perspective, you can divide it up into large and smaller enterprises. And you can see the majority of our businesses in larger enterprises. However we did see in our smaller Enterprise business, as I mentioned up front, that we did see a decline in our smaller Enterprise business. That was -- that did impact us across the globe but in particular in Japan where we have an appliance offering, that our channel partners are just retooling up and getting ready for 2024. From an Enterprise Hybrid ARR perspective, this takes both our subscription-based ARR and adds to it on top the perpetual-based renewals. And you can see that all of this is a renewal -- is a recurring revenue stream. But you can see that we have been increasing in our overall subscription base and declining in our overall perpetual renewal base. That's honestly by design. We do have customers that will end up staying with us in our on-premise business, cloud is not for everyone. However many of them will be moving towards the subscription-based model. So that's definitely the motion that we see. And in the Americas, we saw the perpetual business fall off a little faster than what we had been seeing and anticipating. From a subscription annual recurring revenue standpoint, up at $784 million, that's a 19% year-over-year growth. And you can see that relative to the expansion, in particular, we're doing a nice job and we plan to do even more going into 2024 in terms of increasing through expansion. We're doing that on the back of our wonderful Vision One platform, that's we're fixated on attaching. We're up to a 34% attachment rate right now. If you look at the 9,592 customers that we have across the 28,000, that's a 34% attachment. We know when we attach we can increase our overall ASP. We did really nice for the corridor with adding 535 new customers. The gross sales were up 64% year-over-year, nice solid NRR at 113% and we added 20 new managed service partners including Kyndryl and Arctic Wolf. These managed service partners now are connected up to us and we're jointly providing services to our end customers. Once we get attached, then we're fixated on expansion. We have 14 modules across our platform, we know that we can add more and more value to our installed base accounts if we get more and more modules deployed. 51% of our customers have one module, how do we get more? That's what we're going to be fixated on in 2024. We know the retention rate increases and the ARR impact also increases. Also new for Q4, we've been tremendously successful with transacting through the AWS marketplace and we've taken that success and we're looking to copy it with both Azure and GCP. So Vision One credits are now fully available within both those marketplaces. So we see that as opening up new opportunities for us to land and transact through those respective super marketplaces. We're going to use a very data-driven, AI driven approach in order to go after our customers and identify where we can attach, how we can increase usage, where we can get the expansion and point our resources off to the highest potential and the highest probability for moving a customer, advancing them on our Vision One platform. Finally, three customer examples in the Americas, a hospitality customer looking for increased visibility across their entire environment. They were an existing customer and we went in and they wanted to see that expansion potential. So it was the breadth of our platform which won the day up against CrowdStrike (NASDAQ:CRWD). This next one is in Europe and it's a large, large software company with a massive physical data center and public cloud infrastructure. And they were looking to consolidate vendors, so we ended up replacing Trellix and Tanium there with a massive container security win for us. And then finally in AMEA, in the oil and gas vertical, an existing customer compliance played a big factor. They really wanted to have some solid visibility across their entire environment including 24/7 and our MDR capability won the day. In our Consumer business, our strategy has been to maintain some steady top line growth not increase but maintain but fundamentally to improve our profitability over time. We're going to do that by growing some next generation offerings and increasing our ARPU, increasing how much we get from our existing customers. That's our way, we're going to grow but also improve our profitability. Highlights are, a nice year overall. We did have a soft quarter as I alluded to, overall. Fundamentally the core of the business ends up being an attachment to personal computers. When PC shipments decline, so too will this. We've been shoring it up with additional capabilities that go beyond protecting a PC. They're more fixated on protecting the identity itself, consumer’s identity and those are growing at 9x. We've got some really nice new initiatives that we're working on. So we're looking at expanding in that direction. In terms of the next generation capabilities, we're definitely fixated on some future innovation and driving that operational efficiency across the overall Consumer business. And we do have some additional channels that we're bringing onboard. Finally let's finish with The Road to 2027, we said that we would adopt a zero-based budgeting in 2023 and we did. And we ended up with substantial savings as a result of it. Currency did not swing in our favor but we did in fact drive those savings. In 2024, we said that we would remove $50 million in operational expense and you can see by the restructuring charts that we did do that and we have in fact implemented those. It's not about just cut, cut, cut. It's about finding ways to automate and finding more efficiencies within our overall model, using AI, using a number of different techniques. Of course we're not going to stop in 2024. Our long-term plan is to drive for 29% to 31% operating margins is our long-term goal. If we look at this corporate evolution of our high level P&L that we laid out December 1st, no real change here with the exception of on the top line, we had originally thought at the time that 10% was the right number on the top line. It turns out it will be 9% but there's really nothing to that. The only difference is that we did make a change to an agreement we have with one of our subsidiary companies and that is impacting the post-GAAP revenue. There's no change in the dynamics of the business at all, there's no change at all but just the way that particular agreement is structured, it does have an impact on our post-GAAP revenue, so that's the 10% to 9%.From a long-term plan perspective, we've laid out $2.7 billion in gross sales, a 30% operating margin with $1.7 billion in ARR and a 60% Vision One attach. Vision One is the way we're going to get there. Thank you everyone for your time, look forward to your questions. Thank you.
Akihiko Omikawa: [Foreign Language] [Translated] Can you see the slides? Then please allow me to ask talk about the fourth quarter FY2023 Japanese region business. First of all, I have already touched upon this last year. We talked about what we wanted to realize for the Enterprise market and especially here in April of last year, we had completed a solution and the delivery started. Also there was an explanation that in the Japanese market there has been some delay compared to the global market for the platform approach so compared to the other regions Japan is slightly behind in this area. As for the Consumer market we have the Beyond device security that will be pushed further. As for the Enterprise business, in the fourth quarter as mentioned we have a platform strategy and first of all, we have XDR that we have focused on the larger enterprises on and we have some slight delay in starting in Japan. But for this technology, Japanese companies have been behind in adopting this kind of technology and we have started the delivery here in Japan and so compared to the previous year, there has been a growth by 55.5%. As a result of this and when it comes to the companies that have deployed XDR there is a managed detection and response service that has been provided as Service One. From Q3 we have started our activities and we have seen steady growth here and among the customers compared to the previous year it has grown by 2.2 times and when Service One and XDR is used, then we see that the sales by the customers has increased by 54%. When they start using this for security operations there are more requirements that come up and so there are additional orders that come in as a result of their adopting this technology. Also in Japan the AWS marketplace was started in Japan after other markets but we are seeing steady growth here and in the AWS marketplace we have seen growth so that compared to the prior year there is a growth by 35%. There still remains a large demand for on-premise and when it comes to the public sector and the financial industry, we have the on-premise Deep Security business that still is growing steadily. And for the SMB customers, overall there was a mention about the appliance situation but the appliance replacement cycle has started and there has been some delay in the delivery so that compared to the prior year there had been some drop in the hardware sales. But we have grown the number of customers and the managed service area has grown as well and furthermore we have the XDR function for the SMB market and we have made available a service in this area so we have added XDR functions and we're seeing more business in that area. And especially in Q3 and Q4, for NTT West and so on, there has been announcements made in Q4 there has been momentum in the increase in the number of customers there. Once this takes off then the service value per customer will increase. This will increase our menu offering and that will increase the income per customer on our part. And as we head towards 2024, Trend Micro Vision One, we will be moving forward with the modern SOC. By using Vision One we want to enhance the ROI benefits. So we'll continue to promote the cyber security platform and in the incident response of XDR, we need to get the message out accurately and correctly. And there's also the Attack Surface Risk Management that will be deployed in Japan and there's going to be many security steps that will be taken and there are 240 companies that have been specified as important infrastructure companies and there's also the supply chain customers in that area so we need something like an Attack Surface Risk Management because there's much attention focused in this area. We want to continue to appeal this and get the market and we'll be using generative AI as well and we'll be taking advantage of this technology for our Japanese customers as well. And with Vision One, as already mentioned, from a single service the customer requirements increase and there are new sensors that we are able to deploy to our customers. And there's also CNAPP and we are offering a solution in this area. For the SMB market we have a partner that is collaborating with us to expand our XDR sales and through the partner we want to target the SMB market. We have already seen growth in this area but with the addition of XDR and as we increase the customer satisfaction here in Japan, we believe that partners will be active even more from here onwards in selling this. And so there's also the new Cloud Edge where the deliveries are going to be increasing and in the Consumer area there's the Beyond device security and with new materials we have been able to increase the business by 28%. And as mentioned, there's going to be sales of this for Japan as well, in the device security products. PC shipments are going down but with new sales expansion, we are seeing growth. Device security now covers all the different types of operating systems and again using a new channel we're trying to offset the shipment decline of PC. Of course the Smartphone sales is also declining somewhat but we are trying to offset that. And out of 47 prefectures we are collaborating with 22 prefecture’s law enforcements. We are a trusted partner and we are going wider and deeper into this. For FY24 we will be utilizing AI including Chatbots in order to increase efficiency of our communication with our customers, making the communication easier for our customers to understand. And we also want to implement the measures against expanding risks. There are specific risks or specific features about the risks in Japan and therefore we would like to continue to provide new products and services that will suit the customer's needs. And we will continue our awareness raising activities together with the public organizations in order to enhance Trend Micro's trust so that people will feel safe and protected using our products and services. That's all from me, thank you.
Q - Hideaki Tanaka: [Foreign Language] [Translated] This is Tanaka, Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley. Can you hear me?
Eva Chen: Yes.
Hideaki Tanaka: [Foreign Language] [Translated] Now I'd like to ask about the plans for this fiscal year. First this top line growth of 9% and if we look at just the fourth quarter, we see the sales revenue increased by 1% and pre-GAAP it was about 2%, so it seems like you're slowing down in momentum. So when it comes to this 9% increase in revenues, how certain are you of this? And also what -- for costs you mentioned that you're going to be keeping down the cost to current levels but there is ¥I billion extra costs incurred and aside from that there was there was the currency factor that increased the cost because of the depreciation of the yen. So I didn't feel that you'll be able to achieve your plans that easily but what is your certainty of achieving this? If you could talk about that that would be appreciated.
Mahendra Negi: [Foreign Language] [Translated] Perhaps Kevin is the one who's spending the money, so perhaps you can explain.
Kevin Shimzer: Thank you, Mahendra. Yeah, so we feel very good about it, quite honestly. Like Eva was suggesting, our business is one that Q4’s are seasonally just very high for us and what we certainly found is that sometimes it can be a little bit difficult for us to predict when we're going to close all of those deals and I highlighted in Q4 a couple of different areas where we slowed down. One was around Cloud Edge, that's the appliance in small enterprise in Japan and it was really an unintended consequence from raising the prices. So what we found was our channel partners, we raised the prices early last year and our channel partners took advantage and did large buys just before that price increase. So we ended up with some softness but they're retooling up and we see that resuming as we go into 2024. We'll see that start to come back. The other area that I had highlighted was around the Americas. And we had identified this in our December 1st Investor Conference that that was an area that we were really focused in on. We wanted -- we've done really well in the Americas and in the US in particular at attaching Vision One. But where we need more work is, how can we expand by doing more? As Eva said, platform selling. And what we did was, we have a region the AMEA region which is very good at doing platform selling and we've assigned a number of those people to take on the US and we've made those changes already. We've put those changes in place, so we feel like we will be able to step up to more platform selling in the US and start to get more of our fair share of the US market. So we feel really good on the top line. On the bottom line, I actually feel even better. We said that we would, through automation, through AI, through some reorganization and restructuring that we would find ways to remove just over US $50 million in operating expense and we've done that. So, I know going into it, our operating margins will be substantially higher as a result of that.
Eva Chen: And may I add, that well we make forecasts in yen/dollars. Yen based trend, in 2023, despite whatever currency movement and despite what was, we probably don't like the composition of the currency but at the end, we made 100% of our forecast revenue growth in yen base. And our cost has been impacted by the exchange rate a lot but as you can see, we in our analysis without the restructuring cost and without the actual tax payment we made, we actually still have ordinary income growth and we meet our profit, operation profit targets. So we have very high confidence that in 2024 based on what our forecast is, I think we can meet both of those forecasts in 2024.
Hideaki Tanaka: [Foreign Language] [Translated] Thank you very much.
Operator: [Foreign Language] [Translated] Thank you very much. I will unmute the next person [Operator Instructions].
Hiroko Sato: [Foreign Language] [Translated] Hello, this is Sato speaking. Can you hear me?
Mahendra Negi: Yes.
Hiroko Sato: I just have a one question, your guidance for this fiscal year is, I guess if you divide the 19.5% up on profit margin yet you said that you're going to be forecasting 20%. Is this 50 bps difference should I care or should I not care? Or is there some message in between?
Kevin Shimzer: Mahendra did you?
Eva Chen: Did you take that --
Hiroko Sato: Or -- unless I divided the numbers wrong?
Mahendra Negi: No, no. I think you're doing -- it's just over 19.5%.
Hiroko Sato: Is that gap just basically CFO saying, I want to be a little bit more conservative?
Mahendra Negi: And it's just simple rounding in.
Eva Chen: It’s just simple rounding.
Mahendra Negi: Yeah.
Hiroko Sato: Okay. All right, I just wanted to make sure because your message sounded, so maybe there was a little bit of a message from CFO. My second question actually in addition to this is, and like Tanaka-san was saying, just looking at a fourth quarter results, especially the top line, I know that you said that Japan's looking at a single digit of 2%, 3%, I guess and the other one is US looking at the upper end and the rest is that [inaudible]. And only because I'm basically presented that Japan is finally moving forward with Enterprise areas with all of your signature product for 2024. So isn't Japan should be accelerating a little bit more this fiscal year? Because you also have like 2%, 3% guidance last fiscal year and Japan's hasn't really been growing. So I'm a little bit worried about Japan especially like we're supposed to be getting the PC replacement cycle maybe toward the end of this year. So that should also help move some of your consumer figures hopefully with the PC replacement cycle. I don't know, is there -- are you looking at conservatively for Japan where the whole country is supposed to be shifting to DX? And US, I mean I know you have a lot -- you won lots of award over there but we just don't see the sales numbers. So can you talk about you know these two regions for 2024?
Eva Chen: I’d like to volunteer to take that, First, for Japan, yes I share your optimistic about Japan and I feel we should do better. But frankly the reason that we're being conservative is Japan's sales structure, sales through the channel and also just the adoption of the new technology speed traditionally in Japan is not that fast. So we didn't dare to make that very optimistic progress but we believe it's the right direction. It's just the distribution channel and the speed of customer adoption, we cannot be that optimistic about Japan. So no problem about the Japan operation, it’s just the speed of adoption that we were concerned. And for US, as you can see from our December 1st Investor Day, we did announce, Kevin introduced our new structure in US and we are -- a lot of this restructuring was happening in US that we did. So the whole sales force and our tech support services, all the refreshing of the US operation and we believe after this new structure, US should go back to better growth momentum. So those are the two things that -- I think I'm aligned with you, I do believe these are the two regions that we should be optimistic and have more growth and that's what we lay our investment in.
Hiroko Sato: And actually the final questions from me is, restructuring especially the people. I 'm looking at a Page 36 and I know this is like a combined number of hiring and letting go but the number of people for research and development is actually less. And also looks like you cut numbers from America and also APAC, AMEA areas but kept the rest of the areas as it is. So did you cut engineering resources more than sales or technical support? Where's the resource restriction happening? Because I thought globally getting engineers, hiring engineers is quite difficult with the resource especially in the security software space. Where was the actual restructure, people restructuring happened?
Mahendra Negi: [Foreign Language] [Translated] Sato-san, well this number, some of them basically left in January and that's not reflected yet. So this is going to be clearer at the end of March. And yes people leave and people join without us restructuring, sometimes.
Hiroko Sato: Oh I see. So people being shuffled in a balanced way across the board?
Mahendra Negi: [Foreign Language] [Translated] Yes, by March we will know better. Okay, yes, so cost reduction is mostly in the first quarter, impact of that, yes. As Kevin has just explained, of course there is some cost associated in terms of a retirement allowance but most of the costs were accounted for in the fourth quarter and then in the next quarter we will see the impact.
Hiroko Sato: I see.
Operator: Thank you very much for the question. Now we will unmute the next person, once you’re unmuted, please identify.
Satoru Kikuchi: [Foreign Language] [Translated] This is Kikuchi of SMBC. Thank you very much for the presentations. There are two questions. In recent results, on Page 32 of Mr. Negi's presentation, there is the active customer account and it mentions the subscriptions were flat for this quarter. If that's the case then subscription revenues will not increase is the feeling that I get. However for subscriptions when it comes to the number of accounts even if you don't see an increase does that mean that the subscription revenues can still increase? And if that's the case then I believe that you would be able to achieve your revenue plans but could you tell us the structure there?
Mahendra Negi: Kevin?
Eva Chen: I think the overall structure is that we focus on the existing customer and put more effort on the lower end expansion and those expansion are subscription revenue. So yes, you're right we are, even if we don't add more subscription customer number, we were still able to expand our subscription revenue.
Mahendra Negi: [Foreign Language] [Translated] Was that understandable?
Satoru Kikuchi: [Foreign Language] [Translated] What about perpetual? Then for the fourth quarter there was a major decrease in perpetual revenue and do you believe that this decrease will continue to accelerate and continue or is it just a one-time temporary phenomena? Could you tell us about this?
Mahendra Negi: [Foreign Language] [Translated] The perpetual customers are definitely decreasing and there is about 500,000 but when it comes to the value of customers it's about 38,000. And so even if we see a decrease in the smaller accounts, if we can continue to increase, then we believe that we should be able to achieve the revenue goals in this area.
Satoru Kikuchi: [Foreign Language] [Translated] I see. Let me ask again about this aspect, for the fourth quarter there had been a temporary decrease but for this year you're going to increase by 9% the sales and do you think that they'll be equally distributed over all four quarters or we'll see more increases in the second half? Do you have any targets in this area of how you intend to achieve your goals?
Mahendra Negi: Kevin, you have any comments on that?
Kevin Shimzer: Well we don't give quarterly guidance, right? And we've already talked about how our business can in fact move up and down but we do see already that Q1 is looking quite healthy. So we do see the normal distribution that we would normally see across our business and that's definitely the plan.
Mahendra Negi: [Foreign Language] [Translated] To add to that I mentioned this when I explained about the pre-GAAP results, when it comes to the larger deals there may be a concentration of that towards the end of the quarter and so there are fluctuations by quarter but we believe that the annual outlook holds.
Satoru Kikuchi: [Foreign Language] [Translated] Yes, then in regards to the revenues, I'd have a second question in the targets for 2027 in Kevin's material when it comes to 2027 OP is going to be $100 billion. So it'll double but between revenue and fixed costs, I think that you can control the fixed costs but can you really increase the revenues that's an important point and by region or by segment or between subscription and perpetual this 10% increase in the revenue, is there a breakdown or is there some explanation about how this will be realized? If it's by region there's no expansion by region but in Japan and America how can you achieve growth is something that I'd like to ask about?
Mahendra Negi: Kevin?
Kevin Shimzer: Thank you, for it sounds like you liked our Road to 2027 chart, so thank you for that. Well what we wanted to do is share with everyone that we do have a long-term plan. We have lots of details that are built underneath that plan and we wanted to give this as our North Star. This is where we are moving towards, it does include uh revenue growth across our segments. So it does include uh actually some incremental headcount along the way, so it's not we are not telegraphing that we will be flat in terms of headcount out through till 2027. So it's not unrealistic, we will be hiring some along the way. So we built that model and that plan in order to give us that North Star, so that's what we are working towards. But we do feel like, Eva said it really well when she started to talk about what trend used to be like, very franchise oriented. And now the entire company in the Enterprise space is absolutely fixated on Vision One, on landing and expanding our Vision One platform. And I've been here for 15 years we've -- I've never experienced that before where we have the entire company leaning into one area. It's a hot market. We feel we've got the number one platform. We feel like we have a big installed base and we're going to be going after it much more methodically and yeah so we think we're in a really good spot to be able to achieve the growth numbers that we're talking about.
Eva Chen: And I do think that Trend Micro’s globalization or our global distribution of the business provide the natural hedging and the natural complement to each other. So maybe just for instance, last year we totally lost Russia, Ukraine, all those business and also the second half I am in Israel and all the Gaza, all of those business we lost but we’re still able to grow and achieve our annual growth. So first I would say focusing on the annual plan is much better than just quarterly fluctuation comparison and also I believe our global operation is much more resilient than if we just focus on certain area’s growth. And that's why we don't provide specific region of growth.
Mahendra Negi: [Foreign Language] [Translated] Furthermore to explain, as Eva has mentioned we have a large customer base in Japan is a unique case but there's some who have only a single solution but before the global market there is the know-how which is AI-based which we're starting to deploy in Japan and we can offer accurate advice so that per customer I refer to them as sensors but we're seeing more and more necessity for this kind of approach and since we have this base. And furthermore now as a result of the focus on economic security finally Japan is starting to make efforts in this area. So the head office had been behind but now we're seeing things ignited and here in Japan we have the formula in place and we can take advantage of all the activities on a global basis here in Japan.
Satoru Kikuchi: [Foreign Language] [Translated] Thank you very much, that's all from my side for questions.
Eva Chen: I think it’s the right try, now we are double. You know we know how to hit higher hit rate in the Enterprise business as well as running the run rate business in Japan. So we can do both.
Operator: I will unmute the next person, so please state your name and affiliation and ask your question.
Mitsunobu Tsuruo: [Foreign Language] [Translated] Yes I'm Tsuruo. I’ve two questions. Page 19, Negi-san, ask a question and I just want to clarify. Operating income under ¥40 billion for this fiscal year and you are buying back shares worth ¥40 billion and 70% payout ratio but sometimes you may not achieve that. And the dividend for this fiscal year is going to be lower than 70% payout ratio or you don't know?
Mahendra Negi: [Foreign Language] [Translated] Thank you very much for your question. This is a complicated explanation but when we repatriate profit from overseas, we have to close the books in December and the dividend may not make that deadline. So where is the profit coming from? What is the structure? How do we repatriate the profit? What has happened to profit in Japan on a standalone basis? So generally speaking we can sustain 70% payout ratio but if there is a big profit for a specific subsidiary but the dividend is not paid for the account closing timing, in that case we cannot account for that profit. So this is one factor, a problem that we have. So this is why I -- we explain this on this slide. But this an exceptional situation so we believe that 70% can be maintained.
Mitsunobu Tsuruo: [Foreign Language] [Translated] I see, so for this fiscal year?
Mahendra Negi: [Foreign Language] [Translated] Excluding irregular situations it's going to be more than 180%. Are you talking about ¥180?
Mitsunobu Tsuruo: [Foreign Language] [Translated] No, 180%
Mahendra Negi: [Foreign Language] [Translated] ¥40 billion plus 70%, after tax. Well if you combine last year's the dividend plus the share buyback if you combine the two fiscal years I see what you mean. Well the total payout ratio will change depending on how you combine from which fiscal year. For FY24 we have the net income and then the dividend will be paid out based on that and also as BOD resolved, we have the ¥40 billion share buyback so we are actually adding them up to calculate the total return, payout ratio. So depending on what kind of combination you make from which fiscal year maybe there may be some discrepancies.
Mitsunobu Tsuruo: [Foreign Language] [Translated] I see. My second question about execution. Head count reduction is not rare in a global company, I understand but in Trend Micro's case I think this has been very rare and you have a radio web organization you use AI for your sales activities. And what about the motivation problem for the employees or the transition of the sales force, do you think that would endanger the profitability or the performance of the company?
Mahendra Negi: Kevin, you want to address that? I mean Eva, go on.
Eva Chen: I think if we made the right decision actually the people who stay will have higher motivation and that is the case that we've seen.
Mitsunobu Tsuruo: Understood, understood. Thank you very much.
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