Trend Micro Incorporated (OTCPK:TMICF) Q2 2022 Results Conference Call August 9, 2022 3:00 AM ET
Company Participants
Mahendra Negi – Group CFO
Eva Chen – Co-Founder and Group CEO
Akihiko Omikawa – Executive Vice President
Conference Call Participants
Makoto Ueno – Daiwa Securities
Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley Securities
Yusuke Hori – Mizuho
Satoru Kikuchi – SMBC Nikko Securities
Hiroko Sato – Jefferies Securities
Hiroto Segawa – Morgan Stanley
Mahendra Negi
This is the second quarter consolidated results. As for the net sales, we have seen an increase on a year-over-year basis by 17%, and in operating income, it’s minus 24% on a year-over-year basis. And there has been yen-denominated sales increase by 17%. And you can see this — if the currency exchange rates used for 2021 were used this year, then it would be plus 9%. And for pre-GAAP, on a yen-denominated basis, it has increased by 21%. And excluding the foreign exchange impact, it would be plus 12% compared to the previous quarter, which was 9%. We have a higher number here.
But meanwhile, when it comes to the operating income, why is it that we are down this much? Well, the same thing happened in the first quarter as well. This is the FX factor. If we have a weak yen, then the dollar-denominated sales impacts things. And second point, since this year, we have seen a revival of sales activities. And so there has been a considerable amount of expenses that have been generated, which were suspended for the past 2 years. And also, we are seeing steady growth in this. Within the company, there are some expenses, and we have this linked to pre-GAAP results. And so therefore, there is the impact of this as well. Those are the 3 factors that have caused these results.
Next, this is the dollar-denominated situation, and this is the sales by region. And the weak yen has impacted things dramatically. So it’s better to look at this without looking at the FX impact. And this is the, by region, net sales growth. And you can see the situation of Europe and you can see the single-digit growth of Japan, and that’s the situation for the first quarter.
And this is the FX impact. And we are seeing an increase in net sales in each of the regions. Compared to the previous year, we have the situation of growth without the FX impact. And compared to 1 or 2 years ago, you can see that there has been a growth in this manner. If we look at this by segment, there are 2 segments, the consumer and the enterprise business. And as you can see from this slide, in all of the segments, we have seen growth. And this is similar to the first quarter. Since this year, in terms of revenues, we have seen that there is a new standard for revenue recognition. And there has hardly been any impact at all in the second quarter as well. It has been a net impact of JPY 200 million for revenues.
And if you look at this particular quarter, we have — we will not be preparing this slide in the future. Because even with the new accounting standards applied, there is hardly any major difference. And here is the point that we’d like to show you. As we have been mentioning, for the company, we are making a shift to a subscription business, and we’re showing how this is moving forward. And you can see that the subscriptions are increasing. So the number of subscription customers is growing steadily.
Meanwhile, for the perpetual customers, there are some customers that have shifted to services or there are still some that want to continue with the perpetual licenses. But if possible, we would like to convert even more to subscription. And our hope is to increase the subscriptions. What is the situation of the revenues? This is a very important point that we’re looking at. And you can see that this quarter, we have seen an increase by 32% or $609 million. And for the consumer market, we have seen an increase by 19% as well. Of course, on the upper side, we’re looking at this on an annual basis. But for both, we are seeing very high growth rates.
And if we look at the percentage share by region, the weak yen has impacted things. But we have — you can see the situation here. And before adjusting deferred revenues, we still have the FX impact. And likewise, for Europe, we are seeing very high plus 26% and also for EMEA is plus 18%, whereas Japan and Americas show single-digit growth only.
And by segment, and also, we’re looking at before and after the deferred revenues, we’ve seen a growth by 14% for enterprise, and it’s higher than the approximately 10% that we saw in the first quarter. And we’re seeing steady growth in consumer sales as well. And this is the situation of the deferred revenues, and this is the deferred revenue by region, which we’ll skip.
And this is interesting, I’m sure, to everyone, the situation of costs. And we are showing the red box [indiscernible] year-on-year and quarter-by-quarter. And about half of this is exchange rate. And there is a portion that increases in line with the sales activities recovery. And for cloud, as the subscription service increases, the cloud cost increases as well. And the pink color, this is mostly [mobile] channel cost in Japan. I’m sure that Omikawa-san will talk about this later, but it’s trending strongly.
Yellow is salary and benefits, impacted by weaker yen and also recovery in hiring. As we mentioned in the first quarter as well, considering the market situation, we have to make some adjustments, and that is also another factor behind this number. This is pre-GAAP and margin.
This is a slide on cash flow. Even with lower profit, cash flow is pretty strong, similar to the first quarter. As I mentioned, the pre-GAAP growth rate is very high and that is why there is cash inflow. And you can see that impact on the slide. This is the second highest cash flow. In the previous quarter, we had the highest level of cash flow in history, and this time is the second highest. So for the first half of the year, we believe that this is the highest level of cash flow that we have ever posted.
Hiring activities, 166, a net increase. As I mentioned before, from the beginning of this year, things have changed. In other words, we could not really hire many people in the last couple of years, but now we are making a recovery there. Partly because of weaker yen, and also that is not everything, but partly because of weaker yen, we have a ForEx gain and we have JPY 1.6 billion in extraordinary and nonoperating.
And these are the highlights and lowlights. As I mentioned before, in all regions and segments, we have seen growth. And we’re sustaining high growth in subscription business. We have also posted the second highest operating cash flow for the — following the first quarter. And to the right is the cost is increasing faster than the revenue. We don’t believe that this is a long-term thing, but I’m sure that Eva-san will explain this later. But we have to make investments now, and these investments will continue for a while.
And the multiyear deals are slightly declining. And why is this lowlight? Because after deferral, there is no impact of this. First of all, this doesn’t have impact on the growth of pre-GAAP, so there was a 12% growth. But if we had the multicontract, this percentage would have been higher. And one factor is, why are we seeing a decline in multiyear deals? There are several reasons. Some customers don’t want to invest in multiyear perpetual license.
And also, economic deceleration or recession may be expected, in which case, the customers may want to reduce the cost or lower the budget, which means that we are beginning to see some of the signs. So that is why we have identified this item as one of the lowlights.
Highlights for the half year. This is a total of the first quarter and second quarter. So I would like to skip all these slides and go straight into the revision of forecast. So in April, we were basically assuming JPY 110 to the dollar, but now yen is much weaker. Therefore, we have decided to make an adjustment with JPY 134 to the dollar, which means that there is a JPY 17 billion increase in revenue. The expense will expand by this much, so we will not make any adjustments in terms of expenses.
And finally, this is the new forecast, revised forecast. Net sales, JPY 225.9 billion, 19% higher than the prior year, which used to be 10%. And the ForEx impact is still 10%. So weak yen is the only impact, and all the other numbers stay the same.
That’s all for me, and I’d be happy to answer any questions you may have later on. Thank you.
Eva Chen
Hello, everyone. Thank you for attending our meeting. I’d like to explain in this presentation, talk about the power of Trend Micro One, that is our next 10-year strategy, and why do we strongly believe and invest in this Trend Micro One strategy.
Trend Micro has existed for 34 years now, and we went through 2 major transformation in the past 30 years: which first one is transformed from desktop local area LAN to Internet; and the second one is transforming from Internet to cloud and we become cloud security #1. And now we are going through the third transformation, which is transforming to a unified cyber security platform. And this transformation is undergoing and we believe is a very strong offering that we can offer to the cybersecurity industry.
Trend Micro at a glance in 2021. At the end of 2021, our net sales was — gross sales was USD 1.93 billion, and we’re strongly pleased. Of course, in 2022, we were exceeding USD 2 billion. We are #1 in leader of cloud security. We are leaders in XDR. We are also #1 in public vulnerability disclosure, which is a very important part of enterprise risk management measure. And we have more than 7,000 employees worldwide distributed in 65 countries.
Since then, we transformed Trend Micro. About 2 years ago, we started this transformation of transform our product, individual products into individual platform. As you can see from Deep Security to Cloud One, from OfficeScan to Apex One, and then from our overall visibility, we call it Vision One.
Now we’re embarking the next generation of the transformation, which is not only our product is complete to become a platform, but also our going to market are transforming into a way to expand seat and expand or transform to the platform way of go-to-market. And also, our service and support has become a very rapid, quick response way to support this platform growth. And let me go to why we are doing this and why we believe the market and customer need this type of platform.
First, shifting in markets. This shifting in market is majorly in IT infrastructure to SOC and cloud buying center. Before, Trend Micro’s cybersecurity is mainly come from attachment to the IT infrastructure and operations. For instance, when customer buying a new PC, set up a desktop for their employee, they buy antivirus or desktop security. When they set up a new network, they buy a network security and they buy the TippingPoint solution. Or when they set up the data center security on-prem or in the cloud, they buy Trend Micro’s data center security such as Deep Security or Cloud One. These are all attachment to the IT infrastructure and operations budget. But now what we see is their new buying center emerging in enterprise customer segment. They are not attached to the IT budget, but they have an independent security operation centers budget. This budget before was including like analytical seen in market or network security analysis. These are the major SOC budget.
And the other one is cloud buying center, such as when they build a new cloud application, they will buy the cloud security. These are the 2 new value centers that we believe Trend Micro solution now are participating in these 2 buying center security.
And for the addressable market, therefore, is enlarged for Trend Micro. This blue portion stand for the original IT infrastructure buying centers budget. And the red part is the SOC buying center. The lighter blue one is the cloud buying center. Before, Trend Micro’s revenue probably 90%, more than 90% come from the deep blue color, which is IT infrastructure security buying center. And that portion is growing but not as fast and not as big as the SOC buying center and cloud buying center. As you can see, this total pie is now all Trend Micro’s addressable market. And by 2025, it will grow to nearly USD 50 billion.
For these 2 buying center, how do Trend Micro solution address to these 2 new buying center? When we look at before, Trend Micro was the only company, security company that can offer from endpoint e-mail security to network security, to data center and cloud security. These are 3 portfolio in the IT infrastructure organization.
But we’re starting to find this individual portfolio, security portfolio, what customers want more now is they need to understand the risk of exposure across all cyber assets, which means that they need to collect all this telemetry and integrate them together. That’s what Trend Micro can do and that’s why Trend Micro expand our 3 portfolio and integrate them into what we call XDR, extended detection and response.
This extended detection and response offer our customer a complete way of seeing their risk profile from discover attached service to measure and monitor their different risk level and then finally mitigate the risk. All of this coupled with our common service provided with Trend Micro’s common service and integrate with the ecosystem and coupled with Trend Micro’s managed services. That’s the complete Trend Micro One solution that we can offer to our customers.
This complete solution to address all 3 buying centers. The center is the security operations center, where we correlation and offer the complete attack surface risk management. And then the infrastructure IT buyer still can buy Trend Micro’s existing product, but the new cloud buying center will buy into Trend Micro’s cloud application security profile.
These 3 buying center, I think because the IT infrastructure buying center, we’ve already been doing for years, so I will focus on talking about the SOC and cloud buying centers.
The SOC buying centers. What is its challenge? The major challenge is, every day, their attack surfaces is exponentially growing. What does that mean by attack surface? Whenever they add any device, no matter it’s because of employee work from home or mobile devices or they opened up some remote offices, all of this exposure, making the attacker have no point to attack. And that’s why their attack surface has expanded.
Because of that, they need to continually monitoring all of this attack surface and assess the risk, mitigate the risk. And therefore, they have a lot of need for risk and 0 trust [indiscernible]. But because they need to monitor all of this, and therefore, their security operations center are overwhelmed with the alert that was generated from all this monitoring and actions. This is the complete challenge that every security operation center and CISO of today are facing.
Trend Micro’s XDR is integrating all of this visibility and risk real-time monitoring all of these different point of attack surface. And then providing high [indiscernible], low false positive, very precise as you create alert and therefore, reduce our customers’ lean time to respond. That’s why Trend Micro’s XDR has been highly praised by all the security operation center people.
And this attach surface risk management life cycle, including discover the attack surface, assessing the risk in real time and mitigate the risk with our security control, this complete solution currently already have more than 6,000 customers, active XDR customers, these are enterprise customers, and is 143% year-on-year growth. We already deployed more than 11 million active sensors.
But I think most importantly, this growth mainly come from 5,000 seats and above, which is a very large enterprise segment. That growth is 290% growth. All this means is Trend Micro now already participating that [indiscernible] into this SOC buying center. And utilizing this, we can continue to expand our coverage and provide more solution for the SOC player security operation.
Next is the cloud buying center. Trend Micro has been cloud security #1. And we already expand our cloud workload security into storage and into the configuration management. So we continue to expand this part of portfolio and continuing to be #1 in cloud security. But we believe all these 7,000 customers, 40% year-on-year growth, the more important part is we continue to shift left, means that we not only produce — protects the real-time operation, but also, we shift left to protect from before those services, those SOC services are deployed, so predeployment security.
We’re already seeing 280% growth in multi-services in cloud security, which means that customer, our existing cloud workload security customer are buying more of these services from Trend Micro. And we think our cloud marketplace, which is an indicator of a cloud buyer [indiscernible] the cloud buyer buying from this cloud marketplace and in the revenue we generated come from this cloud marketplace showing 30% of growth.
So this runtime protection, we are utilizing our runtime — cloud runtime protection, #1 position, continuing to shift left. And I am personally very excited that this quarter later, we will be announcing and public offering the preruntime protection, which is the native cloud application protection security, which is called CNAPP. And this type of solution will embed the security when the developers are developing the code and before they deploy during the runtime, mitigating the conflict between the dev and the ops, which is DevOps pipeline security.
So we believe these 2 new SOC or cloud buying center, I think the reality is our customer, no matter what, 80% of them are maintaining a hybrid environment. And therefore, Trend Micro solution coming from — no matter it’s on-prem or originally workload security, we can utilizing our strength in the existing customer base and expand into — no matter it’s security operation center or it’s in the cloud. So for instance, this advantage and knowledge about how to integrate customer security across the hybrid environment is Trend’s competitive advantage against our other so-called [formed in the] cloud security vendor because they don’t have this type of on-prem environment and hybrid environments knowledge.
So I’d like to use 2 customer case to explain this advantage and how we were doing in the SOC and cloud buying center. The first customer is a Fortune 500 bank, is a very big bank. And what they’re originally doing is just using Trend Micro’s ETP or user-based antivirus desktop solution. Originally, they were trying to evaluate should they add EDR, EDR, which is something that CrowdStrike offering, the desktop endpoint protection and detection part.
When they evaluate, this customer actually find what they need is not just EDR, not just the desktop protection, but they see the strength of Trend Micro’s XDR, which crossed e-mail, network, cloud, data center and desktop, correlation. And they find that all of this advantage, Trend Micro can do to their — for their security operation center or it is 5 category of advantage.
First, Trend Micro offered the local data lake, which resolve their geographical problem and data solvency problem. And we integrate with their existing ecosystem the hybrid approach, shifting mindset from EDR to XDR, and the SOC augmentation. All of this 5 advantage made us win this deal not just on the EDR and beat our competitor like CrowdStrike [indiscernible] or its competitor to get this type of expansion, bid expansion in this deal.
The next one is the cloud buying center. It’s the world’s largest manufacturer of tires. And what — they were originally Trend Micro’s Cloud One workload security. But then they find out that they need to have faster to couple with their cloud application. And the automated cloud infrastructure compliance is the real need for the cloud security.
So they find expanding Trend Micro solution using our Cloud One security platform, they were able to do multi-cloud strategy, auto-scaling infrastructure and misconfiguration and compliance auditing, out-of-the-box time-to-value, very quick they can find their application secure, and also vast Linux operating system support, because they were multi-cloud.
And as you can see, these are the advantage that we can win against the platform players such as Microsoft because of our multi-cloud strategy and all these different Linux operating support.
So we believe these 2 cloud buying center and security operation center — buying center, coupled with our existing very loyal customer in the IT infrastructure buying center, those 3 together is what we call Trend Micro One strategy. And I strongly believe that’s our next 10-year strategy and next 10 years of growth. Thank you.
Akihiko Omikawa
Thank you for your patience, and this is Omikawa speaking. I would like to explain the business situation for the second quarter. But before I begin, what I’d like to do first is take about 30 seconds of your time and show you the TV commercial, which was a first after the spring holiday.
[Audio/Video Presentation]
Akihiko Omikawa
Thank you. I will try to share the screen once again. Sorry to keep you waiting. So we show the TV commercial, and in autumn time frame, we will be airing the TV commercial once again.
The first slide talks to the Japan mission. As Negi has mentioned, growth is stable. We want to expand it further, but the trend is sustained. And compared to Japan, the Western countries are progressing much faster and Japan tends to follow or lag behind. But we know that the numbers are definitely going up, so we want to increase the growth rate in Japan as well.
And this is for the enterprise business, the business environment and the market environment. [Indiscernible] security software market is expected to grow fast. And the security investment is increasing in line with this, including supply chain risk and also economic security. Japan may be lagging behind slightly, but we can feel firsthand that the Western countries are definitely attract response. There is a growing demand in security operation center and others. And this is the consumer business in Japan. As you can see, there is a high percentage of Internet users who feel anxious using the Internet. And phishing is also going up in the number that is reported.
And on this slide, again, we are just explaining our business opportunities and the focus areas. For Enterprise business, as Eva mentioned, Trend Micro One is being strengthened, enhanced. And in Europe and America, we are actually building track record. These 2 just provide solutions. But now we are talking about go-to-market. SOC buying center, SOC buying center and also cloud buying center as well as conventional IT buying center.
Considering the economic situation now, things are really changing, especially VLE government is changing. And against this changing market, Trend Micro One can offer an advantage that the competitors cannot. And therefore, this is a focus for growth. And we also have new business as well as consumer business. The consumer business, not just protecting devices with [Fraud Buster], but we want to go beyond device security and expand into these adjacent fields.
Enterprise business, Q2, XDR of course was a key. It’s no longer EDR, it’s XDR. And the large players in XDR have grown 109%. So compared to the end of last year, at the end of the second quarter, this is basically twofold. So the number of companies involved is definitely increasing, and Japan is finally catching up with the rest of the world.
And then Cloud One. As was mentioned, this was called the Deep Security in the past, and we already have #1 market share. Multiple solutions have been added to that, and the Cloud One itself is very solid, 31% growth on a year-on-year basis compared to the end of last year.
AWS marketplace, again, is picking up in Japan, although it’s slightly behind the West countries, and we are seeing 67% growth compared to the same quarter in the prior year. AW marketplace sales is definitely growing, which means that more and more new solutions can be provided, adding to the growth in the AWS marketplace. And finally, Japan is catching up.
Second, for SaaS security solutions, we’re seeing very steady growth here. And if we look at the SMB market, about 76% have been moving to SaaS. And if we look at the SMB and also the commercial VLEs, if we look, we’re looking at approximately 66% that have already selected SaaS in Japan.
But as for issues in regard to the commercial area, we have to go and emphasize branding efforts and also look at how the supply chain risks have to be perceived by the management people of corporations, and they must have greater realization of the SOC and what Trend Micro can be doing is to emphasize the fact that we have been anticipating what will take place. Since the year 2000, we have been talking about what lies ahead, through the years ahead. And we have been talking about Trend Micro One recently. And we have these brands which corporations must realize shows the capabilities of Trend Micro as the best partner for them. And so therefore, we are looking at how we can emphasize this.
And within Japan, we have a large existing user base. So we would like to take advantage of this. And by taking advantage of this, we believe that the further growth can be achieved. And in OT security, we have established the Japanese local corporation of TXOne Networks. There has been a press conference on this, and there has been a Japanese President in place of the operations. And in Europe, U.S., Japan and TXOne Networks connected, 4 regions, and we’ll be further enhancing efforts in OT.
As for 5G, in Q2, Fujitsu at the Nasu Plant has decided to take advantage Trend Micro Mobile Network Security. They have made an announcement on this. Also, NEC has decided to select us as a platform partner at their NEC CONNECT 5G Lab. Meanwhile, in the area of automotive, there is a new company, VicOne, that was established. And there has been an announcement about this. So we have now people with expertise mobilized in these areas.
And in the area of OT security, there are a variety of different awards that we have been able to achieve. And on the left-hand side, you can see SC Awards Europe. Now we have been evaluated for the Best Endpoint Security with our Stellar series. And why is it that we were able to win this year? This is because — or Stellar or legacy protection, we have a solution in place here in Japan.
Now hospitals have a great deal of medical equipment. And there’s a lot of proprietary machines that have been used in hospitals. And in regard to those proprietary machines, our Stellar series can be used, and in Europe and America, this has been used to protect proprietary machines. And the awareness of this in Japan is still limited, but we have been winning awards on this. And in the latest endpoint solutions, we can use this in parallel to our latest solutions, and we have been able to get solid evaluation with awards like this.
Next, for individuals, we are looking at beyond device security. Although the sales is limited here compared to Virus Buster, still we’re increasing the sales of this. And in — started from 2020, we have increased the shares here. And in the second quarter of 2022, it’s about 7.3%. And it’s about JPY 1 billion per quarter in terms of sales. And we’re looking forward to what we can achieve here.
Several years ago, from smartphone resellers, there was only a 0 yen sales and now we have gone beyond JPY 1 billion, and we’ll move forward solidly with new concepts here. We’re also going to enhance support services. And for Japanese engineers and Japanese customers, we’re going to be providing dedicated support. And in new areas, we’re going to be actively participating to provide support.
As for device security, for smartphone as well as PC security, we have been enhancing our efforts. And especially in terms of smartphone security, we are seeing that there is the lowest churn numbers with our solutions. There is hardly any churn at all because the customers, I believe, that our applications are truly useful for their platforms.
And in the overseas market, we are seeing increase in global mobile sales, especially in the area of the United States and also in Asia and Oceania. We’re increasing the sweet sales. In mobile shops like in Japan, we have started seeing business growing in our mobile shops. And we’re continuing to increase the sales here.
Next, with regard to the Cybersecurity Innovation Research Lab, for the Threat Intelligence Center, our researchers are providing timely support when incidents occur and we have these kind of reports generated. And for intelligence efforts in Japan, these are being utilized. And for the security knowledge education center, our engineers are active in the efforts made here. And there is Operation Killer Bee, which has taken advantage of information provided from Trend Micro.
And we’re also seeing, for plus security, human resources as well as the necessity of cybersecurity being taught to corporate management people. And there are efforts that are being made. And there are more and more inquiries for this. About 500 persons have been registered for this program since last year.
As for the transparency center, there is a cybersecurity report committed that we have organized in our website. And on a global basis, how our products can be used and how we are developing and supporting our products. And we have a variety of different activities with the transparency center to introduce our activities. And we are sharing this knowledge with companies that are carrying out development work here in Japan.
And that concludes my report. Thank you very much.
Question-and-Answer Session
Q – Makoto Ueno
My name is Ueno of Daiwa Research Institute. Two simple questions that I have. First of all, you talked about the foreign exchange factor. But we’re seeing the increase in net revenues in local basis. So what is it that the profit ratios are down? If we look at the pink and green areas, then we can see that there is an increase in personnel costs. And so therefore, there may be cloud expenses. And strategically, you’re trying to increase the revenues there. But in terms of profitability, do you find this to be acceptable?
Unidentified Company Representative
There’s also COVID as well as various types of sales activities that had been kept low. But now we’re increasing this. And there’s also the pink area, the mobile channel expenses and many things that are linked together. So from the standpoint of investments, as indicated in Eva’s presentation, we believe that we have an opportunity to get a large market, and so we’re making investments accordingly.
Makoto Ueno
Do you mean that this kind of investments will continue for perhaps a span of 2 years? Is there no change there?
Unidentified Company Representative
No change there. However, there is the track record that we are generating as a result of those investments.
Makoto Ueno
So you’ll be increasing the investments. If you think about the potential for the revenues 2 years ahead, then you will continue these efforts.
Unidentified Company Representative
That’s correct.
Makoto Ueno
And I’m sure that everybody wants to ask, there is the ValueAct, and you’re seeing your stock prices going up tremendously. Now is there things that you can disclose about this or if you have any thoughts in regard to this?
Unidentified Company Representative
Well, we have a high degree of transparency, and so we disclose what we can and for the investors are evaluating things. But from our standpoint, for the ValueAct, as we believe that the investors realize the transformation that we are facing and they realize the situation of our customers and channel partners.
And so therefore, for the corporate management, when we talk about the corporate strategy, this is something that we have repeatedly explained about. And it’s up to the investors to decide on their own about whether they should invest or not or whether something is cheap or not. They will be looking at other situations as well.
Makoto Ueno
So it’s a familiar pattern then. It’s not any kind of external pressure, or rather, you have a high degree of transparency, and so as a corporation, investors are looking at you as an attractive option.
Unidentified Company Representative
Yes. I don’t know whether that represents a gray zone or not. But we believe that this is the best place for you to learn about our company because on a quarterly basis, we talk about our plans. And so if you have any uncertainties about us, then we are able to explain our situation to you. And if you’re not satisfied, that’s that. But if there is some kind of dissatisfaction that you have to the company, there may be people participating who are part of the ValueAct.
And in regard to their investment strategies, they concentrate their efforts and they spend a great deal of time in analyzing our strategy, I believe. And they are also looking at our customers as well as our competition, and they are looking at a comprehensive evaluation of Trend Micro. And they understand we are now targeting a large market, so they perhaps believe that stock price increases can be expected.
Eva Chen
I have comments on these 2 questions. I think first, on the profitability side. As in my slides, I indicated, Trend Micro has been profitable consecutively in 4 quarter ever since Trend Micro become a public-traded company. So you can trust Trend Micro is not a company that’s doing loss-leading investment. We’re always aiming at provide generating profit. And this time, I think our investment in the SOC buying center and cloud buying center are very important and very high potential market to invest in.
And in terms of ValueAct, I think it’s very interesting that — we find their investment interesting is because they invest in Microsoft before when Microsoft started their transformation into the cloud part. And I always feel that before Trend Micro was — our business model was being compared with other cybersecurities product. It’s just — I shouldn’t say not fair, right? It’s just not an apple-to-apple way of comparison, how our business model is, because we are generating profit. And then at the same time, we’re transforming and building from the existing customer base.
And I feel it’s very — how do I say, I feel — I understand why ValueAct want to invest in Trend Micro is when they see Trend Micro as — we are at the point when Microsoft was using their existing customer base and transforming into the cloud part of the revenue, which we have a similar business model and our transformation is the same route each. I think that is why we feel — at least I feel ValueAct, why they invest in Trend Micro, make me a little bit more comfortable because they understand our transformation.
Unidentified Analyst
I have 2 questions. One is, well, you choose a top line but not the profit. And Negi-san, you have explained that the exchange impact on top line and the expenses is basically parallel, but for the first half, expense grew faster than the revenue. So for the second half, the cost of sales will not grow as much as revenue. That’s your expectation. You have to make a recovery there. So specifically, how are you going to control and reduce expenses? I understand that the hiring is accelerated in the second quarter. So based on this exchange rate assumption, will the top line grow this much? And maybe the gap cannot be filled or maybe even expand. So can you please explain why that isn’t the case?
For ordinary profit, I know that there is exchange gain or loss in terms of operating income. Maybe the situation is a little bit tougher. So can you please provide us with some additional comments? That’s the first question.
Can we do it one by one?
Unidentified Company Representative
Yes. The second half revenue is usually larger than the first half. So for the first half, unfortunately, expense grew faster than the revenue. But in the second half, the revenue is expected to grow at the same pace, in which case, we can absorb the expenses and the exchanges impact, unless those become weaker, we can pretty much absorb that as well.
So minor adjustment at this point in time is relatively easy to do for revenue. But for the expenses, there are so many different factors to be considered. Therefore, for the time being, we believe that this number is appropriate. And after another quarter, I think we can gain more visibility into the situation. Therefore, for the time being, the operating income level that we are indicating, we believe, is appropriate.
Unidentified Analyst
Second question. From July to September, I understand that the security investment may be suppressed, especially for the United States market. And Americas, EU, Asia Pacific for these different regions, what is the market environment? And what kind of changes do you expect on a quarter-by-quarter basis? And if there is no change, please mention that as well.
Unidentified Company Representative
Thank you for your question. As I commented, the multiyear deal decreased, especially in the North America, it’s definitely a trend.
Unidentified Analyst
Is this due to potential recession? Or is it because customers want to switch their services or shorter duration contracts?
Unidentified Company Representative
We don’t really know exactly, but this is probably one of the lowlight points as an indicator. That’s what we shared today.
In Europe and Asia, it’s not a single country. There are different countries and we may have a very strong position in a country, a particular country or maybe we had specific deals, and the demand is relatively strong in those regions.
Hideaki Tanaka
My name is Tanaka of Mitsubishi UFJ Morgan Stanley Securities. If I may ask a question. You talked about the pre-GAAP situation. But on a local currency basis, there was only a growth of 3%. And what about multiple year impact? What about the situation of America? What is the situation in competition with other companies? If you could touch upon this.
Unidentified Company Representative
Well, most of our competitors are American companies, and the most competitive market is America. And our scale is relatively small compared to the other competitors which have large sales force. And so there is a very fierce competition taking place.
Hideaki Tanaka
What about the situation then?
Unidentified Company Representative
We believe — I think that it’s improving, but for SOC or the cloud buying operation, in terms of service capabilities or sales capabilities, and maybe it’s an order of magnitude difference in the number of salespeople, so it would be sad to think that you can’t competitive. So that may have been clumsily expressed by myself, but this is the reason why we have to invest more. And also, we have ValueAct, which is a U.S. investor, and so they do market research on their own. And they have evaluated the efforts of Trend Micro and have looked at our potential. Thank you very much.
Eva Chen
Yes. I just want to say, what is the U.S. situation? I just reflect on the past 2 years. At first, when CrowdStrike just appeared, our seller will come back and say, “We don’t see CrowdStrike. We don’t see them appear in our account, and we’re starting together.”
Then we move from there where we say, “We don’t see that.” Later, we’re starting to say, “Hey, we see CrowdStrike.” But every time when there’s CrowdStrike, we lost to them. And now we already move into the next stage where now we almost see CrowdStrike in every of our — the deal that we’re competing.
I think this and also we starting to win some. Now — so that journey says that, first, we were in a different buying center. We were at the IT buying center. They have the SOC. And that’s why our sellers say, “We never see them.” Then later, we’re already moving to — in the past — probably starting 1 year ago, we started to say, “We kept on seeing CrowdStrike. That means we are invited to the bid.” But at that time, we were not competitive enough, so we always lose. But now in the past 6 months, we’re already seeing — we’re gradually starting to win one by one on lots of deal. And it’s winning from, in my presentation, I explained, not just the EDR deal. We win by XDR. We say quite unique is not just endpoint detection and response. Like CrowdStrike, you need the extended one, including the network sensor, including the cloud sensor. And we are starting to win.
So I think it’s slowly, but at least we’re seeing the progress of Trend Micro competing in U.S. for the security operation center. That’s the good part.
Unidentified Company Representative
So if I explained, our product is strong. That is why we’re seeing the growth in Europe and Asia. We are more competitive. So our products are competitive. And as Negi mentioned, CrowdStrike is one of the competitors. And most of the competitors are basically from the United States, which means that they have a home advantage. We have home disadvantage.
So in terms of branding, we are a little bit weaker, although our products are competitive. If there’s a concern that our products may not be competitive, well, it’s competitive, and that is why we are seeing double-digit stable growth in Europe and also in Asia.
Yusuke Hori
Yes, this is Hori from Mizuho Securities. I have a couple of questions myself. North America pre-GAAP looks a little bit weak, and I understand that multiyear contract is declining. But the SaaS subscription, this is a general trend. And I think this situation was already happening for a while, but you’re highlighting it this time.
Why is that? Is that because of the economy and the multiyear cash-out is maybe declining or will be declining? And we are seeing that in this quarter’s number. If that is the case, maybe on a year-on-year basis, we will continue to see this trend in the next coming quarters. Is that the right way of interpreting your explanation?
Unidentified Company Representative
The reason we spoke about the pre-GAAP is because uncertainty about the economy is being discussed a lot. We’re not economists. We don’t have any leading indicators. Security companies are basically lagging indicators. But anyway, this is a phenomenon that we’re seeing that we want to share that with you.
Pre-GAAP growth is not bad at all, as you may know. And in the United States, there’s a shift from a license to service and there is a higher percentage of SaaS and this is what we’re seeing. And in the United States, as you could see from the slide, the number of perpetual license customer is declining, and that’s one negative factor behind that.
Another thing, I don’t mean to make an excuse for ourselves. But there was one large deal which was phased — there’s a delay. The general trend has been explained greatly by Negi-san, but there was 1 big deal which was phased, and there is an impact on pre-GAAP because of that. That was a big impact.
Yusuke Hori
I see. I understand. My second question is going back to the previous question about the headcount. I can see an increase in headcount in the first quarter. And in the second quarter, I believe you’re hiring more people.
What is the background for this? I understand that until last year, it was difficult to hire people because of COVID-19 pandemic. But this year, you’re accelerating your hiring. And finally, you are getting maybe enough headcount that you want. What is the background for this? What is the reason for this happening now?
Unidentified Company Representative
The background is, as I have explained earlier, we have never frozen the hiring process. But there were 2 reasons why we could not hire many people, because hiring managers could not see the candidates face to face and they felt anxious. So hiring managers were maybe on a slow pace.
And another reason is when there is uncertainty, skilled people don’t want to change their jobs in general. So in 2020, 2021, I think the turnover was quite low generally. But now the turnover of many companies is increasing and the mobility of people is increasing. And thanks to that, we are able to hire more people now.
Yusuke Hori
I see. You said that you have competitiveness in your products. And you can win not only in the United States, but also in other countries, too. But you mentioned CrowdStrike. There’s also Palo Alto.
I think they have been hiring media aggressively in the last 1 or 2 years with a stock option value, tempting many headcounts. But this year, the stock prices are not going up. For the last 6 months, the stock-option value is not as attractive as it used to be. And I don’t think they are as aggressive as they were in hiring. I think they’re slowing down the hiring process.
And maybe that is helping you. I know that Trend Micro is not doing anything too aggressive, but you have a long-term vision and you focus on quality. And you have never really focused on those potential employees who would be attracted by options, stock options.
So maybe the bubble is over, but now there’s a tailwind for you, for your hiring process. Is that too much of [indiscernible]?
Mahendra Negi
Well, generally speaking, I agree. I agree. Two years ago, it was difficult to hire engineers and Internet companies were hiring very aggressively, but now it’s slowed down. So compared to the past, many companies have stopped being aggressive. And we’re not necessarily hiring from Palo Alto or CrowdStrike. We have our own philosophy. And maybe Eva can comment.
Eva Chen
Yes, like Mahendra say, the teamwork and the collaboration globally is a very important element of Trend Micro culture. And therefore, at the COVID time when we cannot go overboard, cannot meet face to face, we were hesitant to hire. But now I do admit that we’re seeing more quality [indiscernible] inflow. And at the same time, we have the chance to really meet with them and feel more comfortable to hire and pick the one that we think will fit with Trend Micro’s culture and grow together with Trend Micro.
So we had the chance to accelerate and find some good hire into Trend Micro. Just for instance, recently, just about 2, 3 months ago, we hired someone from U.S. federal CISO. He was a U.S. federal CISO, and he brought in a lot of knowledge about how the U.S. federal government work and how their security operation centers need these. And those are precious hiring that we recently was able to find.
Operator
[Operator Instructions]
Satoru Kikuchi
My name is Kikuchi of SMBC Securities. And I’d like to continue with Mr. Ueno’s question. I’m sure people are involved and looking at various buyback plans, and we are seeing the increases of that. And there are businesses that are doing this. But I don’t think that there’s going to be much change. But when it comes to investment securities, there is increases in the market, and there is much talk about the return to shareholders.
And to be friendly to the investors, and you do have a high degree of transparency, but when it comes to medium-term objectives in the Japanese market, you need to emphasize your medium-term strategy. But I have questions about that. And in terms of improvement in that area or in regard to the cash on hand or in the balance sheet or in how you show corporate growth, if there is any areas that you see room for changes.
Unidentified Company Representative
Well, we should divide this question into 2 parts. About return to shareholders, well, we’re not thinking of any changes. And when it comes to deferred revenues, we have over JPY 180 billion. And this hasn’t been realized, recognized. But if we look at the dividends, then there could be double dividend paid. And so therefore, in regard to the payout ratio being low or so on, we are not wasting capital. But at any rate, there is no wasted capital on our part. And so we are not looking at any changes there.
We are open, however, in how we disclose our information. If the investors are seeking a new way of our disclosure, then we are going to look into that. And in regard to what needs to be shown, if we show something different every quarter, then it would just inconvenience the analysts, and so therefore, we will continue to disclose for a certain period of time what we continue with. And so if you have any ideas on this, please let us know.
Meanwhile, when it comes to the medium-term plan, there is a great deal of uncertainty about the future right now. And the economists are saying that they cannot anticipate what will take place 3 years ahead. And so under such circumstances, it’s just, well, for self-satisfaction if you make 5-year plans.
And so therefore, instead of looking at such [strat] long-term planning, it’s necessary to have the strategy and whether you can deliver on a long-term strategy or not. And so for us, when it comes to 3 years ahead or 5 years ahead, if we just come up with some numbers and try to increase our stock prices with that or we show something that’s 5 years ahead, we have to continue to explain our strategy and how things are proceeding, and we must talk with our shareholders about this.
Satoru Kikuchi
I see. But when it comes to investment stocks and securities, you have seen the increase in your stock prices, but perhaps there is anticipation about what return to shareholders that you’re planning and maybe the buyers may be looking into this or the stock prices may go down. But when it comes to the investment securities, how this is going to be handled from here onwards? Do you have any comments?
Unidentified Company Representative
Well, I think that, that’s not relevant at all. No one knows whether our stock prices are going to go up or not. And when it comes to the investment securities, if you have any opinions, Mr. Habara, we would like to hear from you. But one thing, for us, there is investment made through Holland. And in order to do that, you have to go to Holland. And there is a factor of the person not been able to go to Holland.
Well, one thing is the foreign exchange rates. So when it comes to the investment stocks, the book value is increasing for those that we are holding in foreign currency. And we’re trying to avoid the wasteful management of that. And Mr. [indiscernible] asked about ValueAct and what about the balance sheet and the cash.
But as Mr. Negi has explained, we have not been told what we should be doing in this regard. But there is an episode that I can talk about. It’s not just for this quarter, but customer compares us with a competitor. And the reason why they selected us, may choose us for financial stability and the fact that we do not change the road map constantly.
So perhaps investors are now looking at this and think that in the security business, it’s very important to have cash. And they may be judging that to be an important point. And so therefore, they may be emphasizing the importance of this. But that’s just a personal view on my part.
Satoru Kikuchi
I see. I’m sure all of the analysts are going to be looking into what kind of actions Trend Micro may or may not take, and there was a discussion about this. But most likely, we may assume that nothing is going to change. Can we write our reports that way?
Unidentified Company Representative
Well, we can’t say that nothing is going to change. But for our logic, if investors are going to tell us that there is some better logic that we should apply, then we are willing to listen to them.
Operator
Thank you very much for the question. [Operator Instructions]
Hiroko Sato
[Interpreted] This is Sato, Jefferies Securities. Just one question. This result, was it more or less in line with expectation?
You mentioned lowlights and highlights. And for example, if the pre-GAAP is positive, you would pay bonus, and these are basically according to the assumptions. But looking at the different regions, Europe was quite strong. And Japan and the Americas were a little bit maybe lower than your expectation, or was it in line with your expectation? I don’t know if you have internal expectations or forecasts, but from the management’s perspective, was this quarter’s result better than — better or worse than what you had expected?
Unidentified Company Representative
This is in line with our expectation. When we provide the annual full year forecast, we have these assumptions. For example, well, a mix between Europe and maybe in these regions, the growth would be quite slow. That was the assumption. So when we saw this result, we were not surprised.
And this is not really a quarterly plan. Sorry, there was, for example, a big deal that was phased into the next quarter and we can make — maybe make a recovery. So we believe that on a full year basis, it’s going to be according to plan.
And the cost as well, that was in line with expectation. Excluding the impact of exchange rate, yes, that was basically in line with the plan.
Operator
Do we have any more questions? Are there no further questions? There seems to be no further questions.
Excuse me, there seems to be one. [Operator Instructions]
Hiroto Segawa
This is Segawa. Yes, 2 questions that I have. First, I’d like to ask about the costs. Your personnel costs, you’ve talked about increased recruitment, but what about your annual plans? There’s 800 that you plan to hire when compared to what you’ve hired so far.
We see an increase, but we will see further increases in this regard in the third quarter and fourth quarter. And what is the increase in the personnel expenses as a result? What is the domestic outlook for this? That’s the first question I have.
Unidentified Company Representative
We don’t know whether we can hire all 800, but add-on rate, it’s in the second half as well. We will continue our recruiting activities because recruiting costs are lower and we’ll continue to increase headcount.
As for the costs, things influence things. And if we increase the headcount, of course, cost will increase. So we believe that the personnel expenses will increase in the second half.
Unidentified Company Representative
And if I may add. As Mr. Negi has mentioned, in Q2, because of the depreciation of the yen, there was an impact of JPY 3 billion. But I believe that the actual impact is JPY 1 billion. So it was 1/3 impact. And in terms of this, the same as Q1. And so therefore, the increases are the same as Q1, except for the FX impact.
The change with Q1 is that there is the cash bonus that may occur in the third quarter or the fourth quarter. And this will look like an increase from Q1 to Q3. But as we mentioned in Q1, it may not be as high as what apparently it looks like the increase from Q1 to Q2.
Hiroto Segawa
And for the cost of goods, do you think that there were no extraordinary circumstances?
Unidentified Company Representative
Well, depending on the quarter, it’s difficult to anticipate this. But when we close the accounts, the degree of progress of the projects and so on determines the numbers. And so there may be sales cash flow that increases because of certain cases, but then there’s also the cash-out must be taken into consideration.
And the balance for this is not something that you can anticipate beforehand. And so the result is that we are seeing an increase. Compared to Q1, we’re seeing that for capitalization and amortization, for the balance it caused in the PL, it was high in — compared to Q1, it was high and also high on a year-over-year basis as well.
Hiroto Segawa
I see. And second point, for the subscription ARR growth, could you comment on this aspect?
Unidentified Company Representative
The percentage of prescriptions is increasing. And within the enterprise market, half of the revenues are represented by subscription. But on the other hand, when it comes to growth rates compared to previous trends, it is a high rate, and yet it seems to have grown segment.
Hiroto Segawa
So in regard to the situation of subscriptions, is it going to become more stabilized? That is the point that I would inquire about.
Unidentified Company Representative
Generally speaking, as the numbers become higher, then the growth rates may go down. But looking back further, it used to be a lower growth rate in the past. It was 29% to 30% or 32%. So just because 2% increase has happened doesn’t mean that it’s a significant decrease.
We are targeting a larger market, and we want to generate a higher growth rate by emphasizing the value that our corporation can offer. And I believe that it is possible for us to do this. Thank you very much.
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