Trend Micro Incorporated (OTCPK:TMICY) Q2 2024 Earnings Conference Call August 8, 2024 3:00 AM ET
Company Participants
Mahendra Negi – CFO and Representative Director
Eva Chen – Chief Executive Officer & Co-founder
Kevin Simzer – COO
Akihiko Omikawa – Director and EVP
Conference Call Participants
Gran Casa Ueno – Daiwa Securities
Satoru Kikuchi – SMBC Nikko Securities
Mahendra Negi
I’d like to get started with my presentation about this Q2 results. So, this is a summary slide sales, 13% growth, net sales and operating income 42% plus. And compared to last year, the operating income margin is 42% plus, 18%. And so, pre-GAAP, 12% plus and the pre-GAAP based operating income plus 36%.
So last year, there were accounting standard changes. There were a lot of changes. However, this year, things are rather straightforward. So, this is the result of this quarter. And looking at these numbers, this is the progress to date against the annual expectation or forecast. The blue is the actual software. And at the right top, we have the revenue forecast, the target and we’re steadily working and moving towards that. And so, I think if things continue as is, we’ll be able to reach the target.
And pre-GAAP, this is the trend that we see. Now, one of the key points this year is the improvement of the margin. As was mentioned earlier, this year pre-GAAP margin. So, actually, operating income is improving in the margin as well. And another key point is with regard to the subscription business, enterprise ARR is shown here, perpetual license renewables. That’s the top part and then the subscription ARR at the bottom, the dark blue. And if you add them together, 7% growth is shown. And perpetual license compared to — well, you see this negative 8%, while the perpetual or rather the subscription is increasing by 17%. There will be more details in Kevin’s presentation later, so please wait until he gives more details.
And cash flow, last year versus this year. So compared to last year, because of deferred revenue in software, there is negative numbers here. But cash flow-wise, this is rather healthy this year. And this is headcount. In the first quarter, there was this one-time changes. We had some changes in the Americas. And then, so there was a headcount reduction in the first quarter as well as in the second quarter. And technical support and social marketing are the areas where we see this reduction.
If you ask me if this has been intentional, it’s rather about adoption of technology to enhance our efficiency and productivity. For example, generative AI, among others being increased and that leads to inefficiency gains. And therefore, sales and profits still can be maintained with less people. And therefore, we have further reduction in our headcount. That’s what happened.
And next is cost trends. Last year, cost was increasing at a higher rate than revenue. And therefore, we are controlling cost better this year. And so you see the results there, especially cloud related cost, which is shown in green. This has been rather flat this year. And the reason is, the engineers have done a good job of enhancing efficiency. And so these are some of the contributors. And the yellow part is labor cost. The total headcount has come down slightly and therefore the labor cost has not increased that much either. But because of the yen denominated figures, you might think that this has increased but still that is the current status.
And the highlights for Q2 is we had the highest ever net revenues and highest ever operating income for the first quarter. This is between January and June. So both the net revenue and also operating income for the first half have been the highest ever and operating margin improvement is continuing.
That concludes my presentation. But if you have further questions, we have Q&A session scheduled later. So please do ask questions later. Thank you.
Eva Chen
Hello, everybody. I am presenting from BlackHat in Las Vegas. And BlackHat is the cybersecurity field industry’s biggest event in every year, all the security — cybersecurity vendor get together. And this year, of course, the biggest, topic is not another threat, but it was cross strikes outage causing the global IT outage. And, since Trend Micro is the longest standing cybersecurity company and I am the longest standing the most veteran in the cybersecurity industry. So I share my experience and talking about the balance between IT operation and security operation.
Actually, I think the transforming IT infrastructure in the past 35 years, we’ve seen from the desktop and connecting to local area LAN and then going to Internet, transforming to cloud and now transforming into AI centric IT operation. And during this time, we’re actually seeing the changing of cybersecurity or especially house based desktop security is changing organization.
Originally, all of this operation was when we started desktop security was managed by the IT team. We always talk to the IT managers. And then, it moved to server and we’re starting to talk to the server but still it’s the IT operation team. Until when internet come out, gradually, we’re seeing, there’s network operation team also in the picture because of firewall and IPS, all of this come together.
But always, we were working alongside and managed a lot of time. Cybersecurity are managed by the IT operations side. Until about 2010, we starting to see this security operations center. People are setting up a special organization to manage cybersecurity because of ransomware, because cybersecurity become the center stage. And was this moving into IT operation, moving into security operation that was great that people starting to focus on cybersecurity and set up a special organization to manage it. However, the balance between security operation and IT operation is now too much, a little bit too much.
And the problem is because in IT operation, what we see is it’s a very conservative and it’s impacts of performance is always business continuity. And it’s 99.999, the downtime is the most important thing that IT operation will manage while in security [technical difficulty] mainly focusing on the index call meantime to detect, meantime to protect, meantime to respond. All of this is raising and a lot of times security operations people, their mind is just looking at the attacker and forgot their men operation, security is for ensure the business continuity not just stopping the attack.
So I think there’s a need to rebalance the security operation and IT operation and also understand the cyber risk management, not only the cyberattack risk management, but also how do you deploy and manage the cybersecurity products.
Personally, I think across strike, they’re originally coming from the detection and response EDS field. When you see the site and you just — that the traffic go through, if you manage it and you want to have a very fast detection, it does not impact IT operation. But when they moving into the protection — endpoint protection side, when you need to stop the traffic, you need to protect the operation. And that part, I think the mentality need to be adjusted, tilted back to the IT operation part.
So Trend Micro, we had come from the IT operation part and we have a lot of practice that was doing the EPP, the endpoint protection part. So we have orders like the wind deployment and the very strict update management all of those. I think this time our customer and we as security vendor, we all need to reflect on how we manage our own cybersecurity operation.
Especially, at this time, because we believe, Trend Micro believes that AI, when customers are now implementing AI, AI will greatly impacting the business operation and therefore changing the IT operation. So this whole formula, we call it the cybersecurity formula, customer’s cybersecurity problem X equal to infrastructure change, plus user behavior change minus threat actors change. These are the formula, and when customer are implementing, initiating an AI project, all three of this will be impacted.
Already, we see the threat actors are using AI, there’s more scan, more spear phishing and more deep fake. These are the threat actor, they are changing and they are getting faster. But at the same time, customers when implementing AI, they need to set up new data assess and authorization and their management of the AI application will be changed.
For instance, we’re seeing that AI accelerating the need for a balanced act at this time. If I take a simple — a real example, when you deploy any company, when they deploy a copilot or any AI — sorry, Gen AI application, they will find that originally their data was controlled by each of the different applications, such as HR application, control HR data, finance application, control finance data or sales and marketing application, CRMs control the customer data.
So when you apply using Gen AI and you want to utilize all this data to generate the business index that help your operation, then you need to break this data silo. You need to let AI application able to consume all this data so that if you ask the AI and say, hey, how do I improve the company performance by reducing 1%, increase 1% of the profit margin. It would look through all this data and it will generate the answer.
But this creates a big problem. A lot of people starting to find out that when they deploy the Gen AI application, they will find that, hey, how come my junior engineer was able to see all the financial data, which shouldn’t be and my sales people was able to see all the company’s salary structure, all the engineers’ salary. These are the big problem of AI that is impacting the cybersecurity. And therefore, there is a need to relook into the AI application, how it will impact the IT operation and therefore design the new cybersecurity practice alongside with the AI.
That’s why Trend Micro has been focusing a lot recently and announcing new product to address this type of new risk. And for instance, the employee that was using no matter outside open AI, the public AI service or the company’s own application, AI application there’s a risk that the workforce misuse those AI services such as the example of, Samsung’s engineer posting all of the source code onto the OpenAI to us for advice and that will leak the information.
So this is one of the problem first, the employee workforce will have the AI misuse and customer were starting to set up the data center — AI data center. And within this type of AI data center, customer care a lot about AI sovereignty and they need to make sure all this domain knowledge are under their control. And, therefore, we are working with a lot of company like the AI Foundry. They were helping enterprise customer train the data, train the AI model.
And at the same time, when they train those model, they need to be able to implement the good [IG], which is a way to filter the data and regulate the data usage, enhance the data. And those are where Trend Micro will implement our Cybertron, our own cybersecurity special trained LLM to be used by all these, enterprise and AI Foundry ecosystem usage.
And so Trend Micro now, we have all these four area that we want to secure AI powered enterprise with Trend Micro, securing the AI workforce, safeguarding the enterprise ARM, such as we work with NVIDIA, and NVIDIA was publishing there in service, their micro service to enable enterprise to build their own enterprise AI.
And while they were building that enterprise AI, Trend Micro will have our own cybersecurity AI that can be built into their enterprise AI. And so this is safeguarding enterprise AI. And, also, we have all this, AI gateway that we can secure the next generation AI data center where when they deploy those AI services, they’re using the contender, Llama, Llama 3 and we were able to secure that type of new generation AI data center.
And lastly, we also use AI to address the new type of threats. So for instance, recently, we published a new service that is a deep fake detector that we can detect both deep fake video conference those three are real. And we also are building, we call it the linguistic threat detection because now-a-days, consumers, their biggest problem is no longer just the virus. The malicious code is someone that was using language, no matter it’s a text message, an email or a phone call or a video conference call that trick them to do something that type of a scam.
And I think we launched that type of anti scheme service that can utilize — we utilize larger language model to defense against this type of scheme very effectively. So, effectively these are all of the trend micro securing AI power enterprise. And with that, we of course need to work very closely with the infrastructure builder, which is in India. Not only we utilizing their speed, GPU, their best speed, their computing power, we need to better utilize their computing power so that we can do all those detection and building up the cybersecurity model that deal with the new threats much more faster.
But also cybersecurity, we ourself actually is a big, big data problem. We need to like finding the needle from the big head and therefore, we need to consume a lot of computing power to do that. And I think with the new AI and utilizing NVIDIAs GPU, we will be better handle all this big data and generate solving a new customer problem such as the SIM and so, and the compliances problem that they need to collect all those security log and find out all this information.
So we also will be able to work with NVIDIA closely. We always go together to talk to the enterprise customer where they were setting up their AI application, and we can at the same time be the reference design when they were designing their AI application. So that’s how we were working with NVIDIAs and just yesterday, together with NVIDIA, we were keynote speaking at the AI summit at the Black Hat. And yesterday, we also have a joint press release about Trend Mirco and media together we are working on the enterprise AI and the governments they call it AI sovereignty problem.
And with I was fresh on the — from the platform ourself, we launched this zero trust secure assets AI gateway. And just on August 1st and we already have several of these customers that they were using and they pay for this AI services and we’re very happy that we started to see our investment, our research that we come out with securing the AI solution was getting great positive feedback. And I believe Trend Micro this wave is leading the wave because in Black Hat.
Trend Micro are the thought leader and all the customers are saying that your solution is really addressing our AI application problem. And I could say Trend Micro currently is the leading one in the AI security field.
So that’s all. That’s our the last one is our Trend Micro’s slogan, everywhere in Las Vegas now is called imagine with AIs Secure with Trend. And that’s our strategy for AI. Thank you.
Kevin Simzer
Thanks, Eva and Mahendra. Hi everyone, my name is Kevin Simzer and I’m the Chief Operating Officer for Trend Micro. I’m here to give an update on our Q2 2024 performance from a business perspective.
If you’ve been following us, you’ve seen probably quite a bit of awareness building around us as a cybersecurity vendor, focused in on using AI in our security offering, but also quite uniquely by protecting AI infrastructure for our customers. And I’ll tell you how we’ve been doing.
From a Q2 standpoint, we were very pleased with our overall Q2 performance. We did beat our internal plan numbers in both net sales and operating margin. And that’s with a backdrop of, in Q2, of a continued weakening yen [ph]. That actually has a fairly big impact on our overall operating margins. And we were very happy to actually finish just above our internal plan numbers. So nice performance overall.
The growth and the performance continue to come from our enterprise part of our business, enterprise net sales up 16% year-over-year, which was great to see. We just issued a press release talking about we now have 10,000 Vision One customers. So very, very strong adoption of our market leading cybersecurity, next Gen AI platform.
From a consumer standpoint, the other part of our business, net sales were within our plan numbers at plus 2%. And what we said was we were going to really focus in on driving more profitability within the business. And that has been our focus, increasing the ARPU, which we saw in Q2, very focused in on the efficiencies of the channel. So overall, just a nice quarter for us.
From a regional standpoint, Japan finished right on its number. So that was by design based on renewals. Growth continued to come from the EMEA and the Americas region, which was great to see. And probably the only surprise for the quarter was in Europe where we did see a market dynamic, where we saw a protracted slowdown in particular in public sector transactions. We don’t foresee that to be a longstanding one, but we did see a slowdown in Europe that we did not anticipate.
From a total business recurring revenue standpoint, sitting at $1.65 billion now, we’ve been really focused in on building up that recurring revenue stream and some nice growth, but you can see where that growth has been coming from and that has been the large enterprise part of our business We still really like the small enterprise and consumer part, and we’re optimistic in the second half that we will start to see some lift there.
In small enterprise, we just announced that we’re taking our market leading Vision One platform and making that available to MSP partners that are servicing small enterprises. So we think that’s actually going to be very helpful for giving us some lift. And then in the consumer space with the things that we’re doing from a product innovation standpoint, we’ll continue to actually focus in on ARPU expansion. However, we also think that AIPC will actually cause an increase in PC shipments and that will cause us to lift as well.
If we drill into the enterprise part of our business $1.25 billion, 7% year-over-year growth. But where that’s coming from is in our subscription part of our business. Again, we’re really trying to move to this more ratable subscription oriented type business, up 17% with $831 million, and you can see the decline in the perpetual and that’s by design for the most part. Actually, 50% of that decline is actually movement from perpetual licenses into subscription, so we’re going through that transformation. So it seems to be unfolding exactly what we’ve thought.
We’re very fixated on the large enterprise part of our enterprise business. We have 28,000 existing customers today, and we’re focused on expanding those customers with the additional modules that we have. We have 11 modules in our platform and getting that expansion, motion going.
From a large enterprise recurring revenue standpoint, this is one of the ways we measure how we’re doing from a platform perspective. So we saw really, really good attachment of our Vision One connected ARR, but we’re also seeing our on premise business move more and more and getting attached to this part of our SaaS part of our business It’s up 45% quarter-over-quarter. And even when you look at that 10% decline, actually, 87% of the movement that’s happening there is actually, customers that are moving and adopting the Vision One platform overall.
From a large enterprise recurring revenue standpoint, this is the largest, those 28,000 enterprise customers that we have when we look at that it’s a $1 billion growing at 9% year-over-year with a great compounded annual growth rate. So some really nice growth over the years, but still continues in Q2 here. But in particular, you can see where it’s coming from the biggest growth area that we have is our AI powered next gen SOC, that’s up 26% year-over-year. And the second biggest category that we have is email security that’s built into our platform and a lot of customers are now taking us up. They’re trying to consolidate vendors and have fewer cybersecurity vendors that they’re keeping track of and it’s a nice easy add on module for us.
The number one sales motion we have though is to go out to the 28,000 customers that we do have and make sure that we’re getting Vision One attached. And as I said earlier, we have 10,000 now that have that attached. That’s a 36% attach rate, so we still have a lot of runway to go within our own installed base. We added 500 customers up to 236 million in next gen SOC, specific ARR that’s up 26%. And the NRR is quite strong in that platform because that’s where our module expansion is happening 114%.
We know that as we add modules, both the retention rate and the ARR impact is much greater and we have 56% of our customers with one module. So a lot of green space for us to go after. Here’s three customer examples. The first one is in the U.S., a mega cap healthcare company in the U.S. This was an existing customer of Microsoft. They ended up replacing Microsoft with us. They loved our AI powered platform. They loved the visibility and the protection that they can get, but fundamentally, they wanted to consolidate security vendors and they were looking for endpoint email and cloud all consolidated within that single view, that single console.
The middle one is from AMEA. It’s in the oil and gas sector. And I really like this one because it shows both the power of the consolidation story, but also these folks were really obsessed with getting better visibility from an attack surface standpoint. But they also were looking at deploying AI and they liked our security for AI based applications. So how we can make sure that their LLMs are protected from LLM poisoning and all the other threats that they have to be thinking of.
The last one is in the automotive industry in Europe, a really, really nice expansion. Again, it was the power of our platform endpoint email and cloud, but also our MDR services that we have available. So they wanted us as a second set of eyes. So that is just all part of our offering that really, really gives customers the confidence in our platform story overall.
Switching gears with consumer. Actually a nice quarter for consumer, we got some growth. It was right on plan. We’ve been fixated on getting growth within that mobile channel specifically, and we’ve been doing that. We saw the ARPU increase. It’s been increasing pretty well in particular in Q2. So our expansion story with larger packages is working quite well, and that will continue to be our strategy, while we are aggressively going after the AI PC.
Finally, let me leave you with this road to 2027. If you recall back to our December conference — IR conference, we have laid out a business model that we were pivoting towards and I’m so pleased to see that we’re executing very, very nicely towards that road to 2027. We’re already seeing the dramatic changes in the restructuring that we had done, focus in on getting the top line going but fundamentally a real focus in on operating margin. And we’re seeing that if we look at 2023 at a 13% operating margin now sitting at an 18%. So, really nice overall movement towards this new model that we put in place. So very pleased overall in how we’re executing and feel very poised for the second half where we will start to see the, I think the fruits of our labor and the model kicking in even stronger.
With that, thank you very much everyone and look forward to the questions after.
Akihiko Omikawa
This is Akihiko Omikawa speaking and I would like to explain the situation of Japan region. Every time I show this slide, enterprise, SMB and consumers, these are the three pillars of business in Japan. So this is just a quick recap.
This slide shows the situation of our enterprise business. As was explained earlier by Kevin, Japan is lagging behind other countries in terms of Vision One business. And because of that impact, the attach rate is a little bit lower than the rest of the world. As you can see in this slide, Vision One is really driving the growth of ARR and XDR users increasing steadily.
Vision One’s target are large enterprises and the current attach rate is 16.8%. And we are increasing this every quarter. Kevin showed the slide and other countries are reaching 37%. Japan is definitely lagging behind, but our challenge is how to catch up with the rest of the world, how quickly we can catch up.
Now, attack surface risk management. This is very unique for Trend Micro, including risk management and XDR for post-event countermeasures at a high level. And starting this year, we accelerated this initiative. In line with this effort, when you look at the managed service provided by our security experts in terms of security operation, technical support, we definitely see the demand growing. So this service provided is generating 4.4 fold larger ARR compared to the same quarter last year. Within Japan, we have experts engineers working for the same company for many years, gaining trust of our customers and providing this business over many years.
Now, looking at the SMB business, sales is growing steadily. Working together with our partners, we are definitely seeing positive growth over many years now. Last year, we introduced XDR in this segment, especially for this second quarter. Just for this quarter, 2,400 companies started using XDR. And in total, we have more than 7,000 companies as users.
At the end of last year, it was several hundreds, but now we have more than 700 companies using XDR services.
Supply chain risk is imminent for SMBs, and therefore, they need high-level security. Together with our partners, we are providing this service to the customers, and it’s definitely growing. NG SIEM new model of Cloud Edge has been released and this has accelerated the sales which actually grew 1.6 fold compared to the same quarter last year. And the AIR is steadily growing at 14% on a year-on-year basis.
Last but not least, consumer business, we have the own device security products, which has been our focus in this segment. On the right hand side with the bar graph, you can see a big leap jump. Because of the product switch and inventory, there was a big peak but now this has settled down. And we have come back to the normal level of our market inventory. 20% of our sales are related to the drive and device security to security products that are related to that. In other words, consumer security environment is becoming more complex.
And starting from August, we have started providing the services to solutions to deal with deep fake fraudulent phone calls. And over the last week or so, it is selling very well because of heightened demand. I’m sure that people receive a lot of fortunate phone calls and these phone calls can be blocked, and also once this is registered and if your family member tries to call back, you will get notice about that as well. So this is a very good solution.
In IPC shipment started in Japanese stores and we have launched a related product as well. And, it is, again, growing. In terms of collaboration with official institutions, we have 40 some collaborations more than 20 centers, 30 prefectures out of 47 prefectures are collaborating with us right now in terms of security education for law enforcement. Through the collaboration with the police, Trend Micro is now becoming more widely used, including our efforts in anti-fraudulent initiatives. That’s all for me. Thank you.
Question-and-Answer Session
Q – Gran Casa Ueno
Ueno from Daiwa Securities. I have one question, a simple one. On Page 25, active customers, the number is there. For a subscription that is supporting cloud, it’s not quarter-on-quarter but on an year-on-year basis, I still see decline. And Vision One is sold and additional functions are added. And I think you’re trying to improve ARPU and I think the overall sales has been growing. It’s true, I can see that. Now the subscription customer number declined. How do you view that? And do you expect that you can turn around and increase the number of users?
Mahendra Negi
I’d like to answer. This is Negi speaking. So one thing is, amongst these numbers, there are some overlaps, double counting. In the subscription number, for example, the lower part, perpetual is mentioned there. Both might be used by the same user. And so I think, it skews the picture a bit. And as was mentioned in the presentation, we are focusing on enterprise, especially the large enterprise 28,000 they’re using with regard to Vision One.
And therefore, rather than focusing just on the near number of the customers, I think the focus should be how much upside we can have in terms of Vision One deployment or attachment. So rather than focusing on the number of customers, we would like to focus more on more potential or actually promising customers that we already have.
For SMBs, for example, these are another focus areas. So the numbers should come back. Okay, in terms of schedule, when do you expect that to happen? Maybe the total number of users declines, continues to decline. But Vision One, additional functions and features can be added and you can actually have the same users use more functions. So go deeper is one approach.
Gran Casa Ueno
But is there going to be a time in which you will really should focus to the increase in the number?
Mahendra Negi
Well, 420,000 companies altogether. We don’t have any particular target number, for example, of 450,000 by next year. We don’t have that kind of a numerical target. Yes, we do have sales increase in other targets, and therefore in time we hope that things will recover hopefully. However, that in itself is not the objective or target.
Gran Casa Ueno
Okay, as a sample, what is the per customer? Well, I understand that as long as you have more sales from one user that would be good. So, just a rough figure, how much upside do you expect? Is it 30% increase per user that you can expect?
Mahendra Negi
As mentioned in the presentation, the visual connected modules, there will be more modules being used and that translates into more sales by tenfold. The sales can increase by 10x. It depends on the customer and the customer timing of doing that or increasing their modules. And in smaller SMBs, maybe they buy once and then they don’t have other ones to buy. But we’re talking about the 28,000 large enterprise customers that we’re focusing on. I hope this answers your question. 28,000 companies that’s our focus. Therefore for — against or with regard to the 28,000, we are trying to have the sales increase.
Gran Casa Ueno
Sales per customer is what I wanted to understand better about.
Mahendra Negi
In the two, three weeks’ time in Japan — actually in the past two, three weeks we have carried out large events where end users gathered and there were user presentations and also managed service partners and their customers. Those SMBs also presented in such events. And so it was quite nice. In other words, we have certain focuses and we have examples and then the users can spread the word to other users. And partner companies are using our products, and they have positive things to say about us. And therefore, including partners and users we are visiting them. Of course, the focus is to increase the number of cases that we can reference. And we would like to also, of course, catch up with new users as well. So we’re working on both ends.
Gran Casa Ueno
Okay. I understand. Therefore, the sales per customer and its potential, we have no clue as to how much you’re expecting as a potential going forward or the upside. So please inform us going forward as well, if you can.
Operator
Thank you very much. I would like to unmute the next person for the question. This is Sato [ph] Jefferies Securities. Can you hear me?
Eva Chen
Yes.
Unidentified Analyst
I have just one question. Pre-GAAP Europe number. Kevin and Negi said that pre-GAAP didn’t grow in Europe, which was a surprise. I don’t think it was growing in the first quarter, but in the second quarter, it was the same situation. Kevin said public sector. Was it transportation? Maybe it’s a transportation, I’m not sure. But maybe this will recover.
Now, in the second half, do you have a clear vision visibility into the pipeline? That’s the question. And also, is the growth flat because of the absence of this public sector growth? Do you have any visibility into what would happen in the second half in Europe?
Kevin Simzer
You are correct. Pipeline visibility, we have the visibility. We are in summer holidays, so it’s not necessarily in the third quarter, but even in the third quarter, I think we can see some recovery. We expect the quarter to be better. Some of the larger projects in the public sector have been shifted to the next quarter.
Unidentified Analyst
One follow-up question. Regarding the cloud strike incident, did that have an impact on you? Are you receiving more inquiries in Japan or in the United States? Maybe some customers would switch the brand to Trend Micro.
Eva Chen
Because it was a painful experience, the customers are looking for other options including us.
Omikawa, do you have a comment?
Akihiko Omikawa
Yes, we have received many inquiries. But as you may know, we also had our own experience about systems, we have improved things, we have built the transparency center, improved the transparency and we have provided this content immediately. So I think the customers feel at ease. Maybe not an immediate switch but as Eva has explained, security operation is the overall concept. So what do we do about the operation to begin with? Is the current format really appropriate?
This is a great chance for us, opportunity for us to rethink all that. SRM company risk security operation from that perspective, we can talk about the ideal vision of how things should be because this is how the, persons involved in the oppression are thinking about this. So we’re getting an opportunity to explain about this overall thinking.
Unidentified Speaker
Just one more. System integrator — network integrator when I look at the earnings announcements, cyber security related business is doing pretty well. And there’s is Omikawa for this fiscal year’s guidance, I know that for Japan it’s low single-digit that’s why he said that 1% growth in Japan this is a lacklustre from the system integrator specific to you everything are certainly left and right that’s the micro Japan is missing this way. Growth in Japan being 1%, about half of this is a consumer sales. Please keep that in mind.
As you have said we maximize the capability of our partners. So moving to evaluate a different company, evaluates different separations, including Vision One. And we are looking at preparation together with the customer in terms of data handling and speed, people are recommending, willing to recommend Trend Micro.
So the answer to your question is, we want more people to understand what is good about Trend Micro system integrators and network integrators, important partners. We have the discovery and other great solutions. So on these two fronts, we have to make a business case. And we need to make more efforts so that the business would include our solutions. And as you have said, system integrator and network integrators grow and together, Trend Micro can grow. So we want to be a de facto component of their growth. We are making efforts to that end.
Operator
I’d like to unmute the next person to ask the question.
Satoru Kikuchi
Kikuchi from SMBC Nikko Securities. My first question is something that I asked in the past. Generally speaking, IT companies not in the manufacturing but the IT sector company, when they reduce headcount or do restructuring.
Eva Chen
Well I think the top line will suffer as a result because we’re talking about services that are sold by people. Therefore, the top line will suffer as a result of headcount reduction. But operation margin or profit margin will increase as a result.
So I think, at least it seems like that is what’s happening. Now restructuring is the decision by the management and people might say that it was a misjudgment by the management or maybe it’s difficult to calculate everything.
Now what’s happening is, top line is that not the impact of the restructuring or the headcount reduction. If it’s not, then from Q4 to Q1, I think restructuring has done and headcount reduction happened. And then, I think nobody will be motivated, after headcount reduction happens. And therefore, I think sales will suffer by a few percentage points if that’s the case.
Satoru Kikuchi
Then when you look at your operation after the organizational change assuming that there has been some negative impacts how do you plan on recovering from that stage? Or if you say, no, that’s not happening with us then maybe it’s about your competitiveness. So I need some explanation there.
Eva Chen
From your per perspective, when you went through this restructuring and also a global — change in the reporting line structures and what was the result of those changes? And what is the current status? Of course, if there is no such impact, then how do you explain the top line? Because that top line might suggest that your competitiveness is lower now.
So the first part profit margin, it’s not because of that we reduce headcount. Of course, we want to improve margin. Now headcount reduction, we just wanted to enhance our efficiency. So, actually the profile of the people need it will be changed as a result. And therefore, for example with this change, maybe support personnel will not be needed in larger number as in the past. And so it’s not just about the near volume or number, but rather the value that each person, employee can bring about. So I think the thinking here is that we’re enhancing the productivity and efficiency of individual employees that we have. I hope this is in sync with what you are thinking.
Satoru Kikuchi
The number of views customers are being reduced. And if it’s because of the reduced number of workers, employees that’s understandable. But if that’s not the case, there has to be something else. And that might be the competitiveness that is getting less and if it’s a one-time thing. But if it’s not a one-time thing and you see decline in the total number of customers and you’re not growing in Europe, and I’m trying to understand why is it because the person in charge changed, as a result temporary delay in order placements? Is that happening? I’m trying to understand the mismatch, so to speak, between the numbers and what you say is happening. I think there’s a confusion in the minds of many people. You went through this major transformation or reform and as a result of the top line was actually sacrificed temporarily. But you will stabilize things and then you expect the top line to grow again that would be a convincing debate explanation.
Mahendra Negi
The sales with enterprise is increasing, the total number of enterprise — customers is declining. We have 400,000 or more customers that we are focusing really on the 280,000 companies — rather companies. So sales and increasing and the profit margin increases. We are growing in the sales as well as margin and so we are really focused on the enterprise segment.
So we shouldn’t really pay too much attention to sales for a while. It’s not a temporary factor that is causing this sales being rather stagnant and — well, enterprise isn’t growing, you say, but I understand. I guess it is a fact or is it subscription is growing, but still I see this mismatch, at least.
Satoru Kikuchi
In my view, it’s a mismatch and maybe that’s affecting the share price as well. Because of restructuring, has there not been any operation-related impact? And reporting line has been restructured as well. And of course, sales could suffer as a result but it’s not related to what you did with these changes. Again, you don’t have any confusion in your organization?
Mahendra Negi
No, we don’t have any confusion. As Kevin mentioned, in the second half sales is going to be increased and also the profit margin will increase. So, these are not possible with any confusion organizationally and at the end of the day, you might say that the number hasn’t increased but we say otherwise. We think that in the second half, it will increase.
Satoru Kikuchi
I think in the second half, you will come out of this confusion. You have restructuring done, and the sales increase is not seen. That’s rather something that you don’t expect. I was just wondering that organizational confusion may have caused this stagnation in sales. That’s understandable, but if you say that’s not the case, then I don’t understand exactly how that came to be? Well, maybe I have a misunderstanding, but in any case, the past few periods have been rather disappointing the quarters.
Eva Chen
Yes, we have this plan that we have established, and of course, we will see how we can realize the plans, and we, of course, will try to reach the plan. And we believe that we can enhance productivity so that we don’t need to depend on that many people, in terms of numbers, that is. And so, of course, it’s up to the investors to make the final judgment or decision. I may be repeating myself. So, I really think and hope that things will improve. Otherwise, something is wrong.
Satoru Kikuchi
And I have a second question. In the IR conference last year, in December, what’s the cost reduction? And based on this, what to do in the next fiscal year? Is the cost staying suppressed and you can do the business this way? Or do you have to increase the cost in areas where it’s necessary? I don’t think I got a clear answer about that.
I understood that opening margin would be improved, but looking at the current operation, early in August, only more than half of the year has passed. Into next fiscal year, are you sure that you don’t have to increase the headcount? And if you have to increase the headcount the sales has now been pushed up by FX. But on a daily basis well, FX is difficult to predict but I don’t think the sales is increasing. So if I increase the cost, then operating margin will not improve. So what about operation cost strategy for next year? Do you think to increase the headcount or not? Autumn is actually higher season for new, graduates. So how do you intend to deal with headcount and cost control next year?
Mahendra Negi
First of all, like I said before, sales is not just pushed up by the FX only. For example, 6% growth in enterprise for the recent quarter. So forecast for this fiscal year as well as 2027 is growth of sales without the impacts of FX. So the margin will be improved based on the platform strategy. So we do platform selling and increase the efficiency of the employees. And that will push up the cost but the cost increase will be slower than the growth of sales, and that would improve the margin. So we will be hiring some people. It’s not zero hiring. But the profile of the employees will change. And we don’t want to increase the sales just by increasing the headcount.
Satoru Kikuchi
Your headcount usually increases after summer, maybe in the Q3. But if you plan not to increase it very much?
Eva Chen
There is no hiring phase. We’re still hiring people, but the profile is different now. So we are getting new hires as well.
[Indiscernible] decease of headcount but you’re saying that the profile is changing. By the end of September or by the end of December what would the headcount look like based on the hiring process right now, we expect it to be flat. 6% to 7% turnover is expected. And this can go up and down, depending on the market condition. But in order to keep the headcount flat, we have to hire the same amount. Thank you. That’s all from me.
