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 second quarter of fiscal year 2023 and progress of full year forecasts. 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 second quarter of FY 2023. This is a summary of our full year consolidated financial results. In the second quarter, overall result is on track against the full year forecast, which was disclosed on November 11, 2022. Our quarterly trends for consolidated net sales is as shown in the slide. Sales for HENNGE One business is composed of recurring revenue. It is continuously on an increasing trend quarter-over-quarter. Year-over-year fluctuation for consolidated net sales is as shown in the slide. Sales for HENNGE One business shows a steady progress year-over-year. Our quarterly trends for gross profit and gross profit margin are as shown in the slide. Year-over-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-over-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 various events and seminars, including HENNGE Now, which targeted large companies, resellers, existing customers, and new 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. As for advertising expenses, while we conducted advertising activities aggressively, 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 the second quarter of FY 2023 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 19 at the end of this quarter.
In order to strengthen the organization for acquiring new customers more, we are focusing on increasing the number of experienced IT sales members. We will keep considering various actions which will contribute to our talent acquisition enhancement. Let's move on to the cash flow status. During the first half of the year, there was an upfront payment related to our cloud infrastructure, same as the previous year, and we conducted active advertising activities. Operating cash flow in this first half of this fiscal year decreased year-on-year. Financial cash flow decreased year-on-year due to the acquisition of treasury shares for the future use in the stock compensation plan. Cash and cash equivalents grew steadily year-on-year. I will explain our business activities during this quarter. This is an overview of our business highlights.
During this quarter, based on our initial plan for FY 2023, we held various events and seminars which targeted wide variety of customers, including large companies, resellers, existing customers, and new customers. 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 our cancellations are that 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 first quarter of FY 2023, in addition to those, there are 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 been increasing. As for the number of contracted users, it increased mainly from the acquisition of new contract with relatively large companies and less cancellations compared to that of previous quarter. 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 more than 50% of existing customers out of circa 2,000 have moved to the new license lineups at the end of March 2023. The steady increase in the number of contracted companies and ARPU led to a significant increase in ARR. As for the transition to new license lineups for existing customers, based on the number of companies, it moved slightly under 30% as of the end of FY 2022, approximately 40% as of the end of the first quarter of FY 2023, and more than 50% as of the end of the second quarter of FY 2023.
While the size of the customers who had moved to the new license lineups varies, many of the relatively large companies in Japan have March as their fiscal year end. 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 seasons with relatively high number of contract renewals, which is one of the reasons for the increase in ARR for this quarter. The transition to new license lineups for existing customers have progressed well. We will continue to promote activities to ensure that our customers understand the added value of the new license lineups and have a smooth transition. Turning to our full year outlook for FY 2023. This slide shows our policy for FY 2023.
HENNGE One business has progressed well. We carried out various advertising activities, including events and seminars based on our initial plan. As for the personnel plan, we are still facing challenges to fulfill our sales force. We are focusing on increasing the number of experienced IT sales members in this fiscal year. In order to encourage that, we have revised a part of the internal policy and will be applying new compensation scheme for the sales members from April 2023. We will continue to accelerate midterm growth in HENNGE One ARR by continuously carrying out active marketing activities and building a more solid organization by enhancing our talent acquisition capability. This slide shows our forecast for FY 2023. There is no change from the full year forecast, which was disclosed on November 11, 2022.
These charts show the transition of our sales by business over the last three years and the progress of the second quarter against the forecast for FY 2023. Results of the second 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 second quarter against the forecast for FY 2023.
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 HENNGE 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-over-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. 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 three-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 acknowledgement 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.
ARR had grown significantly as we acquired a number of contracts, including relatively large companies, and the transition to new license lineups for existing customers progressed well. As you can see from the increase in the number of contracted companies, I can feel that the market is actually expanding. I would like to continue this trend by strengthening the organization for acquiring new customers, which we are facing as a challenge. We are planning to complete the migration of existing customers to the new license lineups within this fiscal year by delivering the value of HENNGE One and gaining their understanding. At the same time, we will accelerate midterm growth in HENNGE One ARR by continuously carrying out active marketing activities and building a more solid organization by enhancing our talent acquisition capability. 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 acknowledgement 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. We have been providing HENNGE One as an ID as a service 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. We released a new service called tadrill in November 2022.
Besides releasing new features of HENNGE One, we are planning to provide new services that meets the customers' demands. 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. HENNGE One is mainly composed of ID as a service, which brings higher and higher value to the customers as those customers get powered by more and more Software as a Service. We will continuously stimulate further expansion of cloud adoption in Japan, and at the same time, collaborate more and more with other cloud companies to form a platform, bringing further growth in the market. This concludes our explanation of the second quarter of FY 2023. Thank you for taking your time to watch our video.