Link and Motivation Inc

TSE:2170

Earnings Call Transcript 2019-Q2

[Yoshihisa Ozasa, executive]

I am Ozasa, Chairman and Representative Director of Link and Motivation. I will start earnings presentation for the first half of 2019. Here's today's presentation agenda. Firstly, I'll give you a company overview; secondly, business report; thirdly, future management policy and revision and results forecast; fourthly, report and conditions by business; fifthly, report and conditions by organization; and lastly, announcement of share repurchase.

Let me move on to a company overview. This page shows operating structure of the Link and Motivation Group. Our group consists of Organizational Development Division involved in B2B business, Individual Development Division involved in B2C business, Matching Division connecting the 2 businesses and Venture Incubation. This page shows strengths and characteristics of our group. There are 3 points: Strengths #1 is only one status enabled by our core technology, Motivation Engineering. Strengths #2 is profit stability and growth. We operate businesses that can pursue both profit stability and growth in business fields ranging widely from individuals to corporations. Strength #3 is our employee engagement. Our group is an organization with a high level of engagement through the application of our core technology, Motivation Engineering. Those 3 points are our strengths and characteristics.

Now I'll move on to the second item business report. Revenues were JPY 19.134 billion, decreased year-on-year and fell short of the forecast. Operating income was JPY 1.471 billion, decreased substantially year-on-year by 30.4% and fell short of the forecast. The primary factor was a priority focus on a subscription business model in the Organizational Development Division, which led to increased SG&A expenses and weaker growth in other businesses.

This page shows consolidated SG&A expenses. Sales-related expenses increased substantially year-on-year by 21.2% due to a prioritized concentration of sales promotion expenses on Motivation Cloud and other priority products. As a result, overall SG&A expenses increased 4.2% year-on-year.

This page shows revenues and gross profit by segment and year-on-year change. In the Organizational Development Division, shown at the top, revenues and gross profit both decreased substantially year-on-year because growth in the Consulting & Outsourcing Business fell below the forecast.

In the Individual Development Division, shown in the middle, despite slower growth in the Cram School Business, firm performance by the Career School Business resulted in a slight increase in revenues year-on-year and a slight decrease in gross profit year-on-year.

In the Matching Division, shown at the bottom, despite slower growth in the Personnel Placement & Temp Staff business, firm performance by the ALT Placement business resulted in a slight decrease in revenues year-on-year and a slight increase in gross profit year-on-year.

This page shows product revenues by segment and year-on-year change. In the Organizational Development Division, growth in Package and Consulting sales in a Consulting & Outsourcing business fell below the forecast and both revenues and gross profit decreased substantially year-on-year. The 2 reasons for the decrease were as follows: Firstly, in the first quarter of 2019, the organization worked for recovery by separating into staff specializing in Consulting and staff specializing in Motivation Cloud, but the effects will not materialize until the third quarter and after. Secondly, priority was placed on a subscription model and personnel resources in Consulting were deployed for one. Those are the reasons.

Next, I'll talk about Individual Development Division. In the Career School Business, revenues increased slightly year-on-year and gross profit decreased slightly year-on-year due to good performance by accounting courses, national exam courses and English conversation.

In the Cram School Business, revenues decreased year-on-year, and gross profit decreased substantially year-on-year as growth in enrollment fell below the forecast.

This page shows Matching Division. In the ALT Placement business, revenues increased 5.7% and gross profit increased substantially year-on-year by 11.7% due to firm performance from precisely capitalizing on the expansion of English education promoted by the Ministry of Education, Culture, Sports, Science and Technology. In the Personnel Placement & Temp Staff business, growth was weak for store sales temp staff, which accounts for the majority of sales, and revenues decreased substantially year-on-year and gross profit decreased year-on-year despite growth in foreign worker support and Recruiting/introductions.

This page shows consolidated balance sheet. Assets decreased due to the use of cash and deposits to pay taxes. Liabilities decreased due to the repayment of long-term debt. Equity increased JPY 415 million as a result of recording net income.

This page shows dividends. Continuing from 2018, we paid quarterly dividends, a dividend of JPY 1.80 per share is scheduled to be paid on September 25, as originally planned.

I'd move on to the third item, future management policy and revision of results forecast. In management policy to present, we thoroughly focused on subscription model. We proactively invested personnel, funds and other resources in the Motivation Cloud subscription model, bringing mid- to long-term profit, particularly in the Organizational Development Division. There are 2 results: Firstly, slump in existing model. The above policy resulted in understaffing for the existing consulting and outsourcing model and revenues did not grow. Secondly, delayed progress for Motivation Cloud. Motivation cloud got off to a smooth and speedy start with initial sales to existing customers. But as a proportion of sales, the new customers and major companies gradually increased, business negotiations took longer than expected and progress was slower than planned.

In management policy going forward, I will lead the organization based on parallel management that implements both the existing model and the subscription model. There are 4 points: Firstly, the full-year consolidated performance forecast was revised downward to incorporate the shortfall in the first half of 2019. Secondly, in the Organizational Development Division, in addition to launching new subscription model services, we are focusing on a recovery for the existing consulting and outsourcing model. Thirdly, the KPI target figure for Motivation Cloud was revised due to the delay in progress. Fourthly, a future rollout of a subscription model will also be conducted in the Individual Development Division.

This page reports a downward revision of forecast. JPY 38.500 billion in revenues, JPY 1.880 billion in operating income and JPY 1.050 billion in net income are forecast. I think operating income will be affected by 2 factors besides the decrease in revenues: Firstly, continued and proactive investment in a subscription model, including Motivation Cloud. Secondly, expected impairment loss and conservative estimate of goodwill in the foreign worker placement business and Cram School business.

The fourth item is report on conditions by business.

[Hideki Sakashita, executive]

I am Sakashita, President and Representative Director of Link and Motivation. I'll report on business KPIs and highlights of Organizational Development Division.

Let me start with business KPI of subscription model. We have set Motivation Cloud monthly fee revenue as a business KPI for the subscription model. As a result of a steady increase in contact points, delivered orders and monthly fee revenue, revenue for the second quarter of 2019 increased 64.6% compared with the same period a year earlier and 9.2% from the previous quarter.

Let me move on to business KPI of Consulting & Outsourcing model. We have set average gross profit per customer for the past 12 months as the business KPI for the Consulting & Outsourcing model. In the second quarter of 2019, there was no growth in Consulting due to deployment of personnel resources to the subscription model and results decreased 15.9% compared with the same period a year earlier.

So far, I reported on business KPI. Next, I'll talk about key future themes to expand subscription model. To solve problems of customers, we started 2 new services of subscription model, including Communication Cloud and Teamwork Cloud. These 2 services are the services which will enhance engagement, by using these services in combination with Motivation Cloud. As Motivation Cloud series, we will aim at enhancement of speed for organizational improvement and promotion of effects.

The new services are services related to organizations, communication and management and can be introduced separately. However, I think, they can also further enhance organizational improvement in combination with Motivation Cloud. Communication Cloud corresponds to company items of Motivation Cloud. Teamwork Cloud corresponds to supervisor and workplace items of Motivation Cloud. These 2 new services are tools to support appropriate communication design through linkage with the diagnostic results of Motivation Cloud. In combination with Motivation Cloud, they achieve more effective organizational improvement.

Next, I will discuss future growth image of Motivation Cloud series. As was explained in overall policy, transitioning the Motivation Cloud client list from existing customers and venture companies to new customers and major companies is taking more time than originally planned. So we have revised our year-end plans for 2019 and 2020, and we are aiming for JPY 370 million in monthly fee revenue by the end of 2021. We aim to implement both models in parallel, promoting recovery of the consulting and outsourcing model, while steadily expanding the Subscription model.

That concludes report on conditions of Organizational Development Division. Please stay tuned.

[Takashi Oguri, executive]

I'm Oguri, Director of Link and Motivation. I'll report on business KPIs and highlights of Individual Development Division.

We have set average number of enrollees for the past 12 months and average LTV, lifetime value, for the past 12 months as the business KPIs for the Individual Development Division. The average number of enrollees decreased slightly by 0.3% from the previous quarter. However, average LTV increased steadily by 2.3% from the previous quarter. That's all for business KPI.

Next, as a highlight, I'll report on a key project. In Individual Development Division, we are focusing on expansion of English conversation as demand for global human resources rises as a social trend. Sales are strong with 84 schools nationwide offering English conversation contents. We will aim at further growth through schools nationwide.

Next, I'll talk about key future theme. Also, based on total policy of Link and Motivation, we are currently planning a new subscription model service that will help to increase the enrollee continuation rate. In this age of rapid change, we've seen continuous enhancement of our career, self-improvement and learning will be very important. In Individual Development Division, we think we will have an advantage by providing unfailing total career support to what extent each enrollee can continue learning without giving up or enrollee continuation rate is set as a key indicator. Until now, to increase the continuation rate, we conducted surveys, interviews and counseling to visualize individual values and skills. We are currently planning a new subscription model for longer continuation in courses going forward. So please stay tuned.

That concludes my report on conditions of Individual Development Division.

[Hiroyuki Kitsuu, executive]

I am Kitsuu, Director of Link and Motivation. I'll talk about business KPIs and highlights of Matching Division. We have set the average number of temp staff dispatched during the past 12 months and the total number of introductions during the past 12 months as business KPIs for the Matching Division. The average number of temp staff dispatched decreased 1.6% from the previous quarter due to sluggishness of domestic temp staff dispatched despite growth involving temp staff dispatched. As for total number of introductions, lengths of ALT service increased in the ALT Placement business in our division as we reinforced various engagement measures for ALT. As a result, the necessary number of hiring of ALTs was lower than expectation. Consequently, the number of internal introductions decreased and the total number of introductions decreased 7.3% from the previous quarter. That's all for my report on business KPI.

Next, as a highlight, I'll report on progress of ALT Placement business, which is a key business. The number of our ALTs placed has grown steadily due to MEXT's English education reforms, besides profitability improved by focusing on projects with high profit margins. We will continue to focus on increasing the number of placements and improving profitability.

Lastly, I'll talk about key future theme. We will enhance Global Human Resources business, which is a priority business. Until now in Global Human Resources business, personnel introductions have centered on the education business, such as English conversation schools with the use of our conventional strengths. We will aim for the #1 position in introductions of native English speakers with proactive introductions in the sales service and hotel industries, where needs are numerous due to rising inbound demand. So please stay tuned. That's all for my report on conditions of Matching Division.

The fifth item is reports on conditions by organization. As a source of competitive advantage shifts from business strategy to organizational strategy and employment becomes more flexible, adaptation to the labor market as well as a product to market is critical for businesses. From such a viewpoint, to add to financial statements, which measure adaptation to the products market, Link and Motivation has introduced and administers Engagement Score, which is non-financial information to measure adaptation to the labor market. It is an indicator that provides a standard deviation value for employee engagement and an evaluation based on the results of an organizational diagnostic survey developed by Link and Motivation.

Elements that significantly influence employee engagement are classified into 16 areas based on social psychology. The areas are further subdivided into 132 items for questions on the organizational diagnostic survey. Engagement Score is calculated based on employee expectations and satisfaction, their degree of matching and Link and Motivation's database on 1.16 million employees at 5,020 companies. Scores are shown on the right. Please take scores as so called deviation values. Engagement rating is shown on the left. The relationship between score and rating is strong here. Ranking is assigned with an Engagement Score of B as a mean value. We will continue to disclose our engagement ratings in our announcements of business results.

This page shows position and engagement ratings of our group companies belonging to each division. Out of 12 companies in our group, 11 have a AAA rating and one has a AA rating. The score for a2media, which joined the Link and Motivation group through an acquisition in October 2017, dropped temporarily because of an initial organizational change, but has been recovering due to enhanced organizational measures. As high engagement is maintained as a whole, I hope it will be linked with financial statements, adaptation to the product market and business performance.

The sixth item is announcement of share repurchase. We plan to repurchase our own shares to flexibly conduct our capital policy in response to changes in the business environment. Maximum amount is JPY 500 million, maximum number of shares is 700,000. Acquisition period is about 3 months from August 13, 2019, to November 12, 2019.

Once again, this page shows operating structure of our group. Up until the first half or the second quarter, we struggled, in particular, in Organizational Development division. However, we turned around the division significantly. We will focus on proactive investment in subscription model for mid- to long-term profit and recovery of Consulting & Outsourcing business to support near-term business performance. I hope you will continue to pay attention to the status of the entire group.

That concludes results presentation for the first half of 2019. Thank you very much for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]