Hi, I am Kazuhiro Ogura, the CEO of HENNGE. Thank you for watching our video today. Today, our Director, Haruo Amano, will explain our financial results for the 3rd quarter of FY2023 and progress of full-year forecasts, and then I will explain our growth strategy and give my impression for this quarter.
Hi, I'm Haruo Amano. First, let me explain financial results for the 3rd quarter of FY2023. This is a summary of our consolidated financial results. I will explain the details in the later slides. Our quarterly trends for consolidated net sales is as shown in the slide. Sales for HENNGE One business is composed of recurring revenue, and it is continuously on an increasing trend quarter-on-quarter. Year-on-year fluctuation for consolidated net sales is as shown in the slide. Sales for HENNGE One business shows a steady progress year-on-year. Our quarterly trends for gross profit and gross profit margin are as shown in the slide. Year-on-year fluctuation for gross profit and gross profit margin are as shown in the slide.
While the gross profit margin decreased slightly, mainly due to an increase in R&D members and an increase in infrastructure costs for HENNGE One from exchange rate fluctuations, it still remains high. Our year-on-year fluctuation of operating expenses by nature is as shown in the slide. Cost of sales increased mainly due to an increase in R&D members and an increase in infrastructure costs for HENNGE One from exchange rate fluctuations. Personnel expenses increased mainly due to an increase in the number of employees and the revision of internal policy, which is effective from July 2022. Advertising expenses increased as a result of holding and participating in various events and seminars, including HENNGE Now, which targeted large companies, resellers, new customers, and existing customers. For the other SG&A, it increased mainly due to enhanced recruitment activities and additional internal system usage fees to accommodate increased employees.
The chart in the slide shows quarter-on-quarter fluctuation of operating expenses. Personnel expenses increased mainly due to an increase in the number of employees and the introduction of allowance for sales members in April 2023. As for advertising expenses, while we conducted advertising activities aggressively, such as sponsoring and participating in various events and seminars, it decreased due to differences in the contents and approaches that have been applied from the previous quarter. This chart shows quarterly trends in the net sales and operating expenses. The number of employees and its breakdown by function as of the end of this quarter is as shown in the pie chart. The transition in the number of employees is as shown in the bar chart.
We aim to increase more than 45 headcounts in net for this fiscal year, and we had a net increase of 27 at the end of this quarter. In particular, we have made steady progress in recruiting experienced IT sales members, which is a top priority for this fiscal year. We will continue to carry out the recruitment activities to further strengthen the organization for acquiring new customers, and we will keep considering various actions which will contribute to our talent acquisition enhancement. Now, I will explain our business activities during this quarter. This is an overview of our business highlights. We launched HENNGE One's new feature, HENNGE Secure Download for Box, a PPAP-free solution, in June 2023. In recent years, there has been a growing trend to abolish PPAP, a method of sending a zip file with password and then sending the password separately via email.
This trend is arising from the threat of malware via email, such as Emotet malware and declaration of the abolishment of PPAP by Japanese government. In response, we have provided HENNGE Secure Download, a PPAP-free solution that automatically uploads attachments to HENNGE One when sending emails as a feature of HENNGE One since October 2021. By newly releasing HENNGE Secure Download for Box, collaborating with the content cloud Box, provided by Box Japan, Inc., the file-sharing process could become easier and more secure for companies which use Box. Likewise, we released APIs for HENNGE Access Control as HENNGE One's new feature in June 2023. With the diversified working style and the increased number of cloud services used by companies, ID management operations are becoming more complex.
Companies are required to properly manage their employees' ID life cycles, such as the creation, modification, and deletion of IDs associated with employees joining, leaving the company, and transferring department. Recently, in order to protect IDs from security threats, such as unauthorized access, an increasing number of companies are working on security monitoring to detect incidents at an early stage, in addition to the usage of ID as a service. We provide HENNGE Access Control as an ID-as-a-service features of HENNGE One. By using this API and seamlessly integrating with external systems, it is possible to improve the efficiency of ID-related operations and visualize usage status of Software as a Service by linking with access log information. It also enables early detection of incidents. Next, I would like to explain our result of KPIs. This slide shows the progress of KPIs for HENNGE One from the previous fiscal year.
This slide shows the year-on-year fluctuation of KPIs for HENNGE One. This slide shows the average monthly churn rate. The conventional reasons for the cancellations are such as the IT system was unified into a different system due to the merger of companies, or the cloud migration plan itself was reconsidered. From the Q1 of this fiscal year, in addition to those, there were some cancellations triggered by reviewing their internal IT services at the timing of contract renewal. While we will continue to pay close attention to the trend, it is continuously very low, and the theoretical average contract period is approximately 30 years. This slide shows the quarterly trends in the number of contracted companies and users.
Although we are still facing challenges to fulfill our sales force, we have steadily acquired contracts with relatively small companies due to strengthening relationships with resellers as a trend over the past few years. As a result, the number of new contracted companies has increased steadily. However, the number of contracted users has shown a gradual growth. The quarterly trends in ARR and ARPU are shown in the slide. An increase in ARPU during this quarter is brought from several factors. Firstly, it is a contribution from newly acquired customers with the new license lineup since October 2021. Another factor is that the transition to the new license lineups for existing customers progressed well. The steady increase in the number of contracted companies and ARPU led to a significant increase in ARR.
Please let me give some supplementary explanation on the progress of the transition to the new license lineups for existing customers, which is one of the factors behind the increase in ARPU. HENNGE One is often contracted with the same period as their accounting period. While the seasonality is not that high, March and April are the months with relatively high in the number of contract renewals, as many companies in Japan have March as their fiscal year end. As for the transition to new license lineups for existing customers, based on the number of companies, it progressed slightly under 30% as of the end of FY 2022, approximately 40% as of the end of the Q1, more than 50% as of the end of the Q2, and approximately 80% as of the end of this quarter.
We will continue to promote activities to ensure that the rest of our customers understand the added value of the new license lineups and have a smooth transition. Next, turning to our full year outlook for FY 2023. This slide shows our policy for FY 2023. HENNGE One business is generally proceeding as expected in line with the policy for FY 2023. As for the financial results, there are some points which are different from the situation that we anticipated in the forecast. I will explain it in the next slide onwards. These charts show the transition of our sales by business over the last three years and the progress of this quarter against the forecast for FY 2023. Results of this quarter is overall on track.
These charts show the transition of advertising expenses and operating expenses, excluding advertising expenses over the last few years, and the progress of the Q3 against the forecast for FY 2023. As for advertising expenses, we will continue to carry out activities during the Q4, and it will be in line with the forecast. For the operating expenses, excluding advertising expenses, while we have been and we will continue to invest aggressively for the activities which will contribute for future ARR growth during FY 2023, there is possibility that expenses may be slightly below the forecast. As a result, it does not fall under the criteria for timely disclosure related to the adjustment of estimated profit.
As of the date of this announcement of financial results for the current quarter, there is a possibility that each profit, which was forecasted at the beginning of the fiscal year, may increase. We will continue to explore investment opportunities which will contribute to the future growth of the company for the rest of the fiscal year. However, we are unable to provide a clear indication of the impact at this time. For this reason, we will keep our forecast as is, but we will monitor the situation and promptly disclose any revisions where necessary.
Finally, please let me explain our growth strategy. Our corporate philosophy is liberation of technology. We believe in the power of technology, we love technology, and we strongly believe that technology will make our life better. We want to deliver the power of technology to as many people as we can and to change the world to be a better place. We established HENNGE more than 25 years ago, and since then, we set our philosophy as liberation of technology, which we actually have demonstrated in various areas. From the experience we gained, we think that software as a service is the most fair and sophisticated approach to liberate technologies. This is one of the reasons why we're providing software as a service, and we want to promote the use of cloud services among our customers as well.
Total amount of technology that we provide to the customers and total amount of liberated technology are the measure to prove our progress on our philosophy, and this is expressed as LTV. LTV, or lifetime value, is a total value arising from the current contracts with the customers. Our growth strategy is to maximize this LTV. Our average contract period and gross profit margin is already in a high number. Therefore, in order to maximize LTV, we think that it is essential to maximize ARR. For this reason, we do not focus that much on the result of short-term operating profit, but rather invest aggressively for the future and aim to accumulate the ARR as much as possible.
ARR can be broken into three factors: large N, small n, and ARPU, which represents the number of contracted companies, average number of users per contracted company, and average revenue per user, respectively. The progress of three KPIs for HENNGE One is as shown in the slide. Including our main service, HENNGE One, our group mainly operates a subscription model business. Barring any cancellations, the contracts secured this year will continue to generate sales and become the foundational sales from next year onwards. You can see HENNGE One's ARR is steadily and stably increasing year-on-year. While ARR has been growing steadily, our challenge was that the ARR growth rate kept decreasing due to the denominator getting larger. COVID-19 pandemic has changed the ways of working, and we believe that there definitely will be a situation where cloud adoption will be expanded.
In order to capture such an opportunity, we are now taking a 3-step tactic to create an inflection point for the ARR growth, which would create an accelerated upward trend of the ARR. The first step took place during FY 2021. We invested aggressively on marketing activities, which led to the acknowledgment of the strength of HENNGE One and our brand value to the company's decision-makers, resellers, and more. We also announced new features of HENNGE One together with new license lineups. The second step took place during FY 2022. We approached aggressively mainly to the new customers with new features and new license lineups. The growth rate of the ARR was slightly under 20%, mainly due to the shortage of members, which was impacted by the change in the employees' joining and leaving ratio.
We could increase Large N and ARPU steadily by introducing new license lineups not only to new customers, but also to some of our existing customers. Last but not the least, we are currently working on the third step, which is to approach existing customers with these new features and new license lineups. Through these three steps, our assumption is to create a growth cycle that will affect both Large N and ARPU. Following these explanations, I would like to give my impression for this quarter and our challenges. In this quarter, we conducted sales and marketing activities, which took advantage of our unique strength in being able to provide ID as a service and other solutions that meet recent demands, such as PPAP free in one stop.
As a result, ARR had grown significantly as we acquired a number of contracts, and the transition to the new license lineups for existing customers progressed well. As you can see from the increase in the number of contracted companies in the last few quarter, I can feel that the market is actually expanding. By strengthening the organization for acquiring new customers, which we are currently facing as a challenge, we would like this to lead to our growth. In addition, we released HENNGE Secure Download for Box and HENNGE Access Control API as new features of HENNGE One this quarter. We will accelerate midterm growth in HENNGE One's ARR by continuing activities, which will contribute to increase the value that we can provide to our customers, deliver that value to our customers, and gain their understanding.
We have been providing HENNGE One as an IDaaS consisting of five main features and one option for a long time, and we have enhanced our values by adding new features continuously, such as three new features added in October 2021 and HENNGE Connect added in April 2022. Moreover, we released a new service called tadrill in November 2022. As I mentioned earlier, we started providing HENNGE Secure Download for Box and HENNGE Access Control API in June 2023. Besides releasing new features of HENNGE One, we are planning to provide new services that meets the customer's demands, including File DLP, which is currently under development.
We will continuously add more and more essential features that will help our customers' transformation led by cloud utilization, which will maximize the amount of technology that we liberate and provide to our customers in accordance with our corporate philosophy. By proceeding these steps, we will achieve midterm ARR growth in the mid-20% average growth rate. Our aim is to achieve and exceed JPY 10 billion for HENNGE One's ARR. We would like to establish a sustainable growth model by continuing the business cycle to increase the acknowledgment of our brand and increasing the number of potential customers. At the same time, we will also keep strengthening our sales force and the relationships with resellers, developing and releasing new features, and creating additional values of HENNGE One. This concludes our explanation of the Q3 of FY 2023.
Thank you for taking your time to watch our video.