TMICF - Trend Micro Incorporated (TMICF) Q3 2023 Earnings Call Transcript

2023-11-11 03:34:02 ET

Trend Micro Incorporated (TMICF)

Q3 2023 Earnings Conference Call

November 09, 2023 02:00 AM ET

Company Participants

Mahendra Negi - Chief Financial Officer

Kevin Simzer - Chief Operating Officer

Akihiko Omikawa - Executive Vice President Japan and Global Consumer Business

Conference Call Participants

Satoru Kikuchi - SMBC Nikko Securities Inc.

Kaoru Chiba - J.P.Morgan Securities Japan Co., Ltd.

Hiroko Sato - Jefferies Japan Limited

Hiroto Segawa - Morgan Stanley MUFG Securities Co., Ltd.

Presentation

Mahendra Negi

Thank you. I hope you can see the screen. Usually, in my presentation, I'll start with the – first, with the quarterly summary. But this time, it's a little bit different. There are two important pieces of information that I would like to share with you to begin with. The news release has been already provided, and I just wanted to summarize the content of those news releases.

Starting with the shareholder returns. For FY2023, end of the year dividend and FY2024 share buyback targets is the first item. Now, we have been trying to optimize the level of cash that we own. And we went through various different approaches for calculation. There were different opinions. And on the balance sheet, we have certain regulatory restrictions. And based on that, we try to figure out what is the maximum amount that we can return, which is JPY140 billion. And we have decided to return this to shareholders as soon as possible.

And as you can see at the bottom of the slide, this is a combination between regular and one-time dividend, and we want to deliver JPY100 billion and then JPY40 billion in share buyback. Of course, we still have the fourth quarter to go, which means that, in the end – at the end of December, we have to look at the balance sheet and calculate these numbers, which means that these numbers are still subject to potential change. Please kindly understand.

Another item that I would like to share with you. This is the policy for shareholder return going forward. So this time around, we are talking about relatively large sum of money, but we still have a lot of cash on hand, which means that going forward, the net profit that – or net income that a company makes should be returned to the shareholders 100% as share buyback or dividend. And the 70% payout ratio will be maintained, but the balance sheet structure will be changing quite a lot.

So there will be some restrictions, but still we will attempt to return the total net income and still we will have plenty of cash left, which means that we can make further business investments. And if there are good opportunities, we may consider M&A and also we will consider other possibilities of further enhancing the capital efficiency.

I'm sure that there are many questions related to these two points. And what I would like to ask you is to join us on the IR Day on the 1st of December and ask those questions that you may have, because today we want to focus on the earnings announcement for the third quarter. So we want to talk about the business performance and the businesses and receive those questions today. And Kevin will be appearing on video, but he's also participating in Q&A. I think it's 2:00 AM in the morning for him, but he will be answering any questions you may have today.

Now, with that, we would like to start with the summary of the third quarter. As you can see net sales, 13% up, and the operating income up by 58%. This is something that was pointed out by analysts. How is the management going? Well, starting from this fiscal year, we have been controlling things quite tightly, but it'll take some time to see the outcome.

And net income. Why minus 93%? Well, I will explain that in the next slide, but the pre-GAAP is growing 13% on yen basis and 63% growth, and basically 9% growth without the ForEx impact. Net sales and ordinary income, this was actually record high.

So why did we lower the net income? Well, in order to payout dividend. We basically brought over – we're bringing over all the profits that we are making overseas, and this means, once the subsidiaries overseas transfer this amount to the parent company in Japan, we have to pay a certain amount of tax. That's basically JPY8.1 billion, and this has to be incurred in the third quarter. And this is why we are seeing a temporary decline in net income. But without that, we would have had JPY9 billion in net income and this is minus 33% still.

You may remember, last year in the third quarter, we sold of a subsidiary and we had a gain from that. So in the absence of that, it looks as if it is lower, but actually with this adjustment, it is about the same level as the ordinary income.

And then we will look at net sales by region and without the FX impact. As you can see across the board, we are seeing positive growth. And if we look at this by segment, you can see that in the enterprise area, we are seeing double-digit growth. In the previous quarter, the growth in the enterprise was slow, but this quarter, we have been able to achieve this kind of double-digit growth for the enterprise arena as well.

And then when we look at the pre-GAAP results of each area, then we can see this negative number for the Americas. But there is two reasons for this. First is because of the consumer business, and unfortunately, there has been an impact here because of that. And this resulted in what you see here.

Meanwhile, in EMEA, we have a very high growth rate of over 20%, and we have 8% growth in Japan. This is not satisfactory to us, but we have continued to see growth here. Meanwhile, as I mentioned, compared to the previous quarter, we had this 2% for consumer, but because of the FX impact in the pre-GAAP area, we have seen this kind of result for the enterprise area.

And for the sales by region, as well as the growth in the sales in the enterprise arena, Kevin will be making an explanation. Meanwhile, for the subscriptions, you may see a decline. But there is just one factor. There was one contract and because of that, it was just a single company. But the amount was not that great and so there is no impact on the net sales, although the customer count has been changed. And meanwhile, for the subscription ARR, we have seen a growth by 20%. That is not satisfactory to us, but we continue to see growth in this area.

As for the costs in regard to expenses, if we take advantage, the Service Cloud area, the sales, then this will not go down. And we believe that this aspect is impacting things, and we believe that about half is going into the pass area. And so in denominated basis because of the FX impact, there has been some decline here. Meanwhile, for the headcount. For the quarter, we are focusing on the people's productivity. As for the summary of the highlights, as already mentioned, there has been record set for quarterly revenues and ordinary income and double-digit growth of enterprise business also tighter cost control for improvement of operating margin.

For the half year results, this is just the sum of the past two quarters, so I'll skip this. And here is the FY projection annual impact, and you maybe wondering why the net income has gone down and there's the tax of JPY8.1 billion, and so therefore, there's a change in our annual outlook.

And that's all from my side, and Kevin, will be giving further details later on. Thank you very much for your attention.

Kevin Simzer

Thanks, Mahendra. Hi everyone. My name is Kevin Simzer, and I'm the Chief Operating Officer for Trend Micro. I wanted to take a few minutes to give you an update on the overall health of our business. I hope you are as pleased as we are to see the topline growth continue and our operating margin continue to improve.

We believe it all starts with the platform itself. Our market-leading Trend Micro Vision One platform is truly landing with a great deal of success. Not only is it the most comprehensive platform out there with both protection and detection and response across email, endpoint, cloud, network and OT environments. But we also are unique and we support both an on-premise and a SaaS offering.

Wrapped with our attack surface risk management that covers both inside the enterprise as well as out with generative AI built in. It's by far the most comprehensive of any cybersecurity platform out there. It's not only us that's saying good things about it, we are really pleased to see Forrester recognizes in the – not just the top right position, but also the top right relative to strategy, so our strategic direction. We continue to get a lot of accolades in terms of our threat defense expertise, and that's measured quite nicely in terms of us being the number one company for disclosing vulnerabilities on the market by a long shot. It's really in our DNA and how we think.

We've taken the AI that we've built into the platform. Actually, quite honestly, we've been incorporating AI into our platform for a decade, but recently, we added the generative AI capability in terms of our co-pilot capabilities. Now we've expanded it to include actually AI running our entire business. Today, you can go on our website and when customers are calling in perhaps with some kind of an issue going on with the platform itself, when we generate the knowledge base article, which gets posted on our website, that's all generated using large language model and generative AI.

We've taken it one step further into our go-to-market machine, and we are starting to analyze now. All of the different inputs that we have from a customer standpoint, we know the emails that they are opening, we know the places on our website that they are accessing, we know the health of the customer, we know exactly when they are logging into our Vision One platform, and we can incorporate all that data and provide a recommendation to our field organization in terms of the next action. Maybe it's a health check, perhaps it's an inquiry on a certain new capability, lots of different things that we could potentially action and AI is helping to drive us in those directions.

Now several quarters ago, we started to talk about The Road to 2025. This is not something new inside Trend. In fact, this was introduced in just after we introduced our Vision One platform in 2020, and we wanted to create a set of internal KPIs that we could start to demonstrate that we are getting the flywheel spinning around SaaS adoption. We knew that as customers started to adopt SaaS that it would be higher protein, topline revenue, all subscription. We knew that our ability to expand would be higher. We knew that our customers would be healthier. We knew that our retention rates would be higher, and we have demonstrated that and you are going to see it over and over again within this presentation, how we are moving the yardsticks forward.

But this was the first step. This was just the first step to get the flywheel moving around our SaaS offering. In our December 1 IR conference, you'll hear more about how we've taken this model and adapted it and expanded it to also include our on-premise offering, which we are super excited about.

For the Enterprise business, we set a target of $2 billion in sales, $1.5 billion in ARR with 100 million protected assets across 500,000 commercial SaaS customers. We continue to move the yardstick forward within the quarter using U.S. dollars and in a common currency. So this way you can truly get a real idea of the growth within the business. The Enterprise business grew 9% year-over-year, sitting at $354 million for the quarter.

And what's really interesting is our subscription sales, that sales on our SaaS platform, reaching $198 million in subscription SaaS sales, that's up 20% year-over-year. So now 56% of our overall quarterly business in the enterprise space is coming from SaaS subscription sales. This was an important flywheel that we wanted to get going.

We also measured it in terms of SaaS customers up at 430,000 SaaS customers growing 5% and continuing to get both broader and deeper penetration within those customers with 74 million protected assets, that's up 22% year-over-year. So really showing that our platform is landing.

Another KPI that we built out was annual recurring revenue around the platform, $745 million. That's up 20% year-over-year at the end of Q3. So really nice continued success within the adoption of our platform. We are transforming in other ways as well. We've been a traditional two tier distribution model, and as that model has started to evolve towards what the industry refers to as super marketplaces, we too have been there. We moved quickly on top of this.

$113 million in ARR, sitting at 52% year-over-year growth of business transacted through the AWS marketplace. We have customers that have large EDPs and they want to be transacting through the marketplace. But there's no more important measure than, well, how are you doing in terms of attaching your platform? And we look at this in a couple of different ways. One is, is it adopted? And then the second is, how are we doing on usage.

In our Enterprise business, we have smaller enterprises and we have larger enterprises. 30,000 large enterprises is the approximate number of our total large enterprise installed base set of accounts. And here we are showing that Vision One is now attached to over 32% of those 30,000. We are up just over 9,000 customers running our Vision One platform. So that's the first metric, how we attached.

The second measure, this usage or engagement score as we refer to it here, we can cohort our customers into three different buckets: low, medium, and highly engaged. A highly engaged customer is logging into our platform daily. They are using multiple sensor types. They are using our workbench to do forensics analysis and threat discovery. They are really, really getting the full richness of the platform.

And we know that when we get a highly engaged customer, on average it drives around $112,000 in ARR. So we are fixated on moving more and more of those 9,000 plus customers to highly engaged customers because that they are truly leveraging the platform. We are building a moat because they've got a lot of data that we are consuming and they are leveraging it in a big way. So that's a big priority for the field organization all the way back into the product development team.

We see it in the numbers in terms of the number of six figure deals. So a 100% year-over-year growth in terms of six figure deals. Now that we are selling into the security operation center, now that we are more strategic with our customers, we are seeing larger deal sizes. We are also seeing that with SOC specifically that the growth in those deals has grown dramatically. So 50% increase in the number of transactions that we did in the SOC space this quarter, so really, really nice success. With the macroeconomic conditions, we continue to see protracted sales cycles, many more approvals that are needed in order to land the deal. But that's not getting in the way that we are still able to land these larger transactions.

Finally, from an ARR perspective, sitting at $745 million, we still have our site set on the $1.5 billion. And this is a number that we'll be talking about more during our IR conference. But what we know today is that we need 2x the number of XDR customers to be attached and deployed. So we know how many we have to achieve between now and the end of 2025.

Another thing that we introduced in Q3 that I'm super excited about is an update to our overall partner program. It included an important set of changes all in support of the MSSPs and MSPs. So we've got a lot of new capability that we are offering up in order to attract those MSSPs. In fact, we introduced this at the start of the quarter and here we are within the quarter. We ended up with 30 plus new MSSPs already. In fact, I've heard from a partner in Germany where one MSSP has already brought us 18 brand new customers as a result of us engaging with them. So a really nice way for us to get expanded.

Speaking of customers, here's three examples of customer wins. We use this nomenclature of land and expand. Landing an enterprise in the U.S. and the financial vertical is no easy feat, of course, highly regulated PCI, compliance was a requirement. We landed them because they were absolutely fixated on a more comprehensive offering, and that's what we delivered.

The second is, in Europe, it's a hospitality organization, been an existing customer of ours for a while. Strong focus on security, we've been protecting their endpoints and they were looking to expand to EDR and to email. And they already had an email offering, and this was from another cybersecurity company. This was an example where we consolidated down to fewer vendors. So we ended up providing the more comprehensive platform and we were able to replace the incumbent email offering.

And then finally, in Japan, a massive consumer electronics company. These folks have been an existing customer of ours for a while. We've been protecting the endpoints. CrowdStrike had been protecting the EDR and they were looking to consolidate and our platform ended up winning out. And here we were landing with a really, really nice win replacing CrowdStrike on with our XDR offering. So three good examples of customers that we closed within Q3 that hopefully give you an idea of the types of transactions that we end up doing.

Switching gears to our Consumer business, this is 22% of our overall total business is our consumer business. An important part of our business in addition from a business standpoint, but also provides a great deal of threat intelligence to our overall data warehouse of where are threats happening around the globe because we have so many consumer customers.

We've set a target of $500 million in gross sales, $18 million in customers, and we are really fixated on growing sort of the non-traditional, the non-PC part of our business. That we've been fine in, but we're looking to expand beyond that ultimately to increase our AOV, that's what we're really fixated, increasing our size of wallet. We are also pleased with the performance of our consumer business in Q3 2023, finishing at US$103 million that's plus 5% year-over-year growth, 17 million plus customers. And then what's really nice is the growth is coming from our next generation offerings, which has been our priority.

Our growth strategy has been around mobile, telco, business-to-business to consumer, as well as some future innovations. And I'm pleased that we actually started to see growth in all of these areas. Now these are smaller parts of our business and we are being very selective to make sure that we pick the most efficient areas as possible because even though we are fixated on driving some growth within the consumer business, we are absolutely obsessed with driving maximum amount of margin within the consumer business itself.

So we see attaching ourself in the mobile channel, in particular in Japan, but some other regions as well. We've had some good success in the AMEA region, Asia Pacific, Mediterranean, Middle East and Africa region with select telcos, where we've been attaching through telcos can be very cost effective to drive growth. We've introduced some new identity and privacy protection capabilities, and that's selling through a different set of partners that we haven't worked with before. And this is proving to start to get some traction and drive some growth.

And then finally, what we've seen beyond our traditional set of growth, we've seen our additional capabilities around VPN and password manager. And soon as we go into Q4, we'll have some more identity protection capabilities, all of those future innovations driving growth for us.

I hope this was helpful in terms of providing some color on the quarter. Look forward to your questions, and I really hope that everyone will end up joining us during our Investor conference in December where we'll be double clicking on this further and really giving you some good insight how this next wave, this next evolution of our strategy will play a big role in terms of continuing to drive our topline growth and doing it in a more operationally efficient way. Thank you.

Akihiko Omikawa

And I would like to start my explanation with my video on. This is the status of business in the Japan region in the third quarter. Kevin has already covered FY2023 Enterprise and Consumer business. Left side is Enterprise and right hand side is Consumer.

And Enterprise business for that we have attack surface risk management, Vision One and XDR. And based on that, we are providing a value through cybersecurity platform. And in addition to the IT budget, we are looking at risk management for the whole enterprise or security operations center budget. So we are trying to get more from different types of budgets.

And also for the Consumer business, on the right hand side, we have that beyond device security. We have been depending on mobile and PC, but we want to expand the type of services that we provide so we can achieve stable growth. And this is the outcome of Enterprise business in Japan. We are penetrating a cybersecurity platform and XDR implementation started finally in Japan, lagging behind the U.S. and Europe.

There's some characteristics of the Japanese customers to consider, but now we are seeing good growth and XDR is increasing by 42% year-on-year. And also, when the customer starts to use XDR, what they tend to do is start using additional sensors and additional services around XDR. This means that sales from these companies are also increasing at the same percentage, 42%. So this is a very positive purchase cycle.

And after the implementation of XDR, some companies begin to realize that they need expert support. They cannot do this on their own. And an XDR managed detection and response support is provided from Trend Micro. And this is also growing very strongly. And the sales growth from this business is 3.5 fold compared to the same quarter last year. Now, really detailed instant response and other types of supports are now provided from Japan. And again, this is impacting our customers in a positive way. We go through partners, but we also provide services directly.

In the past, our main business was selling products, but recently centering around XDR, we can collect information and we can look at the company risk and decide what needs to be done. We can provide advice in making these decisions. In other words, we are getting more budget from security operation center, which is different from the IT budget through these new services that we are providing. And this was lagging behind in Japan, but now we are seeing good growth.

Moving on to cloud security, AWS marketplace is very dynamic in the U.S. and Europe. But in Japan, the customers tend to depend on our partners rather than trying to buy something directly from the marketplace. But still we are seeing a very good growth at 49%. And also, SMB business, which is stable. Every quarter number of customers is increasing.

And furthermore, with the Virus Buster, there is mainly on-premise that is facing the end of life. And so therefore, there's a shift to the cloud that is taking place. And managed services by partners are starting to penetrate. And furthermore, our partners have been expanding on UTM sales. And in the SMB market, we have XDR functions that have started to be deployed.

And it had just been one company that had been handling this, but now NTT East had made an announcement on this. And there will be more partners that will be making efforts to the SMBs by adding the XDR functions for the enterprise market for this area as well. And so therefore, the services will be increased. And for each customer, we believe that there is going to be an increase in the revenues that we can generate.

And this is for the consumer market. We have the beyond device security product, and as shown here on our year-over-year basis, we have a 56% increase. And there are various functions that are deployed here, and the user interface has been simplified. And from the beginning of October, we have moved forward with this, and one-month has passed. And in regard to there maybe an increase of over JPY1,000 revenue per customer that has been increased.

And so this has started as a standard and for smartphones, there is a decrease in the number of smartphone dedicated shops. But we are satisfying their customers and there's lower churn. And so therefore, there is much emphasis on selling these products. And when it comes to device security, for PCs and so on, there's been a new channel developed and there's a lot of small businesses covered. And there are many cases where, in the sales channel of smartphones, there are more and more requirements for securities. And so therefore, there's a development of new channels in these areas.

Finally, in the area of security education, we have been working together in security education with police, and there are less proprietary Japanese mobile phones. And as we face an aging population, it'll be necessary to carry out security educational events in conjunction with police officials. And we are active in various ways in efforts here. And second, we have been moving forward with the tie-ups with the local governments such as [indiscernible] in Tottori Prefecture and in Awara City in Fukui Prefecture. And we have now agreements in place with those areas.

And with that we would like to move forward with greater efforts for penetration of security education in these areas. Those are the activities of Q3. Thank you very much.

Question-and-Answer Session

Q - Unidentified Analyst

Can you hear me? I was asked to unmute the microphone. So is it okay to ask question now?

Mahendra Negi

Yes. Yes, we can hear you [indiscernible]. We can hear you.

Unidentified Analyst

Thank you. Simple question. So profit growth was very strong, the result was very positive. But looking at the details, it seems that cost control was quite strong too. This is Page 8 of your presentation material. SG&A increased 6%, JPY57 billion or so. This is controlled to this level. In the second quarter it was JPY52.2 billion, 10% increase. So year-over-year and quarter-on-quarter, the third quarter cost was very much controlled. And what are the major factors behind this? That's the question. And also in the fourth quarter next year, do you think this is sustainable? This is something that we cannot really see from outside because it's the management decision. So those are the two questions. Quarter-on-quarter, why is the cost contained at the same level and also what will happen to the cost in the fourth quarter and next fiscal year?

Mahendra Negi

Thank you for your question. First of all, there was a reason that the cost was increasing after the pandemic finished. Of course, during COVID-19, there was not much marketing and travel. And once the problem – that situation changed, the cost increased to a certain level and we didn't want to increase any further. So we are curtailing travel expenses and so on. And of course, the payroll is pretty big. We are now focusing on productivity. These are the two big factors, I believe behind the cost containment. Well, in February, we will talk about the next year's outlook. But in terms of productivity, well, we want to focus on productivity so that we don't have to increase the headcount. We can use generative AI to improve productivity. That's what we believe.

Unidentified Analyst

I see. Thank you. So in that case, some of this can continue into next fiscal year. Now, if you look at the cost on a quarter-by-quarter basis in that previous year, the fourth quarter was actually quite high compared to the rest of the quarters. And if the situation in third quarter continues, then we should expect a big profit in the fourth quarter in this fiscal year too. But there was no upward revision. So I wonder if there are any additional factors that you're considering for the fourth quarter.

Mahendra Negi

Well, for the fourth quarter, there is variable cost involved, and that's related to the revenue. And we also pay bonuses every six months. So that's also a variable factor, and that is why we cannot really predict that. And we think it's too early to talk about revisions. So depending on how this plays out, we may revise or not.

Unidentified Analyst

Thank you.

Mahendra Negi

So third quarter profit was very strong, but it does not necessarily mean that we will see the same result in the fourth quarter. But we don't have to be too pessimistic, right? But we don't know how the fourth quarter will end. So for the time being we don't intend to revise.

Unidentified Analyst

I see. Thank you very much. That's all I have.

Mahendra Negi

Actually, Q3 cost control. I would like to add a comment to that. Cost reduction, this is inclusive of FX and the stock option cost is the only item that has declined. Q3 last year, well the stock price actually went up and the stock option cost was quite high, but this time around it's the opposite way. So this is not very happy situation. But share price went down and stock option cost also went down at the same time.

Unidentified Analyst

Excuse me. I have finished asking my questions, so please don't ask me to unmute my microphone anymore.

Mahendra Negi

Okay. Let me continue with my explanation. So the stock option cost was high last year and the low this year. So this is a temporary cost reduction in the Q3. This was a big factor for Q3. That's all. Thank you.

Satoru Kikuchi

Thank you very much. [Indiscernible] please. This is Kikuchi. In regard to cost, you've been able to keep it down and it's a good trend and we're looking forward to improvement in profits. But in regard to increasing the headcount in the U.S., you'll continue to be aggressive and now you have the headcount in place, so you'll be willing to try to get business opportunities to develop the market and to secure more customers. And has that been achieved to some extent or have you given up to some extent? Are you thinking of holding back activities or is it possible to continue to achieve more without spending too much cost and people? Compared to the previous explanation in regard to the costs, in regard to the sales strategy or in the marketing strategy, are there improvements? If there are any changes in those strategies? Could you touch upon this?

Kevin Simzer

Mahendra, can I take that one?

Mahendra Negi

Yes, yes.

Kevin Simzer

Okay. Maybe I'll take this question to maybe give a little bit of color just around the globe on the regional performance. And then I'll land with the specific question around the Americas and the U.S. Mahendra went through it quickly. You'll be able to digest it later, but it's wonderful to have a large global footprint like we have. And what we saw across the globe in Q3 was our continued very successful, very strong performance in the Asia Pacific, Mediterranean, Middle East and Africa region. Very, very strong growth. I like to use the pre-GAAP numbers. I like to use the common currency in order to try and really get a sense for how the business is performing. And we saw that in that region, really, really strong.

Second up is Japan. Very nice quarter in Japan. Strengthened both the Consumer and the Enterprise business, really strong and healthy. In particular in the Enterprise business, seeing our government business start to come back and perform. So that was really nice in Japan. The third is Europe. And honestly, everything is executing really, really well in Europe. And we can see strong performance continue to come. In Q3, we suffered from some really a difficult comparable from Q3 of last year. We had a very, very strong quarter last year in Europe, and it just made the growth that much harder, but we feel like we're executing very well and doing a lot of nice things.

Now in the Americas. The Americas is a big geography. In Canada, we had very healthy double-digit growth. We had a lot of softness in Latin America, in particular in Brazil in the government business. We saw that being quite soft. And then in the U.S., we are definitely not giving up. We in fact have – we put a new sales model in place starting in January. And we've been seeing sort of quarter-over-quarter the performance of the U.S. team improve. We did get some growth out of the U.S. in Q3, and that's coming off of Q1 and Q2 where we actually declined.

So we're starting to see the results of that. There's still more work to do and we see lots of potential. It doesn't require any more investment, that's for sure. We have lots of investment already in place. And that's our consistent story around our operations is we're really, really thinking that we've got enough and we're trying to drive productivity now. I hope that answered the question.

Satoru Kikuchi

Thank you very much. Are there any extra explanation that you'd like to give us, Mr. Negi? No. That's all right. Next, in regard to the Japanese business, there were price increases and also in the Docomo shops and so on, we are seeing changes, so we'd like an explanation on that. Compared to the fourth quarter of last year in pre-GAAP, it seems to be things are slowing down. On a year-over-year basis, you're seeing the results going up. But for the Japanese trend, do you think that the pace will be similar to the last two years? Or do you think that we've gone through a cycle already? And when it comes to the carrier shops, there's going to be the impact of the situation there, so what do you see happening in that area?

Akihiko Omikawa

Yes. This is Omikawa. And there are concerns about the fact that the many mobile shops are closing. So the sales outlets are decreasing. That is a concern. And also in regard to PC shipments, there is a decline compared to what we anticipated. And so therefore, in the consumer business, we can't continue to follow the conventional methods. And so therefore, in terms of ease of use or service to the customers, we have been moving forward with efforts and we're trying to promote utilization and increasing the unit price per customer. And so it's very slight, but we have been able to achieve some growth. That's the situation of the consumer business, but there are negative factor – there are positive factors.

And in the small business area, there are mobile security functions of the Virus Buster that is required in the SMB market. And in that sense, in the newer channels and in areas where there had been a lack of penetration in the past, we have been making efforts with the users there, and also in the consumer area as well. We're trying to increase the value added elements of our services so that even users who have not used our products in the past will be able to take advantage of our products more. So we'll have to continue to keep forward our efforts.

And for the commercial market, we had been behind in efforts of EDR, but in the area of XDR, as Kevin had explained, there has been successes that we've achieved in replacing other companies EDRs because there had been the EDR deployments that had been made, and yet there had been a considerable burden imposed on the users. And so therefore, there are new methods or new sensors that people are seeking, and there's a slight increase that we're already seeing. But once utilization begins, then we believe that as in the case of Vision One, we will be moving forward with replacements and we have already been achieving a replacement of CrowdStrike.

And once our products are used, we do see that there are more solid efforts. We had been slower to start, but in the commercial area as well, we want to achieve greater growth. And so there's the use of generative AI and a data-driven approach that is taken, and we have these weapons that we can take advantage of, and we've started our activities accordingly in the Japanese market.

Satoru Kikuchi

I see. So in the consumer market from the first quarter of last year, it continues to remain flat, but there's going to be the enterprise market growth that will compensate for this, or what about the consumer area?

Akihiko Omikawa

Well, we're not going to see explosive growth in the consumer area as Kevin has said.

Satoru Kikuchi

I see. Thank you. That's all from my side.

Mahendra Negi

Thank you. Next question, please. Checking to make sure that there are no further questions. Well, I think everybody moves to the earnings announcement by SOFTBANK. Well, next question. I think, we heard something from…

Kaoru Chiba

Yes. This is Chiba from JPMorgan. Can you hear me?

Mahendra Negi

We can hear you now.

Kaoru Chiba

Thank you. Just one question about payroll and the outlook. Headcount is declining constantly. And I understand that you also trying to improve productivity. Will we see same decline in headcount going forward, or have you stopped shrinking your workforce?

Mahendra Negi

We have not really talked about that, but headcount was growing rapidly. That was the comment from the analyst before. And we said we had to hire people after the pandemic, and now we believe we're at sufficient level, so we don't have a plan to actively increase the headcount.

Kaoru Chiba

I understand. Thank you.

Mahendra Negi

Thank you very much. Now we'll unmute the next person.

Hiroko Sato

This is Sato. Can you hear us?

Mahendra Negi

Yes, we can hear you.

Hiroko Sato

I'd like to confirm about the wording. On third page in regard to shareholders, we understand that according to the chart, there's going to be a 100 billion in dividends and then 140 billion next fiscal period, so there's 40 billion and another 100 billion of dividends to make it 140 billion total?

Mahendra Negi

Well, we have the annual dividend that will be paid out next year.

Hiroko Sato

Oh, I see. That's what you mean. I see. Then it doesn't mean a 100 billion and a 100 billion. I was thinking wow, if that's the case, but I understand now what is made.

Mahendra Negi

Yes, so when the payment of the – when the timing of the payment of the dividends happens, and it'll be 140 billion. Next question please.

Hiroto Segawa

This is Segawa, Morgan Stanley Securities. Can you hear me?

Mahendra Negi

Yes, please ask your question.

Hiroto Segawa

Thank you. I have one question. From your subsidiaries, you'll be extracting the profit and that pushed up the payment of the consumption tax, corporate tax. Will this situation continue in the next year? Well, will you continue to pay high amount of taxes going forward?

Mahendra Negi

JPY140 billion, it is based on the balance sheet that we estimate at the end of this fiscal year and this is a maximum that we can go. And if we want to go any higher, we have to do something really drastic. So right now, JPY140 billion, you can already see in the text how this was calculated and the JPY8.1 billion is paid in taxes in relation to this. We cannot do the same amount next year. It's not possible. I mean, we would be overborrowed and that wouldn't be allowed according to the regulations. So JPY140 billion is the maximum we can do right now.

Hiroto Segawa

I see.

Unidentified Company Participants

I think your question is about effective tax rate from the past versus when we aggregate all the profits at the center, how much different does it make? Well, we didn't allocate – allow for tax expenses in the past because we did not assume that we are aggregating all the profit to Japan. But now going forward, we will be doing that which means that we will be paying this tax. So the tax rate will look different from the past to the three years ago. And those previous conditions, we had paid certain amount of taxes and the tax that we will be paying in the future will be higher than those.

Hiroto Segawa

Thank you for your additional comment. That was very clear. Thank you.

Mahendra Negi

Yes. I think [indiscernible] answer was appropriate.

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Trend Micro Incorporated (TMICF) Q3 2023 Earnings Call Transcript