Link and Motivation Inc

TSE:2170

Earnings Call Transcript 2018-Q1

[Yoshihisa Ozasa, executive]

I am Yoshihisa Ozasa, Chairman and Representative Director of Link and Motivation Inc. Let me start the presentation of the financial result information for the 3 months ended March 31, 2018.

Here is the agenda for today. First, announcement of results for the 3 months ended March 31, 2018. Second, report on organizational conditions for this period. This is a score which indicates the condition of organization measured by certain criteria. Third, as topics, I will introduce our new directors. Fourth, progress report on key indicators.

First, I want to start with the announcement of results for the 3 months ended March 31, 2018. Here is the operating structure of our group. First, there is Organizational Development Division, which provides support for creating organizations that individuals choose. And there is Individual Development Division, which provides support for creating individuals that organizations choose. And there is Matching Division, which connects organizations and individuals. We also have venture incubation, which provides capital and organizational support for venture companies.

Here is the consolidated statements of operations. Revenues and every level of income increased substantially year-on-year to record highs. Revenues increased by 10.1% year-on-year, reaching JPY 9.642 billion. In particular, operating income and net income increased substantially as profitability improved.

Operating income was JPY 862 million, an increase by 23.5%. And net income was JPY 533 million, an increase by 29.1%. As a result, operating income margin of the first quarter increased from 8.0% to 8.9% year-on-year, and net income margin increased from 4.7% to 5.5%.

Here is the results versus forecast. Revenues made steady progress, exceeding the forecast by 2.6%. Also, with growth in the highly profitable Organizational Development Division and improved profitability in the Individual Development Division, operating income substantially exceeded the forecast by 19.7%.

This is SG&A expenses. Number one, personnel expenses increased substantially by 23.6% due to an increase in staff for the group as a whole. Also, number three, rent increased substantially by 55.5% following relocation to the Tokyo Integrated Office in May 2017. Number five, sales-related expenses increased substantially by 16.5% due to proactive outlay of sales promotion expenses for Motivation Cloud and other new businesses. As a result, total SG&A expenses increased substantially by 16.8%.

This is a chart that shows revenues and gross profit by segment. First one at the top is the Organizational Development Division. Revenues and gross profit both increased substantially due to significant growth in the highly profitable Consulting & Outsourcing business. Revenues increased by 12.4%, and gross profit increased by 23.4%.

Next one is the Individual Development Division. Revenues and gross profit both increased substantially year-on-year due to solid growth in results of the Career School business and expansion of the Cram School business. Revenues increased by 17.0%, and gross profit increased by 38.9%.

Next one is the Matching Division. Revenues and gross profit both increased due to firm performance in the ALT Placement business and the Personnel Placement & Temp Staff business. Revenues increased by 7.4%, and gross profit increased by 9.6%.

Now let's recap the product revenues by business of each division, starting with the Organizational Development Division. In the Item #1, Consulting & Outsourcing business, sales of Consulting and Member/Database services, including the Motivation Cloud, grew substantially. Consulting increased by 9.3%, and Member/Database services increased by 105.0%.

There was improvement of profitability because event production, which had been outsourced to the Event & Media business, was brought in-house. As a result, revenues and gross profit both increased substantially. Revenues of Consulting & Outsourcing business increased by 12.8%, and gross profit increased by 29.3%.

Item #2 is the Event & Media business. Revenues decreased substantially by 10.7% due to unintentional reduction of event production, with high cost ratio that had previously been ordered by the Consulting & Outsourcing business. On the other hand, due to the growth of IR-related media production, gross profit decreased only slightly by 1.4%.

Next division is the Individual Development Division. In number three, Career School business, revenues increased due to strong sales of Pro Series and National exam courses; and gross profit increased substantially as profitability improved due to more efficient deployment of personnel. Revenues increased by 7.8%, and gross profit increased by 20.4%. In number four, Cram School business, revenues and gross profit both increased substantially due to an increase in the number of classrooms.

Next one is the Matching Division. In number five, ALT Placement business, revenues increased substantially by 10.0% due to firm performance, thanks to the trend to strengthen English education promoted by Japan's education ministry. However, costs increased because the ALT hiring was outsourced to the Foreign worker support operations of the Personnel Placement & Temp Staff business. As a result, gross profit increased by 4.1% year-on-year.

In number six, the Personnel Placement & Temp Staff business, revenues and gross profit both increased substantially, with steady sales of Recruiting/introductions of domestic human resources and the smooth start-up of Foreign worker support. Revenues increased by 10.6%, and gross profit increased by 44.9%.

Here is the consolidated balance sheet. Because since this is a comparison with the number at the end of the last year, there is no big change. Assets decreased slightly due to decreases in cash and cash equivalents and trade receivables. Liabilities decreased by JPY 321 million due to the repayment of long-term financial liabilities. Total equity increased by JPY 204 million from recording net income. As a result, the equity ratio improved from 26.0% to 26.9%.

This is our dividend policy. We continue to pay quarterly dividends. For the first quarter, a dividend of JPY 1.7 per share will be paid on Monday, June 25, as originally planned.

Next, let me report on organizational conditions for the 3 months ended March 31, 2018. When we measure our corporate activity, as for the product market, there is financial information such as income statement and balance sheets, et cetera. As the source of competitive advantage shifts from business strategy to organization strategy and employment becomes more flexible, we believe that adaptation to the labor market as well as the product market will become critical for businesses.

In addition to financial statements, we are utilizing Engagement Score, which indicates the status of engagement between the company and employees as a key management indicator. Engagement Score is an indicator that provides a standard deviation value for the level of mutual understanding, empathy and commitment between companies and employees. We are making evaluation based on the results of our original organizational diagnostic survey.

We have specified items in 16 areas for measuring employee engagement. For example, there are items in the areas related to company, such as stability of company foundation, level of understanding, or empathy, for company philosophy and strategies; business content and its potential; work content and pleasure of work; affinity between individuals and organizational climate; attractiveness of human resources; facilities and work environment; and systems and benefits.

These are the items for measuring engagement between organizations and employees. Also, the behavior of the bosses in the workplace and the condition of the workplace have 4 items each as the items which influence employee engagement. Total 132 items in 16 areas are used for questions on the organizational diagnostic survey.

Regarding these measurement items, based on the level of expectation of each employee, level of satisfaction and level of matching between expectation and satisfaction, total score is calculated. Then the result is broadly divided into 9 ranks.

We have cumulative data from more than 930,000 employees at 3,330 companies. Based on this data, we have calculated our own Engagement Score. Out of 9 ranks, our current rank is AAA rank. Every 6 months, we measure the status of the engagement between our company and employees in order to further improve our productivity. By effectively utilizing our management resources, we want to achieve even higher scores in the future.

Next agenda is topics. I want to briefly introduce our 2 new directors. Our Organizational Development Division, especially its Consulting & Outsourcing business, has the highest profitability and big growth potential, and we are planning to strengthen the management structure of this organization. After receiving approval in the General Meeting of Shareholders, we appointed 2 new directors. They will be in charge of the Consulting & Outsourcing business of this Organizational Development Division.

This is Mr. Koji Asano. In 2003, upon graduation from Faculty of Law of the Keio University, he entered Link and Motivation Inc. After experiencing various businesses, he promoted the start of venture incubation and the launch of Motivation Cloud, which is Japan's first cloud-based organizational development service. Mr. Asano will be in charge of the small- and medium-sized venture company consulting department of the Consulting & Outsourcing business in the Organizational Development Division.

This is Mr. Masanao Kawauchi. He graduated from Waseda University in 2003 and entered our company. After experiencing jobs in various departments, he took charge of the consulting department in the fields of hiring, training and organizational vitalization for major corporations. This is the department with the highest earnings, and he led the growth of this business. He will be in charge of the Consulting department, especially for major corporations.

Next item on the agenda is the progress report on key indicators.

[Hideki Sakashita, executive]

I am Sakashita, President and Representative Director of Link and Motivation Inc. I will explain about the key performance indicators of the Organizational Development Division. Nowadays, market environment for corporations is rapidly changing. The era of tangibles with focus on procurement of money and things or investment is changing to the era of intangibles, and the focus is shifting to people.

Because of the work-style reform promoted by the government, corporations are willing to make investment in manpower and organizations. Especially in order to increase the investment efficiency in human resources, corporations are paying a lot of attention to the field utilizing technology called HR tech. Therefore, our division developed Motivation Cloud, which is the first HR tech cloud service in Japan for managing employee engagement.

Employee engagement means the level of mutual understanding, empathy and commitment between companies and employees, which is known to have correlation with the performance. Motivation Cloud is the monthly pay-as-you-go model cloud service. We have obtained patents for certain functions, and we have cumulative data on more than 790,000 employees at 3,330 companies.

After it was released in July 2016, the number of contact points steadily increased and exceeded 520 at the end of April. It became the #1 cloud service in Japan for managing employee engagement.

Utilizing the data accumulated in cloud, we are aiming to realize high-quality organizational improvement support, which cannot be imitated by other companies. We are building a stable earnings structure with steady gains in monthly fee revenue, and the unit price has risen due to promotion of contact points at major corporations. We will further expand our business, aiming at JPY 130 million at the end of 2018 and JPY 330 million at the end of 2020.

This is some of the contact points that have adopted Motivation Cloud. There is growing support from leading companies that aim to increase engagement with employees, regardless of industry or company size. In addition to the services in the organizational development area, some of these companies started using our IR-related services and we are fielding good response in this business. Please continue paying attention to our activity.

[Takashi Oguri, executive]

I am Takashi Oguri, Director of Link and Motivation Inc. Nice to meet you. Let me explain about the KPIs of the Individual Development Division.

One of the KPIs of our division is Aviva Pro IT human resources training course. Backed by technological innovations, such as IoT and AI, need for IT human resources is growing steadily. To meet the demand, Aviva Pro provides training courses, mainly for programming.

We currently have industry-leading lineup of 40 courses, and we are planning to add courses of the latest technologies, such as AI and deep learning. There has been steady growth for courses such as CAD, creative and other practical courses, and the sales increased by 13.4% year-on-year. Taking the opportunity of increasing demand for hiring IT staff, we will continue to further expand our business.

As the next KPI, I want to explain about our plan for English conversation schools and cram schools. In 2017, we have added Rosetta Stone brand English conversation lessons to our group, and we are providing English conversation courses using 109 Career Schools nationwide. As of May, we have 75 English conversation classrooms, and we are steadily expanding towards 85 classrooms by the end of this year.

Regarding the Cram School business, there is shift from overemphasis on rote learning spurred by the university entrance exam reforms set for 2020. We are taking it as good opportunity to increase the number of classrooms. With the opening SS-1 Shibuya school on May 1, we now have 10 cram school classrooms, and we are steadily expanding toward 12 classrooms by the end of this year. Please continue paying attention to our activity.

[Hiroyuki Kitsuu, executive]

My name is Kitsuu, Director of Link and Motivation Inc. Nice to meet you. I will explain about the KPIs for Matching Division.

Our first KPI is regarding the placement business of assistant language teachers, or ALT. Japan's education ministry announced the new curriculum guidelines and transitional steps starting from 2018 for its implementation. At elementary schools, English study starts from third grade, and one lesson per week will become mandatory. Also, fifth and sixth grade students who used to have one lesson per week will have 2 lessons. Because of this change, demand for ALT is expected to grow.

Backed by this trend, Link Interac has been able to steadily increase the number of contracts and teachers. In April 2017, the number of ALTs placed was 2,828. By April 2018, it has increased by 9.9% to 3,109.

Next, let me explain about the business of Link Japan Careers, which we started last year. Currently, around 70% of foreign workers in Japan are dissatisfied with the work environment and their own careers. It is reported that while nearly 2.64 million foreign workers are coming into Japan every year, around 2.49 million workers are leaving Japan. Therefore, retaining foreign workers in Japan is a major challenge in the employment of foreign human resources.

In order to create an easy-to-work environment for foreign workers, Link Japan Careers is providing support in their daily lives, ranging from finding housing and resident registration in Japan. This business is growing steadily. And in the area of Recruiting Support, 730 were hired as of April 2018. And at the end of this year, the number is expected to increase to more than triple from the previous year.

Regarding reception/acclimation support. Adoption was confirmed by 9 boards of education, including the ones in ordinance-designated cities. We are aiming for adoption by 50 boards of education in the next year. By capturing the growing needs for foreign personnel employment, we will continue to try to expand our business.

Lastly, I want to explain about the number of domestic temp staff dispatched. As you may know, how to secure manpower has become the biggest issue in the domestic labor market. Link Staffing is reinforcing the synergy with Link Academy and working on the career center concept by which we provide matching service for new stages for those who acquired skill at Link Academy.

Due to rising corporate needs for direct hiring, the number of temp staff dispatched in Japan rose only slightly. However, through the rollout of career centers, the number of job placement of those who land in our career school increased substantially by 93.2% year-on-year. We will continue to expand the Career Center concept and secure highly motivated manpower and improve matching efficiency to improve profitability. Please keep paying attention to our activity.

[Yoshihisa Ozasa, executive]

Next, I will explain about the new investment by Venture Incubation. The name of the company is Gojo & Company, Inc. It was established in July 2014. Mr. Shin is the Representative Director and CEO. It conducts micro-finance and related businesses.

Micro-finance is small-scale financial services provided to low-income people who have no access to banks and other formal financial institutions. Gojo & Company is currently doing business in Myanmar, Sri Lanka, Cambodia, India and other countries. Mr. Shin graduated from Waseda Graduate School of Finance and worked for Morgan Stanley Capital, Unison Capital and some other companies, then founded Gojo & Company, Inc. in 2014.

I feel that he is a CEO who has high aspirations and a big potential. We will continue to provide support in the areas of organization, personnel and capital. Especially, we have a long-term perspective to provide organizational improvement cloud service for the organizations in countries such as Myanmar, Sri Lanka, Cambodia and India, where we didn't have services before.

With this investment, total number of our investment has become 22, including 2 companies that have completed stock listing. Thankfully, in the world of venture companies, the support by Link and Motivation Inc. is highly appreciated. We want to continue Venture Incubation activity by selecting companies based on our criteria, such as the level of sympathy with our philosophy and its desire to list stock.

Lastly, this is the operating structure of our group. Regarding the Organizational Development Division, the business is supported by work-style reform or the needs for improvement of productivity of organizations. Regarding the Individual Development Division, there is favorable trend for business due to the raised awareness about careers of individuals. The business of the Matching Division is growing due to shortage of manpower and English education reform.

Regarding the Venture Incubation, because of the increasing interest in the means to measure the condition of organization, deployment of services, including Motivation Cloud, has been accelerated significantly. Regarding all the businesses of all the divisions, we feel that current environment is very favorable to us. We want to utilize this favorable trend effectively so that we can reach even higher places. I would appreciate your continued support to our business.